1

IMPACT OF MERGERS AND ACQUISITION ON THE

PERFORMANCE OF PRABHU BANK

BY

Shahbaj Gaddi

Symbol No : 23539/19
T.U. Reg. No : 7-2-52-207-2019

A Summer Project Report Submitted to

Faculty of Management, Tribhuvan University
in the partial fulfillment of the requirements for the degree of

Bachelor of Business Administration (BBA)

at the
Bhairahawa multiple Campus
Tribhuvan University

Siddharthanagar
April, 2024
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STUDENT DECLARATION

This is to certify that I have completed the Summer Project entitled “Impact of Mergers
and Acquisition on the Performance of Prabhu Bank” under the guidance of “Mrs.
Seema Shukla” in partial fulfillment of the requirements for thedegree of Bachelor of
Business Administration at Faculty of Management, Tribhuvan University. This is
my original work and I have not submitted it earlier elsewhere.

Date: April, 2024

Signature:
Name: Shahbaj Gaddi

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CERTIFICATE FROM THE SUPERVISOR

This is to certify that the summer project entitled “Impact of mergers and acquisition on the
Performance of Prabhu Bank” is an academic work doneby “Shahbaj Gaddi” submitted in
the partial fulfillment of the requirements for the degree of Bachelor of Business
Administration at Faculty of Management, Tribhuvan University under my guidance and
supervision. To the best of my knowledge, the information presented by him in the summer
project report has not been submitted earlier.

…………………………………

Signature of the Supervisor

Name: Seema Shukla
Designation: Lecturer
Date: April, 2024

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ACKNOWLEGDEMENTS

My outmost gratitude goes to the Tribhuvan University for including this Project Work
in the syllabus of BBA, which I think is very helpful in developing practical knowledge
of the student. This report aims to understand the impact of mergers and acquisition on
the performance of Prabhu bank.

I have tried my best to present the subject matter in a simplest and easily understandable
form. The people who remained source of inspiration and encouragement to present this
report deserve to be acknowledged in the right earnest. I am thankful to my friends
Pramod Kumar Baniya and Rakesh Kumar Yadav, who directly or indirectly helped me
in the completion of the study.

Finally, my deepest appreciation goes to my supervisor Mrs. Seema Shukla for her
assistance during the study process. She had devoted a considerable time and effort for
helping me to complete this project. Likewise, I am equally thankful to our Director Dr.
Pitamber Tiwari and all the teachers for their moral support and encouragement.

Shahbaj Gaddi
April, 2024

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TABLE OF CONTENTS

Title Page ………………………………………………………….…………………….………i

Student Declaration…………………………………………………………...…………….…ii
Certificate From The Supervisor……………………………………………………….…...iii
Acknowledgements………………………………………………………….……………..…..iv
Table of Contents……………………………………………………………………………....v
List of Tables……………………………………………………………………………….…vii
List of Figures…………………………………………………………………………...…...viii
Executive Summary………………………………………………………..……………....….ix
CHAPTER I : INTRODUCTION………………………………………………...1-9
1.1. Introduction .........................................................................................................1
1.1.1. Merger and Acquisition in Banking Sector of Nepal ...................................2
1.1.2. Guidelines and Conditions for Opting Merger Bylaws 2011 .......................3
1.1.3. Major Provisions of Merger Bylaws 2017 (Revised) ..................................3
1.2. Purpose of the Study............................................................................................4
1.3. Significance of the Study...............................................................................…..4
1.4. Limitation of the Study........................................................................................5
1.5. Literature Review ................................................................................................5
1.6. Research Methods used for Data Collection and Analysis .................................8
1.6.1. Research Design...........................................................................................8
1.6.2. Population and Sample ................................................................................9
1.6.3. Sources of Data ............................................................................................9
1.6.4. Data Processing Technique ..........................................................................9
CHAPTER II : DATA PRESENTATION AND ANALYSIS ......................... 10-21
2.1. Organizational Profile ....................................................................................10
2.2. Data Presentation............................................................................................10
2.3. Findings and Discussion ................................................................................19
2.3.1. Findings ..................................................................................................19
2.3.2. Discussion ..............................................................................................21
CHAPTER III : CONCLUSION AND ACTION IMPLICATION ................ 22-24
3.1. Conclusion .........................................................................................................22
3.2. Action Implications ...........................................................................................23
REFERENCES ...........................................................................................................25

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LIST OF TABLES
Page No.
Table 1. Capital Adequacy Ratio……………………………………………...11
Table 2. Core Capital Ratio……………………………………………………12
Table 3. Return on Equity……………………………………………………..14
Table 4. Return on Asset………………………………………………………15
Table 5. Net Profit Margin…………………………………………………….16
Table 6. Cash and Equivalent to Total DepositRatio………………………….17
Table 7. Cash Reserve Ratio……….………………………………………......18

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LIST OF FIGURES

Page No.
Figure 1. Capital Adequacy Ratio……………………………………….….11
Figure 2. Core Capital Ratio……………………………………...................13
Figure 3. Return on Equity…………………………………………….…….14
Figure 4. Return on Asset…………………………………………………...15
Figure 5. Net Profit Margin…………………………………………………16
Figure 6. Cash and Equivalent to Total Deposit Ratio……………………...18
Figure 7. Cash Reserve Ratio………………………………………………..19

