A SUMMER REPORT PROPOSAL ON THE TOPIC OF BANK

MERGER AND OPERATING PERFORMANCE

OF COMMERCIAL BANK OF NEPAL

BY
AANAND MISHRA
TU Exam roll no: -34
TU Reg no: -

A Summer project proposal submitted to

Dr. Sanjeev Pradhan / Rajesh Kumar Neupane
Project proposal supervisor
in partial fulfilment of the requirement for the degree of

Bachelor of Business Administration (BBA)

at the
Modern Nepal college
Tribhuvan university

Sorhakhutte, Kathmandu
June, 2024
 TABLE OF CONTENT
1. Introduction and background ............................................................................. 1
1.1 Background of the study ..................................................................................1
2. Statement of the Problem .................................................................................... 3
3. Research Objectives ............................................................................................. 3
4. Hypothesis formulation .........................................................................................3
5. Significant of the study ..........................................................................................4
6. Literature Review ................................................................................................ 4
6.1 Theoretical Review .......................................................................................... 4
6.2 Empirical Review...............................................................................................5
6.3. Theoretical Framework ....................................................................................6
6.4. Research Gap .................................................................................................. 7
7. Research Methodology .........................................................................................8
7.1 Research Design............................................................................................... 8
7.2 Population and sample size .............................................................................. 8
7.3 Sampling Technique ..........................................................................................8
7.4 Instrumentation of Data .....................................................................................8
7.5 Methods of Data Collection .............................................................................. 9
7.6 Statistical Tools Used for Data Analysis ............................................................9
7.7 Nature and Sources of Data ...............................................................................9
8. References ...............................................................................................................
1.Introduction and background
1.1 Background of the study
The financial liberalization of the late 1980s has brought immense benefits to the Nepali economy in the forms
of increase in private sector investments and surge in access to finance opportunities. The competitive financial
system has developed customer-centric services and innovative use of technology thereby, widening the service
provided by the banking institutions throughout the country. However, due to inadequate capital and narrow
financial inclusiveness, the Nepali financial industry has not lived up to the promises it had shown immediately
following the liberalization process. Nepali banking system is characterized by low volume of turnover, high-
interest rate on lending, wide interest rate spread, inefficient management and inadequate resources to fund big
projects (NRB, 2013). Nepali financial system has not only fallen short of attaining meaningful financial
inclusion but also displays regional and urban-rural disparity. Nepal Rastra Bank (NRB) has undertaken the
financial consolidation policy in order to overcome these problems. Merger and Acquisition (M&A) is one of
the efficient measures of consolidation in the financial system. The Government of Nepal has been promoting
mergers as a means to achieve efficiency through economies of scale and scope by facilitating a consolidation
between weaker and stronger banks to create an efficient and robust merged entity.
Merger and Acquisition is a relatively new concept to the Nepali Banking and Financial Institutions (BFIs).
Nepal Rastra Bank introduced the Merger Bylaw 2068 (B.S) grounded on the Company Act 2063(B.S) article
177, BAFIA 2063 (B.S) article 68 and 69, and encouraged all the BFIs to undergo merger as a consolidation.
Laxmi Bank, Nepal Bangladesh Bank, and Narayani National Finance were among the few institutions to have
undergone merger process before the announcement of the bylaws. Through the 2015 monetary policy, NRB
announced a four-fold hike in the minimum paid up capital of the commercial banks and up to twenty-four-fold
increment in the same for the development banks. This required the commercial banks to increase their paid-up
capital to Rs. 8 billion while the national level development bank would have to increase to Rs. 2.5 billion. The
requirement imposed by the banking regulator has further enhanced the conditions to foster the merger and
acquisition process; the wave of M&A, that started as early as 2011, has hit Nepali BFI sector. As of June 2016,
96 BFIs have taken part in the merger process to become 35 (NRB, 2016).
Merger and Acquisition is considered a vital tool to facilitate the sound and efficient performance of the
financial industry while subjugating the problems underlying the system. The instrument also plays a key role in
bringing down the cost of operations and increasing the market competitiveness and profitability of the firms
(Gautam, 2016). In the international financial markets, M&A is often conducted to fulfil the demands of
regulatory bodies and as an attempt to enhance the competitive advantage and expand the operations of the
financial institutions. But, despite these hopeful expectations, almost half of the mergers and acquisitions fail to
meet the initial expectations (Cartwright and Cooper, 1993).

