EFFECT OF MERGERS AND ACQUISITIONS ON PERFORMANCE OF THE NIGERIAN BANKING INDUSTRY

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The Nigerian banking sector has undergone profound structural transformation over several decades, shaped by deregulation, globalization, technological advancement, and evolving supervisory and prudential frameworks aligned with international standards. Among the most consequential drivers of this transformation has been the strategic deployment of mergers and acquisitions (M&A) as instruments of consolidation, capitalization, and competitive repositioning. The 2004–2005 banking recapitalization exercise, spearheaded by the Central Bank of Nigeria (CBN), marked a watershed moment, fundamentally altering the architecture of the Nigerian banking industry and reducing the number of operating banks from 89 to 25 through an unprecedented wave of mergers and acquisitions (Okpanachi, 2011). The contemporary relevance of M&A as a strategic response to regulatory mandates is once again underscored by the CBN's March 2024 recapitalization directive, which mandates banks to raise minimum paid-up capital to between ₦50 billion and ₦500 billion (depending on licence category) by March 2026, with consolidation through M&A identified as a primary compliance pathway (CBN, 2024; Chambers & Partners, 2024).

M&A transactions in banking have historically been justified by the efficiency hypothesis the proposition that combining institutions leads to cost savings, synergy gains, improved risk diversification, and enhanced shareholder value. Chakraborty and Das (2024), in a systematic review of global M&A literature spanning 2013–2023, identify financial and operating performance improvement as the predominant theme in banking M&A research, while acknowledging that outcomes vary substantially by context, deal structure, and integration quality. In sub-Saharan Africa specifically, Ayagre et al. (2024) find that regulation-induced M&As between 2003 and 2019 produced mixed post-merger profitability outcomes, with liquidity positively affecting profitability but bank risk negatively influencing returns a finding with direct relevance to the Nigerian experience.

In Nigeria, the 2004–2005 consolidation exercise was triggered by the announcement of the CBN Governor on July 6, 2004, requiring all deposit money banks to recapitalize to a minimum of ₦25 billion by December 31, 2005. The resulting consolidation through M&A reduced the banking population from 89 to 25, and subsequently to 21 banks after further mergers involving rescued institutions including 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 2024 recapitalization has revived this consolidation dynamic. A notable example is the CBN-approved merger between Providus Bank and Unity Bank, commencing in 2024 as a strategic response to the new minimum capital requirements (Chambers & Partners, 2024). These developments confirm that M&A activity in Nigerian banking is not a historical artefact but a living and evolving strategic imperative.

The financial performance implications of banking M&As in Nigeria are empirically contested. Salihu et al. (2024), examining the merger between Access Bank Plc and Diamond Bank Plc using data from 2016 to 2023, find a statistically significant difference in post-merger financial performance as measured by Return on Equity (ROE), Return on Assets (ROA), and Capital Adequacy Ratio (CAR), concluding that M&A positively affects overall bank performance. Similarly, Aitaa and Mabel (2023), in a study of Access Bank and Diamond Bank, assert that the banking sector performed better following the merger, attributing improvements to operational synergies and expanded customer base. However, other studies reveal more nuanced results. Umar and Tudawada (2022) highlight that post-merger non-performing loans and credit risk can erode the profitability gains expected from consolidation, pointing to the importance of asset quality in determining net financial performance outcomes.

The most recent panel regression analysis by Arogundade and Adegbie (2024), covering Nigerian deposit money banks from 2006 to 2021, finds that M&A activities made a positive contribution to economic growth through enhanced banking sector performance, while also identifying post-merger operational cost inefficiencies as a drag on ROA. This duality performance improvement alongside cost management challenges captures a core tension in banking M&A outcomes that this study is designed to explore. Similarly, Aluko and Ajayi (2023) in a sub-Saharan African study demonstrate that asset quality mediates the relationship between M&As and bank profitability, further complicating any unqualified assessment of M&A performance effects.

The post-consolidation period in Nigeria was additionally complicated by the 2008–2009 global financial crisis, which exposed risk concentrations built up during the explosive growth phase following the 2005 recapitalization. As Sanusi (2010) noted, the inability of the industry and regulators to monitor this growth led to systemic risk accumulation. Today, as the 2024–2026 recapitalization cycle once again compels consolidation, understanding the performance effects of earlier M&As provides essential lessons for policymakers, bank managers, investors, and regulators navigating the current round of transformation.