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EXECUTIVE SUMMARY

The objective of this research is to study the impact of merger and acquisition to bank’s
financial performance in Nepalese banking and financial institutions. The deluge of
mergers and acquisitions occurred when Nepal Rastra Bank introduced a forceful
merger bylaws policy in the year of 2011. It assesses and evaluates the impact of merger
activity on bank's financial performance, offers handy recommendations, and a mist-
less path for other researchers for conducting further study on this realm. This research
merely examines the five years (pre and post-merger) financial performance ranging
from FY 2011/2012 to FY 2016/17. Prabhu Bank served as the subject in the study
designed to investigate the five years financial performance of bank before and after
the merger.
The study made use of secondary data obtained fromBank Supervision Report, 2016
and Banking and Financial Statistics, 2015 by Nepal Rastra Bank, and Annual Reports
of concerned commercial banks. The major ratios aredetermined to find the profitability
performance, liquidity performance, credit performance, leverage ratios and
management efficiency of the sampled bank. CapitalAdequacy Ratio and Core Capital
to Risk Weighted Exposure have been examined to assess capital adequacy of the
sampled banks, and profitability performance has been analyzed using three major
ratios namely Return on Assets, Return on Equity and Net Profit Margin. Liquidity
performances of the sampled banks have been gauged by perusing Cash and Equivalent
to Total Deposit Ratio, Loan to Total Deposit Ratio and Cash Reserve Ratio. Credit
performance has been inspected by analyzing Non- performing loan and Asset
Utilization Ratio, and leverage of bank has been appraised by Debt-Asset Ratio and
Debt-Equity Ratio. Moreover, descriptive statistical tools such as mean, standard
deviation, the coefficient of variation, have been used.
The results reveal that the current status of merged bank is quite satisfactory. Each ratio
is evincing the positive signal, which concludes that the overall financial scenario of
merged bank is strengthening.

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CHAPTER I
INTRODUCTION

1.1 Introduction
Mergers and acquisitions are a vital part of any healthy economy and importantly, the
primary way that companies are able to provide returns to owners and investors
(Sherman & Hart, 2006). According to (Firer, Ross, Westerfield, & Jordan, 2004) “A
merger is the complete absorption of one company by another, wherein the acquiring
firm retains its identity and the acquired firm ceases to exist as aseparate entity”. A
merger is a corporate strategy usually done between two or more than two companies
in which the assets and liabilities of the selling firm(s) are absorbed by the buying firm.
Although the buying firm may be a considerably different organization after the merger,
it retains its original identity.The terms merger and consolidation have been used
synonymously. Firer et.al (2004) defines “consolidation is the same as a merger except
that an entirely new firm is created”(p.843). A consolidation is a merger in which
anentirely new firm is created and both the acquired and acquiring firms cease to exist.
Inpractice, a merger between company A + company B= company A, where company
Bmerged with company a. In a consolidation, company A + company B = company C,
where company C is an entirely new company (Gaughan, 2002).

Firer et.al (2004) explained that an acquisition is a transaction in which an individual

or company, known as the offeror (or acquirer) gains control of the management and
assets of another company, known as the offeree or target), either by becoming the
owner of these assets or indirectly by obtaining control of the management of the
company, or by acquiring the shares (p. 759). Acquisition includes the purchase of an
asset such as a plan, a division, or even an entire company. An acquisition typically has
one company, the buyer that purchases the asset or shares of another, the seller, with
the form of payment being cash, the securities of buyer or other assets that are of value
to the seller (Sherman and Hart, 2006).

1.2 Merger and Acquisition in Banking Sector of Nepal

Liberalization in opening of banking and financial institution led to mushrooming of
banking and financial institutions in Nepal (Sharebazarnepal, 2017). Nepal consisted of
only two commercial banks till 1984 A.D. and the banking facilities were mainly
traditional type. Since the restoration of democracy in 1990s, Nepal adopted mixed
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economic model and has witnessed a tremendous growth in the number of financial
institutions. However, the unnatural increment of the BFIs brought several financial
challenges and complexities. The financial indicator had indicated that the Nepalese
financial sector was weak, vulnerable and, at the verge of a collapse. In such situation
the banking industry is certain to find itself in a wave of consolidation in which the
banking giants would emerge through mega-mergers and smaller banks disappear
through consolidation and acquisitions (Shrestha M. S., 2008). According to (Shrestha,
2012)the concept of M&A was an entirely new thing to the Banking and Financial
Institutions (BFIs) of Nepal when the Nepal Rastra Bank, supervisory and regulatory
body of all the BFIs has issued merger by-laws in May 2011. “Merger is a golden
opportunity for BFIs. This facility is floated to reduce the number of BFIs to strengthen
them” (The Himalayan Times, 2013).

In the beginning, the merger bylaws had failed to create immediate impression in the
banking fraternity and the merger bylaws in the form of consolidation have gained
acceleration over the last two years in 2011 and 2013 when the Himchuli Finance and
Birgunj Finance first sparked the merger trend and consolidated to become the H&B
Development Bank. Singh (2013), the merger bylaws policy introduced by the Nepal
Central Bank in the year 2011 has been successful as almost one fourth of the financial
institutions have opted mergers. Therefore, financial institutions with similar group of
promoters were encouraged to opt for merger with each other. However, since 2015,
financial institutions have been compelled to go for mergers, acquisitions or inject fresh
capital, as the central bank raised the paid-up capital requirement for class ‘A’, class
‘B’ and class ‘C’ financial institutions by up to four folds (The Himalayan Times,2016).