A merger was not a choice of the Nepal Rastra bank but it was a compulsion strategy to increase the capital and
strengthen their capacity to face the competitive market. It is perceived that, merger will result in newer and
larger organizations which are supposed to be efficient in allocating resources, human and capital and maximize
the output gains. It is believed that the larger banks, with more resources can offer more products and services at
lesser operating cost i.e. at economies of scale. However, the perceived gains do not occur, at least not to the
extent that is perceived. Some of the genuine impacts or effect of mergers on the banking industry can be
observed around the world, which has been the reduced availability of loans to the customer base after merger. It
is mainly because of decline in competitiveness in banking industry and increase in the interest rates above
reasonable level. Banks have been observed to be engaged in acttivites ranging from anti-competitiveness to
corruption after the merger.
Bank merger is something of novelty for Nepal, but it has long history in other countries. Merger in Nepal is
horizontal merger because merger is happening between two or more firms which are operating in similar kind
of business. For the development of banking system in Nepal, NRB refreshed and changed financial sector
policies, regulations and institutional developments in 1980 A.D. Government emphasized the role of the private
sector for the investment in the financial sector. These policies opened the doors for foreigners to enter into
banking sector in Nepal under joint venture (Sharma, 2014).

The outcome of this study will be primarily beneficial to policy makers, to rethink whether the results are as
intended when the policy was originally introduced. Besides them the study will also prove beneficial to many
stakeholders in the banking industry of Nepal. The banks that are being merged in future will have an overview
of the condition and impact of mergers in the country and make possible strategies to make it successful.
Besides that, investors will have an overview of the impact of mergers in the Nepalese banking industry. They
will be
able to analyze the trends and growth of the banks being merged and pull out or invest more money in the banks
according to their interest . With the help of this paper, researcher is trying to identify the areas where the
merged banks are doing good and where they are going down which can be taken as a reference by the banks to
be merged in future and can work upon those factors which may take down the performance
2. Statement of problem

The merger and operating performance of commercial banks in Nepal present a multifaceted issue, impacting
various stakeholders including shareholders, employees, and customers. Identifying the beneficiaries, challenges
faced, decision-makers involved, and the changes in post-merger operations is crucial for understanding the
overall efficacy of these mergers. Additionally, assessing the competitive responses from rival banks provides
insight into the broader market dynamics influenced by such consolidations. Furthermore following question
show statement of problem

 Who benefits from bank mergers in Nepal?

 Who faces the most significant challenges during the merger process?
 Who are the key decision-makers in bank mergers in Nepal, and how do their decisions impact the
outcome?
 Who monitors and evaluates the post-merger performance of banks in Nepal?
 Who experiences the most significant changes in terms of operating performance post-merger?
 Who are the competitors affected by bank mergers, and how do they respond?

3.objective of the study

 1. To analyze the impact of Return on Assets (ROA) on the operating performance of commercial banks in
Nepal before and after mergers.
2. To evaluate the influence of Return on Operating Expenses on the operating performance of commercial
banks pre- and post-merger.
3. To investigate the relationship between Return on Loan Loss Provisions and the operating performance
of commercial banks in the merger context.
4. To assess the effect of Debt Equity Ratio on the operating performance of commercial banks in Nepal
before and after mergers.
5. To examine the correlation between Return on Staff Expenses and the operating performance of
commercial banks in Nepal in the context of mergers.
6. To determine the effect of Net Profit Margin and Operating Profit Margin on the operating performance
of commercial banks in Nepal during the merger process.

4. Research hypothesis
H2: The Return on Operating Expenses has a significant positive impact on the operating performance of
commercial banks post-merger.
H3: There is a significant relationship between Return on Loan Loss Provisions and the operating performance
of commercial banks following mergers.
H4: The Debt Equity Ratio significantly affects the operating performance of commercial banks in Nepal after
mergers.
H5: The Return on Staff Expenses is significantly correlated with the operating performance of commercial
banks in Nepal before and after mergers.
H6: The Net Profit Margin and Operating Profit Margin have a significant positive effect on the operating
performance of commercial banks in Nepal during the merger process.

