Impact of Merger on Profitability of Banks: A Study with Reference to Public Sector Banks in India
Kumar Aditya
Department of Commerce, Guru Ghasidas Vishwavidyalaya, Koni, Bilaspur, Chhattisgarh-495009, India.
Akash Dahire *
Department of Commerce, Guru Ghasidas Vishwavidyalaya, Koni, Bilaspur, Chhattisgarh-495009, India.
*Author to whom correspondence should be addressed.
Abstract
Aims: To investigate the impact of bank mergers on the financial performance of public sector banks in India, specifically examining the effects on Net Interest Margin (NIM), Return on Assets (ROA), and Return on Equity (ROE), and to assess the role of bank-specific factors in influencing these outcomes.
Study Design: Analytical study using panel regression analysis with fixed-effects (FE) and random-effects (RE) models, supported by descriptive statistics and correlation matrix, to evaluate the impact of mergers and bank-specific factors on profitability.
Sample and Duration of Study: The study focuses on five public sector banks in India (Bank of Baroda, Canara Bank, Indian Bank, Punjab National Bank, Union Bank of India), using quarterly data from March 31, 2015, to March 31, 2024, covering pre- and post-merger periods (mergers effective from April 1, 2019, for Bank of Baroda, and April 1, 2020, for others).
Methodology: The study included five public sector banks, analysing quarterly financial data over six years. Panel regression models (FE and RE) were employed, with NIM, ROA, and ROE as dependent variables, and a merger dummy variable (0 for pre-merger, 1 for post-merger) as the primary independent variable. Bank-specific control variables included Capital Adequacy Ratio (CAR), Debt-to-Equity Ratio (DE), Cost-to-Income Ratio (CI), Gross Non-Performing Assets (GNPA), and Cash-to-Total Assets (CTA). Hausman tests were used to determine model preference.
Results: The mergers significantly increased NIM, ROA, and ROE, with stronger effects under FE models for NIM and ROA, and RE models for ROE. GNPA and CI were consistently negative and significant, indicating adverse effects of poor asset quality and operational inefficiency. CAR positively influenced ROA and ROE, but its impact on NIM was insignificant. DE showed mixed, often negative effects under FE models. CTA remained insignificant across all specifications. The findings highlight mergers and internal efficiency as critical drivers of bank profitability and resilience.
Conclusion: The study demonstrates that bank mergers significantly enhance the financial performance of public sector banks in India, as evidenced by increased NIM, ROA, and ROE. Effective management of asset quality and operational efficiency further strengthens profitability and resilience post-merger.
Keywords: Bank merger, public sector banks, financial performance