Concerning to previous flaws, NRB updated its BFIs Merger and Acquisition Bylaws
2011 by publishing new BFIs Merger and Acquisition Bylaws 2017.

In the present scenario, there are mainly three reasons that forced the Nepalese
BankingSector to go into the process of M&A.
 Capital requirement
The paid-up capital requirement of the Nepalese bank was Rs. 2 Billion. However, the
government raised the paid-up capital requirement from 2 Billion to 8 Billion. It may
not be difficult for large banks to meet the requirement set by the government but for
the middle and small scaled banks, it became very hard and impossible too. So, M &A
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was only the solution to this requirement.

 Open Financial Market
Nepal’s financial market opened up for international investment on January 2010. One
foreign bank has already applied to start operation. If foreign banks do enter Nepal, it
concerns about the capacity of local banks to compete with its foreign counterparts.
Hence, M&A will minimize costs, increase the economies of scale, and increase
institution's capacity, thus being able to compete at international level.
 Liquidity Crunch
Liquidity refers to the amount of money in the form of cash. The amounts of deposits
in bank are very low and the rate of loan recovery rate is also very low. So, liquidity
has been a major problem in Nepalese banks. Hence, M&A is believed to solve the
liquidity problem as the deposits of the two banking institutions are combined as one.

1.3 Guidelines and Conditions for Opting Merger Bylaws 2011

Nepal Rastra Bank had identified two major conditions based on which it can forcethe
BFIs to go for immediate merger. As per the first condition, the BFIs operated and
owned by the same business family, relatives, and groups will be considered to amalga
mate. The central bank will order to those BFIs to merge if they are owned by the same
family, relatives and groups. The Merger Bylaws policy by the central bank also states
that it can persuade the BFIs to merge if they are operated by a single familygroup.
Similarly, as per the second condition, the central bank will force such BFIs to go for
a merger if there is a shortfall of capital. As per NRB banking and financial institution
regulations,- commercial banks are required to maintain a minimum capital adequacy
ratio (CAR) of 10 percent and development banks a CAR of 11percent. A CAR is
required to determine the capacity of the bank in meeting time liabilities andother risks
such as the credit risk and the operational risk. (Subedi, 2012)states, “If theBFIs fail to
maintain a CAR imposed by the NRB, it will force them to merge which will help to
strengthen their capital and increase competitive performance.”

1.4 Major Provisions of Merger Bylaws 2017 (Revised)

According to the Nepal Rastra Bank (2017), the major provisions of Merger and
Acquisition Bylaws 2017 are:
• A, B, C, class financial institutions can merge with each other but the Dclass
financial institutions can merge only with another same class financial institution.
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• The licensed institutions that have already issued its share in the market can merge
or carry out merger with each other. Furthermore, the institution after being merged
must ensure that it has floated 30% of its total capital after merger to the public. If
this condition is not met, then it must issue further share in the market to the
shareholder or other new shareholders to make 30%.
• The licensed intuitions that have failed to maintain Capital Ratio and Reserve
(CRR) as per NRB directives are capable to get involved in merger. However, the
institutions after being merged must maintain the Capital ratio as per the direction
of NRB.
• Those licensed institutions that have been identified by NRB as problem BFIs are
not allowed to carry out merger; nevertheless, they can be involved in acquisition.
• No any licensed institutions are allowed to carry both merger and acquisition
simultaneously.
• NRB can terminate the merger or acquisition proposal of any licensed financial
institution if the institutions engaging in merger or acquisition have failed to
maintain good governance and proper risk management system that may have long
term negative impact on performance of financial institution after merger and
acquisition.

1.5 Purpose of the Study

The major purpose of the report is to determine the financial performance of Prabhu
Bank, which was merged to Bank, before and after merger. The specific purposes of
this study are as follows:
• To study the impact of merger on profitability of Bank before and after merger.
• To demonstrate the effect of merger on liquidity and leverage position of Bank
before and after merger.
• To investigate the influence of merger on management efficiency of Bank before
and after merger.

1.6 Significance of the Study

Merger and acquisitions have hit headlines from the past as much as the present. It is an
entirely new thing to the Banking and Financial Institutions (BFIs) of Nepal after NRB
introduced the Merger by-laws 2011. With the purpose to reach the capital up to Rs. 8
billion BFIs are in the trend to get into M&A activities. In the past few seven years
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since NRB introduced Merger by-laws 2011, 20 of the commercial banks went through
M&A activities decreasing the number of banks from 31 to 28 ‘A’ class banks. This
study focused on merger and acquisition on banking sector of Nepal. The study would
have significance to number of stakeholders. The study will be of value to the number
of investors and firms in Nepal Stock Exchange (NEPSE) in having knowledge on the
understanding of the importance of merger and acquisition in analyzing company
performance. It would also benefit other firms in competitive industry as this report
shows the synergy effect of Bank. The study would further provide more insightinto the
relationship between merger and acquisitions and performance, which would be value
to the academician and researchers in the same field.

1.7 Limitation of the Study

The proposed study has limitation on its part, which are as follows:
• This study is conducted only with few samples.
• This report has not used complex statistical tools such as regression, correlation
etc.
• The study is only based on one commercial bank that has gone through merge
process out of 20 commercial banks that have conducted M&A activity.

