Effect Of Consolidation On Corporate Financial Performance

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EFFECT OF CONSOLIDATION ON CORPORATE FINANCIAL PERFORMANCE

Abstract

In this research work titled effect of consolidation on corporate financial performance of Nigerian banking sector. The researcher examined the effect of total assets on earnings per share of Nigerian banks. The effect of total deposit on earnings per share of Nigerian banks. And the effect number of branches of Nigerian banks on earnings per share of the banks. Data for the study was sourced through the annual report of the selected banks (Access bank plc and Guarantee Trust bank plc) and journal articles related to the subjects matter. Eview was used in the data analysis. The result revealed  that the observed distribution for Earning per share, value(EPS), Total Assets (TOASSETS), Total Deposit (TODEPOSIT) and Numbers of Branches (BRA) have skewness coefficients of -0.142797, -1.021034, -1.046997 and -0.306628 respectively. This is an indication that TOASSETS and TODEPOSIT has a frequently distribution that is not a normal one. The table further indicates that the Kurtosis coefficient for EPS, TOASSETS, TODEPOSIT and BRA are 1.384315, 2.745141, 2.692382 and 1.797293 respectively. There are to same extent within range of normality except TOASSETS and TODEPOSIT. The implication of these findings is that the frequency distribution of EPS and BRA are to a large extent normally distributed. The significant coefficient of Jargue-Bera statistics is an indication that the frequency distributions of the series are not normal. Table 1 indicates that EPS, TOASSETS, TODEPOSIT and BRA have reported p-value of 0.755469, 0.643299, 0.627126 and  0.827081 respectively. The implication of the findings is that the frequency distribution of EPS, TOASSETS, TODEPOSIT and BRA was not normal. This confirms our earlier position. When skewness and kurtosis were applied for test of normal distribution except TOASSETS and TODEPOSIT. It was also observed that total assets influences the earnings per share of Nigerian banks. Total deposit has significant effect on the earnings per share of Nigerian banks. It was also observed that number of branches of Nigerian banks influences the earnings per share of the banks. Based on the findings the researcher recommends that The managements of banks should work hard to ensure that adequate measures had been put in place to determine the operational /intermediation efficiency of their banks so that effective and efficient utilisation of resources would be maintained. The Nigerian banking regulators should endeavour to determine the potential outcomes of any reform, ordinance, and regulation before it is made mandatory to the banks to comply with. This is because some reforms might not be beneficial. The management and staff of banks should evaluate the basic sources of banks’ profitability.

 

 

 

 

 

TABLE OF CONTENT

Title                                                                                                                  ii          

Certification                                                                                                      iii         

Approval                                                                                                          iv

Dedication                                                                                                        v

Acknowledgments                                                                                            vi

Abstract                                                                                                           vii

CHAPTER ONE

Introduction                                                  

1.1       Background of the Study                                                                      1

1.2       Statement of the Problem                                                                      3

1.3       Objective of the Study                                                              4

1.4       Research Questions                                                                              4

1.5       Statement of Hypotheses                                                                      4

1.6       Scope of the Study                                                                               5

1.7       Limitation of the Study                                                              5

1.8       Operational Definition of Term                                                  6                                 

CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1 Conceptual Framework                                                                              7

2.1.1 Concept of bank consolidation through merger                                         7

2.1.2 The Evolution of the Nigeria Banking sector                                             7

2.1.3 Banks Position to consolidation                                                                10

2.1.4 Capital Adequacy in Nigeria Banks                                                          13

2.1.5 Regulatory and Legal Framework of Capital Adequacy                14

2.1.6 Trend in Bank Consolidation                                                                    18

2.1.7Consolidation and the Emergene of mega Banks                            19

2.1.8 Issues And Challenges Of Banks Consolidation                            21

2.1.8.1 Pre-Consolidation                                                                                21

2.1.9 Consolidation And Financial Impact On Banks                             25

2.1.10        Impact Of Consolidation On The Nigerian Economy               27

2.2 Theoretical Framework                                                                              29

2.2.1 Delegated monitoring Theory                                                                   29

2.2.2. Process of information Theory                                                                 30

2.2.3. Liquidity transformation Theory                                                   31

2.3 Empirical Review                                                                            31

2.3.1 Empirical Review on Total Asset                                                  31

2.3.2 Empirical Review on Earnings Per Share                                      34

2.3.3 Empirical Review on Total Deposit                                                           36

CHAPTER THREE

METHODOLOGY

3.1       Research Design                                                                                   44

3.2       Sources of Data Collection                                                                   44

3.3       Area Of The Study                                                                               44

3.4              Population Of Study                                                                             45

3.5              Sample Size Determination                                                                    45

3.6       Model Specification                                                                              45

3.7       Description of variables                                                                         46

3.8       Method of data Analysis                                                                       46

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

4.1       Data Presentation                                                                                 48

4.2       Descriptive Statistics of the Variables                                        49

4.3       Regression Analysis Result                                                                    52

4.4       Group Data Analysis                                                                             60

CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION

5.1       Summary of findings                                                                              66

5.2       Conclusions                                                                                          66

5.3       Recommendations                                                                                67

            References

CHAPTER ONE

INTRODUCTION

1.1              Background of the study

Consolidation in the banking system is a global phenomenon, which is said to have started in advanced Economies. Notable examples of countries experiencing a wave of mergers and consolidations in the banking industry in recent times are the United States of America (USA) and Japan (Hall, 1999). According to Kwan (2004), since the enactment of the Riegle-Neal Act, which allows interstate branch banking beginning from 1997, the Number of large bank mergers in the USA has increased significantly. Today, the U.S.banking sector is reported to be in good shape, with record profits and relatively low Volumes of problem loans.

