THE EFFECT OF MERGER ON THE FINANCIAL PERFORMANCE OF BANKS IN NIGERIA (A CASE STUDY OF ACCESS BANK NIGERIA LTD, FIRST BANK OF NIGERIA PLC AND UNITY BANK PLC)

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Prior to the year 2005 merger exercise, the Nigerian Banking sector was highly oligopolistic with remarkable features or market Concentra and leadership. Under the recapitalization and consolidation exercise in the industry, each licensed bank was expected to meet up with the new minimum capitalization requirement of N25 billion on a solo-basis or achieve that either through merger with others or acquisition of by others.

The banks were encouraged to enter into merger acquisition arrangements with other relatively smaller banks thus taking the advantage or economies of scale to reduce cost of doing business and enhance their competitiveness locally and internationally.

According to the former governor of the Central Bank of Nigeria (CBN), Professor Charles Soludo, recapitalization of the Nigerian Banking Sector was 'necessitated by the high concentration of the sector by small banks with capitalization of less than $10 million, each with expensive headquarters, separate investment in software and hardware heavy fixed costs and operating expenses, and with bunching of branches in few commercial centers-leading to a very high average cost for the industry, in his view, Saluda (2004) slates that the fragile of the Nigerian Banking   sector in the pre-merger exercise is so bad that, only ten (10) banks out of the eighty-nine (89) in operation accounted for 51.9'% of total assets, 55.4% of total deposit liabilities, and 42.8% or total credit. According to CBN (2004), the rating of the licensed banks in operation, using the CAMELS parameters revealed that ten (10) banks were "sound", fifty-one (51) were "satisfactory". Sixteen (16) were rated "marginal" and ten (10) bank were rated "unsound" in 2004. However, the performance of banks since 200l exhibited a deteriorating trend as the number of satisfactory" banks declined steadily from 63 in 200I to 5l in 2004. In the same vein, the number of hanks that were "marginal" increased from 8 in 2001 to 16 in 2004. "Unsound" banks also increased from 9 in 2001 to l0 in 2004. The marginal and/or unsound banks      exhibited such weakness as under capitalization, illiquidity, weak/poor asset quality, poor earnings, etc.

The CBN reform' to consolidate the banking sector through drastic increase of the minimum capital base of commercial banks from N2 billion to N25 billion in 2005 led to a remarkable reduction in number of banks! Immediately, after the recapitalization deadline ended in December 31st 2005, the number of operating banks in the country reduced from 89 banks to 25 banks but later reduced further to 23 banks with the merger of some banks like first Atlantic Bank Plc and Inland to form Fin Bank Plc, Stanbic Bank Limited and IBTC Chartered Bank Plc to for Stanbic IBTC Bank Plc. The number of operating banks later increased to 24 banks with the entering of Citibank Nigeria limited. With the recent merger and acquisition of some of the nine rescued banks, that is, the merger of Access Bank Plc with Intercontinental Bank Plc, merger of Ecobank Transnational Incorporated with Oceanic Bank Plc, merger of First City Monumental Bank with Fin Bank Plc, the number of banks operating in Nigeria has been reduced further.

However, in August 2011, the CBN revolved the licenses of three of the rescued banks for failing to show ability to recapitalize ahead of the September 30, 2011 deadline, effectively nationalizing bank PHB, Afri bank and Spring Bank. The assets of these banks were transferred to three newly created, nationalized banks: Keystone Bank, Enterprise and Mainstrect bank. AMCON which took over the banks also injected N680 million to 'recapitalize the banks. Unity Bank plc, one of the bailed out banks has already recapitalized while WEMA Bank Plc, the last of the rescued banks, has since scaled down operations to become a  regional bank with emphasis in the South-West Region.

According to Buneseu (2010), the post-merger performance of all Nigerian banks was overcast in 2008 by the global financial and economic crisis which was precipitated in August 2007 by the collapse of the sub- prime lending market in the United States. The crisis led to the crash of most other sectors and markets across Europe with consequent effect on developing economies especially oil-export dependent countries like Nigeria. The rush by stock investors to liquidate their investment to repay their loans in order to avoid the excessive lending rate caused the Nigeria stock market to crash. The crash of the stock market did not only affect the financial performance of some of the banks, it also increased their risk exposure. Sanusi (2010a) attributed the post-merger challenges of Nigerian Banking Industry to the inability of the industry and the regulators to sustain and monitor the sector's explosive growth which as a result led to risk-built in the system.