5. significance of study
The study on the merger and operating performance of commercial banks in Nepal is significant as it offers
critical insights for multiple stakeholders. For policymakers and regulators, it provides evidence to craft
effective frameworks that ensure stable and beneficial mergers. Bank executives can leverage the findings to
strategize mergers for optimal performance improvements, while investors gain a clearer understanding of the
financial impacts, guiding better investment decisions. Academically, the study fills a gap by contributing
empirical data specific to Nepal, aiding future research. Furthermore, by highlighting how mergers influence
operating performance, the study indirectly addresses customer concerns and supports economic development
by promoting a more efficient and robust banking sector.

6 . literature of review
A literature review is a critical analysis of a segment of published body of summary, classification and
comparison of prior research, review of literatures and theoretical articles, Literatures found in terms of popular
write-ups reports, studies, articles will be reviewed. It is a way to discover what other research in the area of
related problem has uncovered.
6,1 theoretical framework
The theoretical framework for studying the merger and operating performance of commercial banks in Nepal
integrates several key perspectives. Drawing from efficiency theory, mergers are viewed as opportunities to
achieve economies of scale and improve resource allocation (Berger, 1998). The resource-based view (RBV)
emphasizes how mergers allow banks to leverage unique resources and capabilities to enhance competitive
advantage (Barney, 1991).
Financial performance metrics such as Return on Assets (ROA) and Profit Margin provide quantitative measures
to assess the effectiveness of mergers in enhancing operational efficiency and profitability (Cornett et al., 2006).
Agency theory contributes by examining the alignment of incentives between shareholders and management
post-merger, crucial for understanding decision-making and governance dynamics (Jensen & Meckling, 1976).
Finally, institutional theory underscores the role of regulatory frameworks and institutional pressures in shaping
merger outcomes within the socio-economic context of Nepal). Together, these theoretical perspectives form a
comprehensive framework for analyzing the complexities and implications of bank mergers in Nepal's banking
sector. (DiMaggio & Powell, 1983)

6.2 Emperical Review

Research have conducted a study to evaluate the changes in the performance of banks after mergers with the
help of revenue enhancements and the cost reductions. They find that industry-adjusted operating
performance of merged banks increases significantly after the merger, large bank mergers produce greater
performance gains than activity diversifying mergers, geographically focusing mergers produce greater
performance gains than geographically diversifying mergers and performance gains are larger after the
implementation of nationwide banking in 1997. Further, they find improved performance is the result of both
revenue enhancements and cost reduction activities. However, revenue enhancements are most significant in
those mergers that also experience reduced costs . ( Cornett, McNutt and Tehranian ,2006)

Another research have aimed at analyzing the post-merger operating performance for acquiring firms in Indian
industry during the post-reform period, from 1991-2003, which was expected to provide large sample size
across industries. The post-merger operating performance of acquiring firms for different relative sizes (of
acquiring and acquired firms) was analyzed to see if differences in sizes of acquiring and acquired firms can
cause a different impact on the outcome compared to general results of merger studies. They have evaluated the
impact of merger on the operating performance of acquiring firms in different industries by using pre and post
financial ratios to examine the effect of merger on firms. They have selected all mergers involved in public
limited and traded companies in India between 1991 and 2003 and the result has suggested that there is little
variation in terms of impact on operating performance after mergers. In different industries in India particularly
banking and finance industry have a slightly positive impact of profitability. Some of the industries have a
significant decline both in terms of profitability and return on investment and assets after merger ( Mantravadi
and Reddy ,2007)

Altunbas and Marques have observed the impact of strategic similarities between bidders and targets on post-
merger financial performance. This article shows that on average, bank mergers in European Union have
resulted in improved return on capital. They ran the empirical analysis by using an extensive sample of
individual bank mergers which in turn, was linked to individual bank accounting information. They have found
that there are improvements in performance after the merger has taken place particularly in the case of cross-
border mergers . In terms of the impact of strategic relatedness on performance, the overall results show that
broad similarities among merging partners are conducive to an improved performance, although there are
important differences between domestic and cross- border mergers and across strategic dimensions (Altunbas
and Marques ,2008)