1.2 Statement of the Problem

Despite extensive M&A activity in the Nigerian banking sector both during the 2004–2005 consolidation and the ongoing 2024–2026 recapitalization wave the empirical evidence on whether these transactions enhance bank performance remains mixed and inconclusive. Theoretically, M&As are expected to generate efficiency gains, broader capital bases, improved risk management, and superior financial returns. In practice, however, the outcomes have been uneven, with some studies reporting performance improvements and others finding no significant or even negative effects.

A fundamental concern is the "bigger, not better" critique the argument that banks merge primarily to gain market share and systemic importance rather than to improve operational efficiency. If this is the case, the resulting concentration of power may threaten competition and ultimately harm the financial system. This concern is amplified in the Nigerian context, where the CBN's recapitalization mandates create regulatory compulsion for M&A rather than purely market-driven consolidation motivations (Chambers & Partners, 2024; CBN, 2024).

Empirical gaps further compound the problem. While several recent studies have examined specific bank mergers most notably the Access Bank–Diamond Bank case (Aitaa & Mabel, 2023; Salihu et al., 2024) comprehensive longitudinal analyses that track the effect of M&A on multiple performance indicators including liquidity, ROE, debt/equity profile, and earnings per share across multiple banks and time periods remain scarce in the Nigerian literature. Furthermore, the extant literature has not fully addressed how the post-merger integration quality, asset quality inherited from target institutions, and macroeconomic volatility jointly shape financial performance outcomes.

The current wave of M&A activity triggered by the 2024 recapitalization directive makes this research gap all the more urgent. As Chakraborty and Das (2024) observe in their systematic review, much of the banking M&A literature focuses on advanced economies, and there remains a need for robust, context-specific evidence from emerging and developing markets such as Nigeria. Against this backdrop, this study investigates the effect of mergers and acquisitions on the financial performance of selected Nigerian banks, using key performance indicators that reflect both profitability and balance sheet strength.

1.3 Objectives of the Study

The broad 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. Ascertain the impact of mergers and acquisitions on the liquidity profile of commercial banks in Nigeria.

2. Examine how mergers and acquisitions adopted by commercial banks impacted the return on equity of the affected banks.

3. Evaluate the impact of mergers and acquisitions on the debt/equity profile of commercial banks in Nigeria.

4. Examine the extent to which earnings per share of commercial banks improved as a result of mergers and acquisitions.

1.4 Research Questions

The following research questions guide this study:

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

2. Do mergers and acquisitions have any effect on the return on equity of commercial banks in Nigeria?

3. What effect do mergers and acquisitions have on the debt/equity profile of commercial banks in Nigeria?

4. To what extent have mergers and acquisitions adopted by banks impacted the earnings per share of the affected banks?

1.5 Research Hypotheses

The following null hypotheses guide the research:

H1:Mergers and acquisitions do not have any significant positive effect on the liquidity profile 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 do not have any significant positive effect on the debt/equity profile of commercial banks in Nigeria.

H4:Mergers and acquisitions have no significant positive impact 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 performance of selected Nigerian deposit money banks over the period 1998 to 2012 spanning the pre-consolidation era, the 2004–2005 recapitalization exercise, and the immediate post-consolidation period. The fifteen-year time frame provides sufficient longitudinal depth to capture pre-merger baselines, the immediate post-merger adjustment period, and medium-term performance trends. The study focuses on banks that participated in M&A transactions during the 2004–2005 consolidation exercise, drawing on four key performance indicators: liquidity profile, return on equity, debt/equity ratio, and earnings per share. While the empirical analysis covers 1998–2012, contextual reference is made throughout to contemporary M&A developments including the 2024 CBN recapitalization directive and recent empirical studies (Salihu et al., 2024; Arogundade & Adegbie, 2024; Chakraborty & Das, 2024) to situate the findings within the current policy and scholarly landscape.

1.7 Significance of the Study

This study makes contributions at multiple levels. Academically, it adds to the growing body of empirical literature on the financial performance effects of banking M&As in Nigeria and sub-Saharan Africa, extending the work of Aitaa and Mabel (2023), Salihu et al. (2024), and Ayagre et al. (2024) by providing multi-bank, multi-indicator analysis. It addresses the research gap identified by Chakraborty and Das (2024) for more context-specific evidence from emerging markets.