1.8 Literature Review

A literature review is a step-by-step process that involves the identification of published
and unpublished work from secondary data sources on the topic of interest, the
evaluation of this work in relation to the problem, and the documentation of this work
(Sekeran & Bougie, 2014). A survey of research article, newspaper article and financial
reports has been carried out to review the literature.

(Panthi, 2012) conducted a case study about major reasons for Nepalese finance
companies’ mergers failure for Synergy Finance Ltd. He focused on the particular SFL
merger’s failure to find out the major factors responsible for the downfall. He has
studied about the 3 companies under the renowned frameworks set by (Harspeslagh&
Jamison, 1991; Jarillo, 2003). Author has relied mainly upon literature reviews and
other the secondary sources like scholarly articles, journals, newspapers and other
publicly available sources on web. This study reflects the deep study of the official
statistics, data and reports and further analysis of them. For the reliability, author
collected the various interviews of the ex-chairperson and ex-CEO of SFL. In first part,
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author analyzes the reports of financial regulatory body Central Bank of Nepal to
understand the situation of the mergers. Along with that, he studies the Mergers Bylaw-
2011 provisions. Furthermore, he analyzes the almost all reliable financial and non-
financial indicators of SFL before and after mergers in order to focus on the particular
reason of its failure. As the conclusions, author finds that a merger is taken as handy
strategy to increase the capital adequacy rather than strategic improvement of financial
health of company. And furthermore, SFL failed in the mergers due to the unhealthy
mergers and failed strategy of reducing non-performing loans of the company.

(Adhakari, 2014) investigates about merger and acquisition as an indispensable tool for
strengthening Nepalese banking. The objective of this research was to study the impact
of merger and acquisition in the Nepalese banking and financial institutions when Nepal
Rastra Bank introduced a forceful merger bylaws policy in the year of 2011. It assesses
and evaluates the impact of M&A on the employees, customers, shareholders of the
merged entity and offers recommendations for further investigations to the concern
authorities. The theoretical part of this research is focused on brief introduction of the
central bank of Nepal, financial system and classification in Nepal. It also covers the
merger bylaws policy introduced by NRB. Some contemporary theories of merger and
acquisition have been studied. The result of the research provides a remarkable effect of
M&A on the merged BFIs. In overall, 20 percent employees were lay-offs from
different working department of the merged entity. Similarly, 80 percent of the merged
entity clients and customer are not aware of recent structural changes in Nepalese
financial sector. However, M&A has created a high degree of confidence and hope in
doing better performance by the merged entity among employers, corporate clients and
customer as well as shareholder’s. A positive signal has been visible in the whole
financial market injected by M&A.

(Joash, 2015)conducted a thesis on “The Effect of Merger and Acquisitions on

Financial Performance of Banks (A Survey of Commercial Banks in Kenya). The
researcher explained mergers and acquisitions perform a vital role in corporate finance
in enabling firms achieve varied objectives and financialstrategies. In Kenya, banks
have been merging with the goal of improving their financial performance. The study
examined the banks that have merged or acquired in Kenya for the period between 2000
and 2014. The aim of the study was to analyze whether the merger had any effect on the
banks’ performance. The study was guided by the objectives such as; to determine the
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effect of the mergers and acquisitions on the shareholders’ value and to examine the
implication of mergers and acquisitions on profitability. The study was a census of
which all the 14 banks that have merged or acquired other sin the period from 2000 to
date were investigated. Data was collected by use of questionnaires with both open and
closed ended questions. The collected data was analyzed using SPSS where the co-
efficient of correlation obtained was used to determine the nature of the relationship
between the independent and dependent variables. The study found out that the mergers
and acquisitions raised the shareholders’ value of the merged/acquiring banks in Kenya.
The study further revealed that the main reason why most banks merged or acquired was
to raise their profitability. The research questions were significant to the study and
useful in arriving data conclusion. The researcher recommended that thorough
feasibility studies should be carried out before the merger/acquisition process can be
done. On areas of further research, it was recommended that effect of M & A in other
sectors of the economy should be established with a view of drawing a parallel with
the effects of the same processes in the banking sector.

Dhakal (2015) studied about impact and challenges of merger and acquisition in
Nepalese banking and financial institutions. This paper presented the reasons for opting
merger activities among BFIs and also focused on the post-merger impact to the
employees, customers and shareholders of the merged bank. The research method used
in this paper was descriptive research, which implies the results based on the survey
and the analysis. The impact on employees and customers were analyzed through
questionnaires whereas the impact on shareholders was observed through analysis of
financial data of merged bank in 2 years of pre and post-merger phase. The results
showed that employees were satisfied with work, wages, working conditions etc. but
they were intensely impacted in the HR issues like cultural clash, positions issues,
socialization, favoritism etc. The customers felt the changes in value, product and
service in post-merger phase but required more innovative service. The overall financial
data showed that bank had improved a lot in post-merger phase hence increasing the
shareholder’s wealth. The challenges were observed in swap ratio, formation of BOD,
structure of management team, HR issues, IT issues etc. Therefore, M&A was a must
in Nepalese market for changing the poor performing BFIs into strong and credible
institutions. The BFIs should consider the socio-cultural factors along with procedural
and physical factors for merger. They should also involve with expert or investment
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banks for full-fledged merger advisory service to avoid the delay and cumbersome
process of merger observed in Nepal.

