The Effects of Merger on Bank Profitability: Evidence from Nepal

Abstract

The empirical research examined the effects of bank merger in the Profitability of banks and financial institutions in Nepal. After a heavy consolidation in the banking sector, the effect of merger on bank profitability does not seem to be assessed quantitatively. This study examines a large panel of entire banking system (more than 200 banks and financial institutions) from Nepal to study the effects of merger on bank Profitability based on the data between July 2009 and July 2018, a period of heavy bank consolidation. Utilizing dynamic panel data GMM-system estimator on financial statement of banks and financial institutions in Nepal across 10 years ranging from 2009-2018, this study shows evidence of no significant effects of merger on bank profitability (RoE and RoA). Results of GMM estimator suggest negative and significant effect of Capital increment policy; Interest spread policy and Capital to Assets Ratio with profitability. Conversely, positive and significant effects of banking sector development and Net interest income to total loan have been found with profitability. These results have significant practical and research implications as discussed in the report.