CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The Nigerian banking sector has experienced major structural changes over the years due to deregulation, globalization, technological development, and changes in regulatory and supervisory policies based on international standards. One of the major factors responsible for these changes has been the use of mergers and acquisitions (M&A) as strategies for strengthening banks, increasing their capital base, and improving their competitive position. The banking recapitalization exercise introduced by the Central Bank of Nigeria (CBN) between 2004 and 2005 was a major turning point in the history of the Nigerian banking industry. Through a series of mergers and acquisitions, the number of operating banks was reduced from 89 to 25 (Okpanachi, 2011). The importance of mergers and acquisitions has become relevant again following the CBN's recapitalization directive of March 2024, which requires banks to increase their minimum paid-up capital to between ₦50 billion and ₦500 billion, depending on their licence category, by March 2026. Mergers and acquisitions have been identified as possible strategies through which banks can meet these new capital requirements (CBN, 2024; Chambers & Partners, 2024).

Mergers and acquisitions in the banking industry are commonly supported by the efficiency hypothesis. This hypothesis suggests that combining two or more financial institutions can reduce operating costs, create business synergies, improve risk management and diversification, and increase shareholders' wealth. Chakraborty and Das (2024), in their systematic review of global studies on banking mergers and acquisitions between 2013 and 2023, identified improvements in financial and operational performance as major areas of interest in existing research. However, they also noted that the results of mergers and acquisitions differ depending on the economic environment, transaction arrangements, and the quality of post-merger integration. In sub-Saharan Africa, Ayagre et al. (2024) observed that mergers and acquisitions encouraged by regulatory requirements between 2003 and 2019 produced different profitability outcomes. Their findings showed that liquidity had a positive relationship with profitability, while bank risk had a negative effect on returns. These findings are relevant to understanding the effects of mergers and acquisitions in Nigeria.

In Nigeria, the consolidation exercise of 2004–2005 began after the CBN Governor announced on July 6, 2004, that all deposit money banks were required to increase their capital base to a minimum of ₦25 billion by December 31, 2005. The exercise resulted in a reduction in the number of banks from 89 to 25. The number later reduced further to 21 following additional mergers involving rescued financial institutions. Some notable transactions included the merger of Access Bank Plc with Intercontinental Bank Plc, Ecobank Transnational Incorporated with Oceanic Bank Plc, and First City Monument Bank with FinBank Plc. The recapitalization directive introduced in 2024 has renewed the possibility of further consolidation in the banking industry. One notable example is the CBN-approved merger arrangement involving Providus Bank and Unity Bank, which began in 2024 as part of efforts to address the new minimum capital requirements (Chambers & Partners, 2024). These developments show that mergers and acquisitions remain important strategies in the Nigerian banking industry and are not limited to the earlier consolidation exercise.

The effect of mergers and acquisitions on the financial performance of Nigerian banks remains a subject of debate among researchers. Salihu et al. (2024), in their study of the merger between Access Bank Plc and Diamond Bank Plc, examined financial data covering 2016 to 2023. Their findings revealed significant differences in post-merger financial performance based on Return on Equity (ROE), Return on Assets (ROA), and Capital Adequacy Ratio (CAR). They concluded that mergers and acquisitions had a positive effect on the overall performance of the bank. Similarly, Aitaa and Mabel (2023), in their examination of Access Bank and Diamond Bank, reported improved banking sector performance following the merger. They linked these improvements to operational benefits and an increase in the customer base. However, other studies have presented different findings. Umar and Tudawada (2022) explained that non-performing loans and credit risk after a merger could reduce the expected gains in profitability. This suggests that the quality of a bank's assets is an important factor in determining whether a merger will produce positive financial results.