Kemal has studied the post-merger profitability of Royal Bank of Scotland where he has used accounting ratios
to analyze the financial performance of Royal Bank of Scotland (RBS) in Pakistan after merger with an aim to
find out the answer of “Does merger of the banks improves the profitability?” The report has analyzed their
financial statements for four years (2006-2009) by using 20 vital ratios which includes the ratios from
profitability, liquidity, market value etc. The results show that the financial performance of RBS in the areas of
profitability, liquidity, assets management, leverage and cash flows has been quite satisfactory before the merger
deal. It means that merger deal fails to improve the financial performance of the bank. This conclusion may not
be the result for all the banks, as others may gain profit or increase profitability from the mergers. But in case of
this report of RBS in Pakistan, merger does not work for it.( Kemal ,2011)
The researcher have investigated the impact of mergers and acquisitions (M&A) on corporate performance. It
compares performance of the corporates involved in M&A before and after M&A. From the paper, they
concluded that acquiring firms in India appears to have performed better after M&A in comparison to their
performance before M&A, primarily due to reduced cost, economies of scale and operational synergies( Rani,
Yadav and Jain ,2015) Abdulazeez,
Another resercher have examined the impact of mergers and acquisitions on the financial performance of some
selected deposit money of some selected deposit money banks in Nigeria from 2002 to 2008. They have used
returns on asset and return on equity of the selected banks to measure the financial performance of the banks of
some selected deposit money of some selected deposit money banks in Nigeria from 2002 to 2008. They have
used returns on asset and return on equity of the selected banks to measure the financial performance of the
banks equity of the selected banks to measure the financial performance of the banks performance owing to
merger and acquisition leading to more financial efficiencyin the Nigerian banks. The study recommends that
banks should be more aggressive in financial products marketing( Suleiman and Yahaya ,2016),
6.3 conceptual framework
The conceptual framework is based on the paper. The paper has compared the pre and post-merger operating
performance of various banks on basis of some variables like operating profit margin, They have gross profit
margin, net profit margin and return on net worth, return on assets and debt-equity ratio. compared the level of
significance between pre and post-merger financial health of the selected banks using paired sample t-test and
found that banking sectors have shown some positive impact on profitability and other sectors are either in same
condition or have negative impact on operating performance.
Functionally
The conceptual framework can be further materialized into a functional form as
below;
Q = f (X i), Where i = 1, 2, 3,….., 8
i.e. Q = f (X 1, X 2, X 3, ….., X8)
Where,
Q = Operating performance of the bank
X 1 = Operating Profit Margin
X 2 = Net Profit Margin
X 3 = Return on Assets
X 4 = Return on Net Worth (Equity)
X 5 = Debt Equity Ratio
X 6 = Return on Staff Expenses
X 7 = Return on Loan loss Provisions
X 8 = Return on Operating Expenses

7.Reserch methodology
Research methodology is a manner of determining how a researcher intends to carry out their research. It’s a
Logical, systematic plan to resolve a research problem. It will provide reliable, valid results that will address
their aims and objectives. Research methodology is all about the specific procedures or techniques used to
identify, select, process, and analyze information about topics.

7.1 Research design

The researcher will use descriptive design where an attempt has been made to measure the impact of mergers
on the operating performance of Nepalese bank being merged. By focusing on documenting and analyzing
existing practices, trends, and outcomes related to bank mergers, this design allows researchers to gather
detailed information about how mergers are structured, executed, and their immediate impacts on operational
performance. Through methods such as surveys, interviews, and document analysis, descriptive research enables
a thorough exploration of complex factors influencing merger dynamics, including financial metrics, regulatory
frameworks, managerial decisions, and market conditions. This approach not only provides a snapshot of the
current state of bank mergers in Nepal but also uncovers contextual insights that enhance the understanding of
why certain outcomes occur. Another reserch design is quantitative reserch design , such as longitudinal analysis
of financial performance metrics (e.g., ROA, ROE, Profit Margin) before and after mergers, with statistical
techniques like regression analysis to identify relationships between variables.
Population and sample size

7.2.Sampling technique
The researcher will use convenience and judgmental sampling technique Since all mergers cannot be studied
and analyzed, based on data availability and time constrain. the researcher has studied these three merged
entities on the basis of. Based on NRB’s research paper(2015) that has used the 3 years pre- and post-merger
data, the researcher has also chosen to use minimum of 3 years data. For the required time period only the
following three banks have the financial data