(Baniya & Shah, 2016) conducted a research on the factors affecting merger and
acquisition decision in Nepalese banking sector. The main purpose of the study was to
find out the factors that would lead to making decision regarding going for merger and
acquisition among the banks in Nepalese banking sector. Four theories: neo-classical,
agency, behavioral and resource dependency; have been taken into consideration for
purpose of finding out factors affecting decision to go for merger and acquisition.200
completely filled questionnaires (out of 250) were collected from the informants for the
purpose of data analysis. Similarly, Statistical Packages for Social Sciences (SPSS) was
used for the purpose of data analysis such as reliability analysis, factor analysis,
descriptive analysis, correlation and regression analysis. The results of the analysis
illustrated that out of nine factors; emphasis on providing service, emphasis on cost
efficiency and emphasis on fulfilling capital requirement had significant positive
relationship with decision to go for merger and acquisition while emphasis on better
branding had significant negative relationship with merger and acquisition decision.

1.9 Research Methods used for Data Collection and Analysis

Research methodology refers to the process which is used to collect information,
process, analyze and present the facts and figures for the purpose of making business
decisions. The research is primarily focused on the financial performance of merged
bank (Prabhu Bank) in 2 years of pre and 3 years of post-merger phase.

1.9.1 Research Design

“Research designs are plans and procedures for research that span the decisions from
broad assumptions to detailed methods of data collection and analysis” (Creswell,
2009). Descriptive research designs is the most felicitous research design for
conducting research as it seeks to accumulate facts and provides a basic picturesque of
financial position of the banks going in for M&A.

1.9.2 Population and Sample

The study examines the financial performance of Prabhu Bank. Currently there are 28
commercial banks in Nepal, out of which, 20 commercial banks have gone through
M&A process and Prabhu Bank has been taken as a sample for the study. Convenience
sampling technique has been used to select the sample firms for the present study.
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1.9.3 Sources of Data

The secondary data has only been used, which was collected from a wide array of
research papers, capital market, articles from national newspaper, and Bank supervision
report by Nepal Rastra Bank, Bank and financial statistics by Nepal Rastra Bank.

1.9.4 Data Processing Technique

 Tabulation and Diagrammatic Representation of Data

The data collected have been classified and presented in the tables to preserve the
understandability. The diagrammatic representation of data facilitated easy comparison
in analysis part. So, various diagrams such as bar diagram, line chart, etc. have been
used to give vivid presentation of data.

 Statistical and Financial Tools

Descriptive statistics refers to statistics, which summarize and describe the data in a
simple and understandable manner (Zikmund, Babin, Carr, & Griffin, 2009).
Descriptive statistical tools used in this report includes mean, standard deviation and
coefficient of variation (CV).

Financial tools depict the health of bank and financial institutions. Some of the major
financial ratios used for data analysis are Capital Adequacy Ratio (CAR), Core Capital
Ratio (CCR), Return on Equity (REO), Return on Assets (ROA), Net Profit Margin
(NPM), Assets Utilization Ratio (AUR), Loan to Deposit Ratio (LDR), Cash and
Equivalent to Total Deposit Ratio (CETDR), Cash Reserve Ratio (CRR), Debt to
Equity Ratio (D/E ), Debt to Assets Ratio (D/A) and Non-Performing Loan Ratio
(NPL).
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CHAPTER II

DATA PRESENTATION AND ANALYSIS

2.1. Organizational Profile

Prabhu Bank was established in 2013, after successful merger with Kist Bank. The
Bank has gone through the various phases of its growth trajectory over a short period
of its existence. Growth of Bank was phenomenal, especially after merger of Grand
Bank Nepal Limited, Kist Bank, Prabhu Bank Ltd, Bikash Bank Ltd, Gaurishankar
Development Bank Ltd and Zenith Finance Ltd in, 2016, attaining the status of “A”
class financial institution licensed and regulated by the central bank of Nepal, Nepal
Rastra Bank. The Bank has completed years of journey since the inception and has
accommodated seven different financial institutions in its making. The bank has a
network of 137 branches and 126 ATMs across the country, making it premier private
bank in terms of geographical reach and clientele segments with customer base of
850,000 among the private sector commercial banks in Nepal. The Bank offers the
full range of banking and investment services for personal and corporate customers,
backed by the team of highly motivated, young and dynamic professionals.

2.2. Data Presentation

 Capital Adequacy Ratio

Capital Adequacy ratio is one of the most significant financial tools that measures the
bank’s capital in terms of its risk-weighted exposure. Nepal Rastra Bank puts regular
surveillance on capital adequacy of banks and financial institutions; especially
commercial banks are under strict monitoring of Nepal Rastra Bank. The New Capital
Adequacy Framework requires the banks to maintain minimum capital requirements.
As per the framework, commercial banks need to maintain at least 6 percent Tier I
capital and 10 percent Total Capital (Tier I & Tier II). The minimum capital adequacy
requirements are based on risk-weighted exposures (RWE) of the banks. The average
Capital Adequacy Ratio of the commercial banks in the review year is 12.03 percent.
(Nepal Rastra Bank, 2014)
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Table 1

Capital Adequacy Ratio

Pre-Merger Post-Merger

Year 2012/13 2013/14 2014/15 2015/16 2016/17

CAR 11.75% 8.68% 11.20% 12.13% 13.10%
Industry Standard 11.00% 11.00% 11.00% 11.00% 11.00%

Source: Bank Supervision Report, 2016

In table 1, the five year data of Prabhu Bank has been depicted and in figure 1, the
tabular data has been depicted in line chart. In fiscal year 2013/14, which is deemed to
be the period of apex upheaval, the bank failed to maintain Capital Adequacy Ratio
with a short fall of 2.32 percent points. After merger, the bank successfully maintained
Capital Adequacy Ratio above the minimum standard.