According to Sanusi (2010b), the reports of the special examination team carried out by CBN/NDIC revealed that nine (9) out of the twenty- four (24) banks were in grave situation prompting immediate intervention by CBN. The reports further revealed that non-performing loans in ten banks totaled N1,696 billion, representing 44.38% of total loans while the Capital Adequacy Ratio in the ten banks ranged between 10% and 7.41% which were below the minimum ratio of 10%. This statistics portrays a fragile banking system. It is therefore necessary to conduct a study of this nature to evaluate the merger exercise in Nigerian-Banking sector in term's of the financial performance of the commercial banks.

1.2   Statement Of The Problem

The relationship between merger and bank performance has been explained by two polar views. Proponents of the exercise opine that increased size could potentially increase bank returns, through revenue and cost efficiency gains. It may also, reduce industry risks, through the elimination of weak banks and create better diversification opportunities, Berger (2000) quotes. On the other hand the opponents argue that merger could increase banks' propensity towards risk taking through increase in leverage and off-balance sheet operations. Furthermore, Adegbaju and Olokoyo (2008) argue that bank merger may not result to good performance if the economic environment is not conducive to make good profit and deepen the- financial structure of the economy.

This project work focuses on the assessment of the bank merger exercise that was conducted in the Nigerian Banking Industry in 2004/2005. Although, the post-merger performance of all Nigerian banks was adversely affected by the recent global financial and economic crisis, this research intends to appraise the merger exercise in Nigerian Banking Industry in terms of banks' financial performance and the structure of the entire banking industry.

1.3   Objectives Of The Study

The broad objective of this study is to appraise the merger exercise that was conducted in the Nigerian Banking Industry. The specific objectives of the study are as follows:

¨     To evaluate the relationship between asset value per share and financial performance of banks in Nigeria.

¨     To examine the relationship between share price and financial performance of banks in Nigeria.

¨     To evaluate the relationship between number of branches 'and financial performance of banks in Nigeria.

1.4   Research Questions

Based on the objectives stated above, this study seeks to answer the following questions:

¨     To what extent does asset value per share influences the financial performance of banks in Nigeria?

¨     To what extent does share price influences the financial performance of banks in Nigeria?

¨     To what extent does number of branches influences the financial performance of banks in Nigeria?

1.5   Research Hypotheses

The research hypotheses that would be tested in the course of this study is stated as below:

Hypothesis 1

Ho: There is no relationship between asset value per share and financial performance of banks in Nigeria.

Hi:    There is a relationship between asset value per share and financial performance of banks in Nigeria.

Hypothesis II

Ho: There is no relationship between share price and performance of banks in Nigeria

Hi: There is a relationship between share Price and performance of banks in Nigeria.

Hypothesis III

Ho: There is no relationship between number of branches financial performance of banks in Nigeria

Hi: There is a relationship between number of branches and financial performance of banks in Nigeria.

1.6   Significance Of The Study

Bank merger serves is a useful focus for analysis because many of the frictions that make capital structure relevant costs of bank distress, asymmetric information, transactions cost and regulation, etc. have been studied extensively in literature. However, this study does not only focus on bank merger, it intends to investigate its impact on the financial performance of .Nigeria" Banks. Therefore, the significance of this study lies in the fact that it would provide all empirical evaluation of the success of the merger exercise. Besides, it will put to rest argument stated above between the proponents and opponents of the relationship between bank merger and banks' performance. The findings of the study would be beneficial to the regulators of the Nigerian Banking sector as they would serve as a yardstick for appraising the bank merger so far.

1.7   scope and limitation of the study

Although, a number of merger exercises have been conducted in the Nigerian Banking sector, this study focuses on the merger exercise of 2004/2005. There is. no doubt that the exercise has impacted greatly on the Nigerian Banking Sector and other sectors of the economy. This study attempts to examine its impact on the financial performance of Nigerian Banks with specific focus on some selected banks. To this end, this study shall conduct a comprehensive analysis of the major indicators of the earnings and profitability of Nigerian banks in the post-merger periods. The empirical analysis is therefore restricted to the period between 2007 and 2011. 

1.8 Definition Of Terms

Based on this study, the technical meaning of some words used is as follows:

Merger:- This is a voluntary amalgamation or combination of two or more firms on roughly equal terms into one new legal entity.

Capital baser:- This is a term used to describe the funds that a company generates as the result of an initial public offering, as well as any additional offerings, that the corporation makes at a later time, plus any retained earnings that are generated by the business.