7.3 Instrumentation of data

For studying the merger and operating performance of commercial banks in Nepal, an effective instrumentation
strategy would involve using a combination of financial statements for quantitative analysis of key performance
indicators like ROA and Profit Margin before and after mergers. Surveys would be conducted among
stakeholders such as bank executives, employees, and customers to gather quantitative data on satisfaction
levels and perceptions of merger impacts. Semi-structured interviews with key stakeholders and regulators
would provide qualitative insights into strategic decisions, challenges faced, and regulatory impacts. Document
analysis of regulatory documents, merger agreements, and internal communications would complement these
methods to understand the regulatory environment and strategic rationale behind mergers. Statistical software
would be used for quantitative analysis, while content analysis techniques would be applied to qualitative data
to identify themes and patterns related to merger impacts and operational performance. This integrated approach
ensures a comprehensive exploration of factors influencing merger outcomes and operational efficiency in
Nepal's banking sector.
7.4 Method of data collection
For studying the merger and operating performance of commercial banks in Nepal, a methodologically sound
approach to data collection would involve utilizing multiple methods. Begin with quantitative analysis of
financial statements to assess metrics like ROA and Profit Margin before and after mergers, providing
quantitative insights into financial performance. Concurrently, conduct structured surveys among bank
executives, employees, and customers to capture perceptions of merger impacts on service quality and
operational efficiency.
Complement these with in-depth, semi-structured interviews with key stakeholders such as regulators and
industry experts to gather qualitative insights into strategic decisions, regulatory challenges, and broader
implications of mergers. Additionally, analyze regulatory documents, merger agreements, and internal reports
to understand the regulatory environment and strategic motivations behind mergers. By integrating these
methods, the study ensures a comprehensive understanding of the factors influencing merger outcomes and
operational effectiveness within Nepal's banking sector.

7.5 Nature and source of data

Primary data
Primary data plays a crucial role in studying the merger and operating performance of commercial banks in
Nepal by providing firsthand insights into the dynamics and impacts of mergers within the banking sector.
Through structured surveys administered to bank executives, employees, and customers, researchers can
quantitatively assess key performance metrics such as Return on Assets (ROA), Profit Margin, and customer
satisfaction levels before and after mergers. Semi-structured interviews with regulators, industry experts, and
executives offer qualitative perspectives on strategic decision-making, regulatory challenges, and the broader
implications of mergers on operational efficiency. Focus groups and direct observations

Secondary data
The study is also based on secondary data collected from various annual reports of several banks, official
website of Nepal Rastra Bank, magazines, journal and other published documents. This paper covers the study
of operational performance of the bank before and after being merged

7.6 Statical tools

The various statistical tools and techniques have been applied to analyze the collected information in this
study. Mean and standard deviation are used for descriptive statistics and paired sample t-test for inferential
statistics. Correlation analysis and VIF test are carried out to identify multicollinearity in the independent
variables for regression. Regression analysis is used to identify the significance of operating ratios on profit
position of commercial banking industry. The data has been analyzed with the help of SPSS and MS-Excel. Pre
and post-merger performance ratios are computed for the sample banks which have gone through merger. The
pre and post M&A performance ratios are compared to see if there is any statistically significant change in
performance of merged firm after M&A, using “paired sample test” at confidence level of 0.05 or 95%.
published articles to study the impact other than that of NRB, which hasn’t tested any hypothesis, this research
will test the positive or negative significance of merger based on different operating ratios

8. References
1.Journal of Business and Social Sciences Research (JBSSR). (n.d.). Vol. 2, No. 1 & 2, pp. 85-107.

2, Assistant Professor, Kathmandu University School of Management, Balkumari, Lalitpur, Phone Number:
015548891/015006429, P.O. Box: 6250, [email protected]

3. Kathmandu University School of Management, Balkumari, Lalitpur, Phone Number: 9841125490, P.O. Box: 6250,
[email protected]

4. Abdulazeez, D. A., Suleiman, O., & Yahaya, A. (2016). Impact of merger and acquisitions on the financial performance
of deposit money banks in Nigeria. Arabian Journal of Business and Management Review, 6(4), 1-5.

5 Adhikari, S. (2014). Merger and acquisition as an indispensable tool for strengthening Nepalese banking and financial
institutions (unpublished thesis) Lapland University of Applied Sciences

:
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