14.00%

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
CAR Industry Standard

2012/13 2013/14 2014/15 2015/16 2016/17

Figure 1: Capital Adequacy Ratio

 Core Capital Ratio

Core Capital to Risk Weighted Asset is the comparison between a banking firm’s coreequity
capitals to risk weighted assets. It is also known as Tier 1 capital ratio. Tier 1 capital includes
equity capital, retained earnings, share premium, and perpetual non- cumulative preferred
stock less goodwill and other fictitious assets
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Tier I Capital Risk

Core Capital Ratio =
Weighted Assets

Table 2

Core Capital Ratio

Pre-Merger Post-
Merger
Year 2012/13 2013/14 2014/15 2015/16 2016/17
CCR 10.94% 7.65% 10.37% 10.96% 11.84%
Industry Standard 6.00% 6.00% 6.00% 6.00% 6.00%
Source: Bank Supervision Report, 2016

In table 2, the five year data has been presented that illustrates the position of Core
Capital Ratio before and after merger of Prabhu Bank and in figure 2, the tabular
data has been depicted in line chart. The Core Capital Ratio is always above the
industry standard maintained by Nepal Rastra Bank.

However, there is downfall in the Core Capital Ratio in Fiscal Year 2013/14,
nevertheless it is above the industry standard.

14.00%

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
CCR Industry Standard

2012/13 2013/14 2014/15 2015/16 2016/17

Figure 2: Core Capital Ratio

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 Return on Equity
Return on equity (ROE) is a measure of profitability that calculates how many dollars of
profit a company generates with each dollar of shareholders' equity. Return on equity
(ROE) is a measure of the profitability of a business in relation to the book value of
shareholder equity.

Net Income
ROE =
Shareholder’s Equity

Table 3

Return on Equity

Pre-Merger Post-Merger
Year 2012/13 2013/14 2014/15 2015/16 2016/17
NI -805 -305 1,018 1,117 1172.85
Equity 2000 2000 3,209 5,881 6175.05
ROE -40.25% -15.25% 31.72% 18.99% 18.99%

Source: Bank Supervision Report, 2016

In table 3, the data representing Return on Equity of the concerned bank has been presented, and
in figure 3, the tabular data has been depicted in line chart. The ROE in Fiscal Year 2012/13 and
2013/14 is drastically low, plunging below Zero, however, after merger, there has been a
remarkable financial progress with ROE jumping to 31.72% in FY 2014/15. Though in the later
sampled years, ROE is lower, it is positive and has surpassed ten percent point.
 14

7000

6000

5000

4000

3000

2000

1000

0
NI Equity ROE
-1000

-2000

2012/13 2013/14 2014/15 2015/16 2016/17

Figure 3: Return on Equity

 Return on Assets
Return on Asset indicates how profitable a company is relative to its
total assets. The return on assets (ROA) ratio illustrates how well management is
employing the company's total assets to make a profit.

Net IncomeTotal
Return on Asset =
Asset

Table 4

Return on Asset
Pre-Merger Post-Merger
Year 2012/13 2013/14 2014/15 2015/16 2016/17
NI -805 -305 1,018 1,117 1172.85
TA 23,431 21,191 46,510 68,338 71754.9
ROA -3.44% -1.44% 2.19% 1.63% 1.63%
Source: Bank Supervision Report, 2016

In table 4, the ROA of the concerned bank has been depicted prior and after merger. lar
data of Table 4 has been presented in line graph in figure 4. The ROA of concerned
bank before merger is negative, which reflects the poor financial health of the bank,
while after merger, the bank recovered its profitability position.
 15

Chart Title

80000
70000
60000
50000
40000
30000
20000
10000
0
-10000 NI TA ROA
2012/13 2013/14 2014/15 2015/16 2016/17

Figure 4: Return on Asset

 Net Profit Margin

Profit marginis expressed as a percentage of sales or operating revenue in case of bank
and financial institutions and, in effect, measure how much out of every dollar of sales a
company actually keeps in earnings. Net Profit Margin is the important indicator of
profitability that evinces the net profit in percentage of total operating revenue.

Net Profit
Net Profit Margin =
Total Operating Reven

Table 5

Net Profit Margin

Pre-Merger Post-Merger
Year 2012/13 2013/14 2014/15 2015/16 2016/17
NI -805 -305 1,018 1,117 1172.85
TOR 1,216 918 1,893 2,524 2650.2
NPM -66.20% -33.22% 53.78% 44.26% 44.26%

Source: Bank Supervision Report, 2016

 16

In table and figure 5, the ROA of the concerned bank has been depicted prior and after
merger.The same tabular data of table 5 has been presented in line graph in figure 5. The
Net Profit Margin in the FY 2012/13, and FY 2013/14 is negative, which evinces that the
bank was operating in heavy losses. However, in the latter years, the bank managed to
maintain positive Net Profit Margin.

