A Comparison of Technical Efficiency of Performance of Different Banks Before and After Merger: A Study of Pakistan Banking Industry

Abstract

Mergers and acquisitions are the part and parcel of every field, especially in banking industry. This research is focused on the performance of mergers in the last decade. As evident from recent past the banking industry in Pakistan has to cop with many mergers. Mergers are not opted only for the sake of synergy and economic benefits but there are certain other reasons. In Pakistan the other stimulant is the State Bank of Pakistan’s capital requirement, which is being raised with the passage of time. This study has analyzed the performance of 6 mergers (Prime and ABN AMRO, ABN AMRO and Royal Bank of Scotland, RBS and Faysal Bank, Saudi Pak Commercial Bank and Silk Bank, Union Bank and Standard Chartered Bank and Cres and Samba Bank), occurred in the last decade in Pakistan banking industry. Regression analysis is used to analyze the contribution level of different variables in the bank profitability. The results for net assets, net advances, branches and labor productivity were found to be extensive and quite significant. In the second phase the Data Envelopment Analysis of all the banks were done and it is found that all the banks involved in merger have got their performance improved by some extent. The two stage analysis was used for the analysis of the bank performance i.e. first for efficiency and the later for effectiveness of the bank. The first stage results were found to be impressive for most of the banks but in second stage (effectiveness) the results were quite different. A complete comparison of the individual variables has been done in order to pin point the deficiency of individual banks. Main four resulting banks have shown significant improvement in all the independent variables except the Faysal Bank whose labor productivity has shown rapid downward trend. Overall, the mergers and acquisitions, especially in Pakistani environment, are found to be a win-win situation.

Key words: Data envelopment analysis (DEA), Mergers and Acquisition (M&A)