Further research on mega mergers in the USA suggests that Merged banks experienced higher profit efficiency from increased revenues than individual banks, due to the fact that they provide customers with high value added Products and services (Akhavin, Allen,Berger, David and Humphrey 1997).

Historically, the Nigeria banking industry has undergone four stages of development phases. The first stage could be described as the unguided liaises fair phase 1930 to 1958, during which several poorly capitalized and unsupervised indigenous bank failed before their tenth anniversary. The second stage was the control regime 1960 to 1985, during which the central bank of Nigeria ensured that only fit and proper banks were granted a license. The year 1986 witnessed tremendous change in the nation’s financial landscape.

This was as a result of the economic reforms embodied in the structural adjustment programmed (SAP) that marked the introduction and commencement of neoliberal philosophy of free entry from being in operation which was over stretched and banking license were dispense by the political authorities on the basis of patronage . This reform however, led to the growth in terms of number of banks, branches, product creativity and the level of operation of Nigerian banks. This was the third phase which was referred to as the post-SAP, the control regime 1986 to 2004 (Ekezie, 1997).

However, from 1987 to 1989, there were series of fluctuations experienced in the foreign exchange market and insider abuses in the Nigerian banking industry. The end result was the massive close down of banks that began to set in mainly due to poor corporate governance non- compliance with regulations, weak management and declining profits, capital efficiency, insolvency, high incidence of nonperforming loans/poor asset quality , and over reliance on foreign exchange market for income through round tripping of officially sourced foreign exchange (Yakubu, 2008).hence the need for a reform in the banking system.

Mergers and Acquisition which are divisions of consolidation are commonplace in developed countries of the world but are just becoming prominent in Nigeria especially in the banking industry. Before the recent consolidation, the Nigerian banks had not fully embraced mergers and acquisitions as expected because of their cultural background in terms of asset ownership, greediness, shame, fear of what people will say and lack of proficiency required for mergers and acquisitions, among other reasons. The issue of mergers and acquisitions in banking industry started in October, 2003 under the past president of CBN (Charles Soludo). The CBN rolled out incentives to encourage weaker banks adopt mergers and acquisitions. The incentives included concessionary cash reserve ratio for a period of two years to the newly restructured banks, conversion of overdrawn positions of weak banks to long-term loans

with concessionary interest and the acquired banks could be given up to 24 months grace period for complying with the minimum liquidity ratio requirement to enable it settle down as a newly recapitalized/restructured bank.

Though, most of the feeble banks were unwilling to comply until the new order on July 6, 2004 (Famakinwa et al, 2004). The situation changed from July 6, 2004 as many banks had either merged with or acquired other banks.

The increase in awareness and scheme is due to a number of reasons such as threat of distress, regulatory driven environment, foreign inducement, persuasion from regulatory bodies and economic benefits of mergers and acquisitions. The most common of these factors that is responsible for the growth of mergers and acquisition in Nigerian Banks is regulatory factor. Thus, mergers and acquisitions as consolidation tools have become a near permanent feature of our financial system after July 6, 2004 (Ewubare, 2004). The policy of 25 billion naira minimum capital base forced banks to go into merger and or acquire one another as a strategy to meet the requirement. Part of the broad objectives of consolidation expected include improvement of profitability and efficiency of the banks in terms of operations and finance.

1.2              Statement of the Problem

The need for a strong, reliable and viable banking system in Nigeria is under scored by the fact that the industry is one of the few sectors in which the shareholders’ Fund is only a small proportion of the liabilities of the enterprise. It is, therefore, not surprising that the banking industry is one of the most regulated

sectors in any economy. It is against this background that the Central Bank of Nigeria, in the maiden address of its past Governor, Prof. Charles Soludo, outlined the first phase of its banking sector reforms designed to ensure a diversified, strong and reliable banking industry. The major objective of the reforms is to ensure and guarantee an efficient and sound financial system. Thus, the reforms were designed to enable the banking system develop the required resilience to support the economic development of the nation by efficiently performing its functions as the medium of financial intermediation (Lemo, 2005). Also, these reforms were to ensure the safety of depositors’ money, position banks to play active developmental roles in the Nigerian economy, and become major players in the sub-regional, regional and global financial markets.

1.3 Objectives of the study

The aim of this research work is to examine the effect of consolidation on corporate financial performance of Nigerian banking sector. The specific objectives of this research work includes the following;

  1. To examine the effect of total assets on earnings per share of Nigerian banks.
  2. To ascertain the effect of total deposit on earnings per share of Nigerian banks.
  3. To evaluate the effect number of branches of Nigerian banks on earnings per share of the banks.

1.4 Research questions

  1. To what extent total assets affect earnings per share of Nigerian banks?
  2. To what extent does total deposit affect earnings per share of Nigerian banks?
  3. To what extent number of branches of Nigerian banks affect earnings per share of the banks?

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