A more recent panel regression study by Arogundade and Adegbie (2024), which examined Nigerian deposit money banks between 2006 and 2021, found that mergers and acquisitions contributed positively to economic growth through improvements in banking sector performance. However, the study also identified operational cost inefficiencies after mergers as a factor that reduced Return on Assets. This finding highlights an important issue in banking mergers and acquisitions: although combining banks may improve financial performance, managing the costs and operations of the newly combined institution can remain difficult. In a similar study involving sub-Saharan African banks, Aluko and Ajayi (2023) found that asset quality played an important role in the relationship between mergers and acquisitions and bank profitability. Their findings further demonstrate that the financial effects of mergers and acquisitions depend on several factors.

The period following the Nigerian banking consolidation was also affected by the global financial crisis of 2008–2009. The crisis exposed weaknesses and risks that had developed during the rapid expansion of the banking industry after the 2005 recapitalization exercise. According to Sanusi (2010), the failure of banks and regulators to properly monitor the industry's rapid growth contributed to the accumulation of systemic risks. As the 2024–2026 recapitalization programme creates another opportunity for consolidation, examining the financial performance of banks involved in earlier mergers and acquisitions is important. Such an examination can provide useful lessons for policymakers, bank managers, investors, and regulators who are involved in shaping the future of the Nigerian banking industry.

1.2 Statement of the Problem

Despite the numerous mergers and acquisitions that have taken place in the Nigerian banking industry, particularly during the 2004–2005 consolidation exercise and the ongoing 2024–2026 recapitalization programme, there is still no clear agreement on whether these transactions improve banks' financial performance. In theory, mergers and acquisitions are expected to increase operational efficiency, strengthen capital bases, improve risk management, and enhance financial returns. However, the actual results have not been consistent. While some studies have reported improvements in bank performance after mergers, others have identified insignificant or negative effects.

One major concern is the argument that mergers may make banks larger without necessarily making them more efficient. This position suggests that some banks may enter into mergers mainly to increase their market share and become more influential within the financial system rather than to improve their operational performance. If this happens, the resulting concentration of banking power could reduce competition and create additional risks for the financial system. This concern is particularly important in Nigeria because the CBN's recapitalization requirements may compel banks to consider mergers and acquisitions as a means of meeting regulatory capital requirements rather than pursuing consolidation entirely for market-related reasons (Chambers & Partners, 2024; CBN, 2024).

There are also gaps in existing empirical studies. Although several researchers have examined individual bank mergers, particularly the merger between Access Bank and Diamond Bank (Aitaa & Mabel, 2023; Salihu et al., 2024), there are still limited comprehensive studies that examine the long-term effects of mergers and acquisitions across several Nigerian banks. In particular, more evidence is needed on how these transactions affect different financial performance indicators, such as liquidity, Return on Equity, debt-to-equity ratio, and earnings per share, across different banks and periods. Existing studies have also not fully explained how post-merger integration, the quality of assets inherited from acquired banks, and changes in the wider economy work together to influence financial performance.

The current wave of consolidation arising from the 2024 recapitalization directive makes these research gaps more important. Chakraborty and Das (2024) observed that much of the existing literature on banking mergers and acquisitions focuses on developed economies, creating a need for more detailed studies in developing and emerging economies such as Nigeria. Therefore, this study examines the effect of mergers and acquisitions on the financial performance of selected Nigerian banks. It considers important financial indicators that reflect both the profitability and financial strength of the banks.

1.3 Objectives of the Study

The main objective of this study is to examine the effect of mergers and acquisitions on the performance of the Nigerian banking sector.

The specific objectives are to:

1. Determine the effect of mergers and acquisitions on the liquidity position of commercial banks in Nigeria.

2. Examine the effect of mergers and acquisitions on the Return on Equity of the affected commercial banks.

3. Assess the effect of mergers and acquisitions on the debt-to-equity position of commercial banks in Nigeria.

4. Determine the extent to which mergers and acquisitions have influenced the earnings per share of the affected commercial banks.