Chart Title
3000
2500
2000
1500
1000
500
0
-500 NI TOR NPM Category 4

-1000

2012/13 2013/14 2014/15 2015/16 2016/17

Figure 5: Net Profit Margin

 Cash and Equivalent to Total Deposit Ratio

Cash and equivalent to Total Deposit Ratio (CETDR) measures the amount of liquid
asset held by the bank with respect to Total Deposit. Higher the cash and equivalent to
total deposit ratio, higher the liquidity of bank.
 17

Cash and Equivalent

CETDR =
Deposit

Table 6
Cash and Equivalent to Total Deposit Ratio

Pre-Merger Post-Merger
Year 2012/13 2013/14 2014/15 2015/16 2016/17
CE 3581 2059 10317 14127 14833.35
Deposit 21,093 19,835 42,144 60,941 63988.05
CETDR 16.98% 10.38% 24.48% 23.18% 23.18%
Industry Standard 20.00% 20.00% 20.00% 20.00% 20.00%
Source: Bank Supervision Report, 2016

In table 6, the Cash and equivalent to Total Deposit Ratio of the concerned bank has
been presented prior to and after merger. The same tabular data of table 6 has been
presented in line graph in figure 6. The bank has failed to minimum percentage
requirement of 20 percent during FY 2012/13 and FY 2013/14. The sudden downfall
in the liquid assets in FY 2013/14 reveals ailing health of the bank

Chart Title
3000

2000

1000

0
NI TOR NPM Category 4
2012/13 2013/14 2014/15 2015/16 2016/17
-1000
Figure 6: Cash and Equivalent to Total Deposit Ratio

 Cash Reserve Ratio

Cash Reserve Ratio is a specified minimum fraction of the total deposits of customers,
which commercial banks have to hold as reserves either in cash or as deposits with
 18

thecentral bank. It is also known as Cash Balance at NRB to Total Deposit Ratio.
Cash Balance at NRBTotal
Cash Reserve Ratio =
Deposit

Table 7
Cash Reserve Ratio
Pre-Merger Post-Merger
Year 2012/13 2013/14 2014/15 2015/16 2016/17
NRB Balance 2,412 899 5,986 7,505 7880.25
Deposit 21,093 19,835 42,144 60,941 63988.05
CRR 11.44% 4.53% 14.20% 12.32% 12.32%
Industry Standard 6.00% 6.00% 6.00% 6.00% 6.00%

Source: Bank Supervision Report, 2016

In table 7, the Cash Reserve Ratio to Total Deposit Ratio of the concerned bank has
been presented prior to and after merger. The same tabular data of table 7 has been
presented in line graph in figure 7. The bank has failed to minimum percentage
requirement of 20 percent during FY 2012/13 and FY 2013/14. The sudden downfall
in the liquid assets in FY 2013/14 reveals ailing health of the bank
70,000

60,000

50,000

40,000

30,000

20,000

10,000

0
NRB Balance Deposit CRR Industry Standard

2012/13 2013/14 2014/15 2015/16 2016/17

Figure 7 . Cash Reserve Ratio

2.3. Findings and Discussion
• Prior to merger, Prabhu bank had maintain Core Capital Ratio higher than the
minimum requirement set by the Nepal Rastra Bank, however, the bank has failed
to maintain minimum Capital Adequacy Ratio of 11 percent in the FY 2013/14.
 19

Nevertheless, after merger the Bank has maintain both CCR and CAR above the
minimum requirement set by Nepal Rastra Bank.
• Prabhu Bank suffered heavy losses in FY 2012/13 and FY 2013/14. The negative
ROE, NPM, and ROA of Prabhu Bank reveals that the bank is suffering
financially, which eventually led to its bankruptcy. After merger, the ROE, NPM,
and ROA gradually recovered.
• Non-Performing Loan is actually bad loans for bank that adds risk to bank. High
non-performing loan symbolizes that bank is not utilizing its deposit in good loans.
Prabhu bank eventually plunged to bankruptcy due to burgeoning non-performing
loan. After merger, Bank managed to dwindle high Non- performing loan in the
latter years.
• Prabhu Bank in its years of collapse was struggling to maintain liquidity. The low
CETDR reflects that bank has failed to maintain enough liquidity ensuing the
drastic situation of bank panic. Prabhu bank in its year of collapse maintained
CETDR of only 10.38 percent, which is twice low in comparison to the minimum
requirement of 20 percent set by Nepal Rastra Bank.

• After merger the bank recovered all its losses, maintained adequate liquidity as per
the requirement of Nepal Rastra Bank, decreases Non-Performing Loan, and
finally tried its best to reduce the size of balance sheet by reducing the debt
 20

The findings of this study revealed that overall financial performance of Prabhu bank
after merger was consistently better on each study period; similarly (Joash, 2015)
concluded that in Kenya banks have improved their financial performance with M&A
activities; interestingly (Panthi, 2012) revealed that merger is taken as handy strategy
to increase the capital adequacy rather that strategic improvement of financial health
of the institutions. Furthermore, (Adhakari, 2014) revealed, merger and acquisition as
an indispensable tool for strengthening in Nepalesebanking and financial institutions.
Therefore further-extensive study can be done to depict the actual benefits of the M&A
activities on financial performance.