For policymakers and regulators, the study provides an empirical basis for evaluating the outcomes of regulation-induced consolidation. Given that the CBN's 2024 recapitalization directive is once again compelling banks to pursue M&A strategies (CBN, 2024), evidence on the performance effects of the 2004–2005 round offers critical lessons for designing effective supervisory and post-merger monitoring frameworks. The study's findings may also help the CBN and the Nigerian Deposit Insurance Corporation (NDIC) assess whether M&A should be pursued selectively based on the financial health of the merging institutions.

For investors, the study illuminates the relationship between M&A activity and key financial metrics ROE, liquidity, debt/equity, and EPS enabling more rational and informed investment decision-making. For banking practitioners, the analysis highlights the conditions under which M&A generates value versus those where it creates operational and financial risk. Finally, for scholars and students of banking, finance, and economics, the study provides a rigorous, empirically grounded reference on one of the most consequential strategic events in Nigeria's financial history.

1.8 Operational Definition of Terms

Merger: A merger is the voluntary combination of two companies into a single entity, typically involving a stock swap or cash payment, whereby shareholders of both firms share the risks and rewards of the combined organisation. In the banking sector, mergers are often driven by regulatory recapitalization requirements, the pursuit of scale economies, and competitive repositioning (Chakraborty & Das, 2024; CBN, 2024).

Acquisition: An acquisition involves the purchase of one company (the target) by another (the acquirer), which may be friendly or hostile. In Nigerian banking, acquisitions have typically involved financially stronger institutions absorbing weaker or undercapitalized banks to improve operational and financial standing. A recent example is the CBN-approved acquisition arrangement between Providus Bank and Unity Bank in 2024 (Chambers & Partners, 2024).

Bank Recapitalization: The process by which a bank is required or elects to raise its minimum paid-up capital to prescribed thresholds set by monetary authorities. Recapitalization strengthens banks' capital bases, enhances their capacity to absorb losses, improves capital adequacy ratios, and supports greater lending to the real economy. The CBN's 2024 directive mandated banks to achieve new minimum capital levels between ₦50 billion and ₦500 billion by March 2026 (CBN, 2024).

Consolidation: The reduction in the number of deposit-taking institutions accompanied by a simultaneous increase in the size, scale, and concentration of remaining entities in the sector (BIS, 2001). In Nigeria, consolidation through M&A reduced the number of commercial banks from 89 to 25 during the 2004–2005 exercise, and a similar consolidation dynamic is anticipated during the 2024–2026 recapitalization cycle (African Business, 2026).

Return on Equity (ROE): A profitability ratio that measures the net income generated as a percentage of shareholders' equity. It reflects management's effectiveness in deploying equity capital to generate profit. ROE is a primary performance indicator in banking M&A research in Nigeria (Salihu et al., 2024; Fuoye Journal, 2023).

Return on Assets (ROA): A profitability metric that measures how efficiently a bank uses its total assets to generate net income. ROA is widely used alongside ROE as a composite measure of bank financial performance before and after M&A transactions (Arogundade & Adegbie, 2024; Ayagre et al., 2024).

Liquidity: The ability of a bank to meet its short-term financial obligations as they fall due, using liquid assets. Liquidity is a critical dimension of banking soundness and a key performance indicator in the context of M&As, as post-merger integration can strain short-term liquidity positions. The CBN's regulatory minimum liquidity ratio stands at 30%, with the sector-wide average exceeding 40% as of early 2024 (CBN, 2024).

Earnings Per Share (EPS): A financial metric that measures the portion of a bank's net profit allocated to each outstanding share of common stock. EPS is an important indicator of post-merger value creation for shareholders and a proxy for the distributional consequences of M&A transactions on shareholder wealth (Fuoye Journal, 2023).

Debt/Equity Ratio: A leverage ratio that compares a bank's total debt to its shareholders' equity. It reflects the degree to which a bank finances its operations through debt versus equity, with implications for financial stability and risk profile following M&A transactions.

Shareholders' Fund: An alternative term for owners' or shareholders' equity, representing the funds invested in the bank through share purchases or retained earnings. Shareholders' fund is a key indicator of a bank's capital strength and a determinant of its capacity to meet recapitalization requirements (Osiegbu, 2005).

Non-Performing Loans (NPLs): Loans that are in default or close to default, with the borrower failing to make scheduled payments for a specified period. High NPL ratios signal poor asset quality and potential losses, and have been shown to erode post-merger profitability gains in Nigerian banks (Umar & Tudawada, 2022; Isola & Adeyemo, 2023). The Nigerian banking sector's NPL ratio peaked at 27.6% during the 2009 global financial crisis and has since been reduced to below the 5% regulatory maximum.

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