1.4 Research Questions

The following research questions are formulated to guide the study:

1. What effect do mergers and acquisitions have on the liquidity position of commercial banks in Nigeria?

2. To what extent do mergers and acquisitions affect the Return on Equity of commercial banks in Nigeria?

3. What effect do mergers and acquisitions have on the debt-to-equity position of commercial banks in Nigeria?

4. To what extent have mergers and acquisitions influenced the earnings per share of the affected commercial banks?

1.5 Research Hypotheses

The following null hypotheses are formulated for the study:

H1: Mergers and acquisitions have no significant positive effect on the liquidity position of the affected banks.

H2: Mergers and acquisitions have no significant positive effect on the Return on Equity of commercial banks.

H3: Mergers and acquisitions have no significant positive effect on the debt-to-equity position of commercial banks in Nigeria.

H4: Mergers and acquisitions have no significant positive effect on the earnings per share of the affected banks.

1.6 Scope of the Study

This study examines the effect of mergers and acquisitions on the financial performance of selected deposit money banks in Nigeria between 1998 and 2012. The period covers the years before the banking consolidation exercise, the 2004–2005 recapitalization programme, and the immediate period after consolidation. The fifteen-year period provides an opportunity to examine the financial performance of the selected banks before and after the merger transactions, including the initial adjustment period and subsequent performance trends.

The study focuses on commercial banks that participated in mergers and acquisitions during the 2004–2005 banking consolidation exercise. Their financial performance is examined using four major indicators: liquidity position, Return on Equity, debt-to-equity ratio, and earnings per share. Although the actual period covered by the empirical analysis is 1998–2012, the study also makes reference to more recent developments in the Nigerian banking industry, including the CBN's 2024 recapitalization directive and recent research findings by Salihu et al. (2024), Arogundade and Adegbie (2024), and Chakraborty and Das (2024). These recent developments provide a wider context for understanding the relevance of the study to current banking policies and academic discussions.

1.7 Significance of the Study

This study is important to different groups, including researchers, policymakers, financial regulators, investors, banking professionals, and students of banking and finance.

Academically, the study contributes to existing research on the effects of mergers and acquisitions on the financial performance of banks in Nigeria and sub-Saharan Africa. It extends the works of Aitaa and Mabel (2023), Salihu et al. (2024), and Ayagre et al. (2024) by examining several banks and different financial performance indicators. It also contributes to addressing the need for more studies that provide evidence from developing economies, as highlighted by Chakraborty and Das (2024).

For policymakers and financial regulators, particularly the Central Bank of Nigeria, the study provides information that may assist in assessing the results of consolidation policies introduced through regulatory requirements. Since the CBN's 2024 recapitalization directive has encouraged banks to consider mergers and acquisitions as a means of meeting the new capital requirements (CBN, 2024), the experience of the 2004–2005 consolidation exercise can provide useful lessons for developing effective regulatory and post-merger monitoring policies. The findings may also assist the CBN and the Nigerian Deposit Insurance Corporation (NDIC) in determining whether mergers and acquisitions should be encouraged based on the financial condition and stability of the institutions involved.

Investors may benefit from the study because it explains how mergers and acquisitions relate to important financial indicators such as Return on Equity, liquidity, debt-to-equity ratio, and earnings per share. This information may support better investment decisions and help investors assess the possible financial benefits and risks associated with bank consolidation.

For bank managers and other banking professionals, the study provides insight into the conditions under which mergers and acquisitions may improve financial performance and situations in which they may create operational and financial difficulties. It may also help management understand the importance of effective integration, cost control, liquidity management, and asset quality after a merger.

Finally, the study will serve as a useful academic resource for students and researchers in banking, finance, economics, and related disciplines. It provides an empirical reference on mergers and acquisitions, which remain among the major developments that have influenced the history and structure of the Nigerian financial system.

1.8 Operational Definition of Terms

Merger: A merger refers to the combination of two or more companies to form a single business entity. The process may involve the exchange of shares or payment in cash, with the shareholders of the combining companies sharing the benefits and risks of the new organisation. In the banking industry, mergers may be encouraged by regulatory capital requirements, the need to achieve economies of scale, and the desire to improve competitive strength (Chakraborty & Das, 2024; CBN, 2024).