The report visualizes summarized scenario of pre and post-merger financial

performance of Bank within the study period of 2-year pre-merger and 3-year post
merger. Thus other researchers can conduct an intense research with longer study
period. Similarly, the report has covered only the certain major ratios to evaluate the
overall financial performance of the sampled bank. Cash and Equivalent to Total
Deposit Ratio, Loan and Advances to Total Deposit Ratio and Cash Reserve Ratio have
been used to depict the liquidity performance of the sampled bank while other ratios
like Cash and Portfolio Investment to Deposit Ratio (CPIDR) and Net Loan to Total
Assets (NLTA) can also be used as proxy of liquidity performance. On the other hand,
profitability performance of the financial institutions can be represented by interest
spread ratio and earning spread ratio.
 21

CHAPTER III
CONCLUSION AND ACTION IMPLICATION

3.1. Conclusion
The financial performance of the merged bank has been analyzed on the basis on
Profitability performance, Liquidity performance, Credit performance/Asset credit
quality, Capital base and Leverage position. These financial ratios evince the overall
performance of the bank. The pre-merger scenario of Prabhu Bank was not satisfactory
as Prabhu Bank during 2013/14 was deemed to be the period of apex upheaval, as
Prabhu Bankfailed to maintain Capital Adequacy Ratio with shortfall of 2.32 percent
points. Moreover the profitability position before merger was at critical level during
2012 and2013 with negative ROA, ROE and NPM. Prior to merger (in FY 2012/13 and
FY 2013/14) the bank has been struggling to maintain the adequate liquidity. The
diminishing Cash and Equivalent to Total Deposit Ratio and Cash Reserve Ratio the
bank was in short of cash and possibly ensuing bank run. Similarly, credit performance
measured by Non-Performing Loan to Total Loan and Advances Ratio is higher during
pre-merger period of study. This indicates the bank has been struggling to recover the
loans. Likewise, leverage ratios namely Debt Asset Ratio and Debt Equity Ratio was
studied. The debt to asset ratio prior to merger was measured at 9.36 and 9.46 in terms
of asset base of 10 (0.936 and 0.946 in terms of 1) in FY 2012/13 and FY 2013/14
respectively. This high debt to asset ratio eventually led to bankruptcy. Similarly, the
debt equity ratio is also high prior to merger almost ranging to 10 times, which reflects
that bank has used excessive leverage plunging its net profit down to negative.

The decision of Prabhu Bank to merge was a worthwhile indeed. During the study
period of post-merger, Bank was successful to maintain the minimum capital
requirement set by NRB. The profitability performance after merger with other banks
indicates a remarkable progress bringing the profitability ratios (ROA, ROE and NPM)
to positive. The CV of ROA, ROE and NPM before merger is 40.95%, 45.05% and
33.17% respectively while CV of ROA, ROE and NPM after merger is 14.36%,
25.83% and 9.46% respectively. Hence, Bank has maintained high consistency in
profitability ratios which has presented a financially safe scenario for investors and
depositors. Similarly, the liquidity performance posterior to merger showsthe bank has
been successful to meet the NRB requirement. The CV of CETDR, CRR and LDR
 22

prior to merger is 24.11%, 43.23% and 14.46% respectively while the CV of CETDR,
CRR and LDR after merger is 2.59%,6.88% and 4.22% respectively indicating the
uniformity in maintenance of liquid ratio above 20%. Meanwhile, the credit
performance of the bank is measured by percentage of non-performing loan overtotal
loan and advances. There has been a gradual decrement in non-performing loan after
merging with Bank (in FY 2014/15 to 2016/17) contributing to increment of profit of
the bank. Lastly, the leverage ratios during the study period are almost ranging to 10
times, which reflects that bank has excessive leverage plunging its net profit down.

3.2. Action Implications

The study is based on the impact of merger on the performance of Prabhu bank. The
study lays emphasis on the impact of merger on some critical aspects of bank
performance such as capital adequacy, liquidity, leverage, and profitability. The study
is confined to limited aspects of bank performance; thus the researchers can further
make intensive study with other numerous variables apart from those that have been
considered in this study.

Some of the major action implications have been enlisted below:

• This study recommends managers to have strong grip on leverage ratios. The higher
leverage ratio possess more threats to any organization. The Debt Asset ratio above
0.9 is very high and is prone to financial crash. Moreover, the Debt Equity ratio is
10 times is extremely vulnerable. Thus, the study suggest managers to reduce the
size of balance sheet.

• The bank has to utilize its assets in more productive sectors. The Bank, with
dwindling Asset Utilization Ratio, seems not being able to effectively utilize its
assets in productive sectors. Further, the bank has lower loan to deposit ratio of 70
percent which is 10 percent below the maximum lending capacity set by NRB.

• Bank has excess liquidity which is apparent through Cash and Equivalent to total
deposit ratio. So, utilizing excess liquidity can make a worthwhile contribution in
further increasing the profitability.

• Though the Bank managed to reduce high Non-Performing Loan of around 24

percent, a consequence of Prabhu Bank’s management failure, the bank still has
NPL of 5 percent (approx.) after merger. Thus, the study recommends bank
 23

managers to make a thorough review of all the loans and advances of the bank and
put an effort to turn non-performing loan to performing loans.
 24

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