Acquisition: An acquisition occurs when one company purchases another company, which is referred to as the target company. The transaction may be friendly or hostile, depending on the circumstances surrounding the purchase. In the Nigerian banking industry, acquisitions have often involved financially stronger banks taking over weaker or undercapitalized institutions to improve their financial and operational conditions. The 2024 CBN-approved acquisition arrangement involving Providus Bank and Unity Bank is a recent example (Chambers & Partners, 2024).

Bank Recapitalization: Bank recapitalization is the process through which a bank increases its minimum paid-up capital to meet the requirements established by the monetary authorities. It is intended to strengthen the capital base of banks, improve their ability to absorb financial losses, support capital adequacy, and increase their capacity to provide loans to the economy. Under the CBN's 2024 directive, banks were required to meet new minimum capital requirements ranging from ₦50 billion to ₦500 billion by March 2026 (CBN, 2024).

Consolidation: Consolidation refers to a reduction in the number of financial institutions operating in a sector, usually accompanied by an increase in the size and market concentration of the remaining institutions (BIS, 2001). In Nigeria, the 2004–2005 banking consolidation exercise reduced the number of commercial banks from 89 to 25 through mergers and acquisitions. A similar consolidation process is expected to arise from the 2024–2026 recapitalization programme (African Business, 2026).

Return on Equity (ROE): Return on Equity is a financial ratio used to measure the amount of profit a bank generates in relation to shareholders' equity. It shows how effectively management uses shareholders' funds to generate earnings. ROE is one of the major indicators used in assessing the financial performance of banks before and after mergers and acquisitions (Salihu et al., 2024; Fuoye Journal, 2023).

Return on Assets (ROA): Return on Assets is a financial measure that shows how effectively a bank uses its total assets to generate profit. It is commonly used alongside Return on Equity to assess the financial performance of banks before and after mergers and acquisitions (Arogundade & Adegbie, 2024; Ayagre et al., 2024).

Liquidity: Liquidity refers to a bank's ability to meet its short-term financial obligations when they become due by using available liquid assets. It is an important measure of financial stability because banks must maintain sufficient liquid resources to meet customers' withdrawal requests and other immediate obligations. In the context of mergers and acquisitions, the integration process may affect a bank's short-term liquidity position. The CBN's regulatory minimum liquidity ratio is 30%, while the average for the banking sector was reported to be above 40% in early 2024 (CBN, 2024).

Earnings Per Share (EPS): Earnings Per Share is a financial indicator that measures the amount of a company's profit attributable to each outstanding ordinary share. It helps shareholders assess the earnings generated from their investments and is used to examine whether mergers and acquisitions create value for shareholders (Fuoye Journal, 2023).

Debt-to-Equity Ratio: The debt-to-equity ratio is a financial measure that compares an organisation's total debt with its shareholders' equity. It indicates the extent to which an organisation relies on borrowed funds in relation to owners' funds to finance its activities. In banking, the ratio provides information about financial leverage and the possible risks associated with a bank's capital structure after a merger or acquisition.

Shareholders' Fund: Shareholders' fund refers to the financial resources belonging to the owners of a bank. It generally consists of the capital contributed by shareholders and accumulated retained earnings. It is an important measure of a bank's financial strength and its ability to meet regulatory capital requirements (Osiegbu, 2005).

Non-Performing Loans (NPLs): Non-performing loans are loans in which borrowers have failed to make the required repayments for a specified period or are considered unlikely to repay their obligations. A high level of non-performing loans indicates poor asset quality and may expose a bank to financial losses. Research has shown that non-performing loans can reduce the profitability gains expected from mergers and acquisitions in Nigerian banks (Umar & Tudawada, 2022; Isola & Adeyemo, 2023). The Nigerian banking industry's NPL ratio reportedly reached 27.6% during the 2009 global financial crisis before declining to below the regulatory maximum of 5%.

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