Analyzing profitability of Banks of Iran in Pre and Post Merger Condition

Objective: The operational environment of commercial banks has become dynamic and competitive. The failure of banks in this competitive environment and their poor financial performance have forced the banking system to provide strategies to improve their performance in this environment. Merger and acquisition strategies are increasing as one of these solutions with the aim of reducing the inefficient sector. Therefore, the purpose of this study is to investigate the effect of mergers and acquisitions on the profitability and Profitability efficiency of active banks in the banking system of Iran in the period of 2005-2021.

Method: The purpose of this study is to investigate and analyze the situation in which potential merger and acquisition has occurred in banking sector base on our presumption. Seven scenarios have been assigned in order to merge the banks in Iran. two first scenarios are among state banks, third and fourth scenarios are in private sector banks and the rest are among both state and private sector banks. It is worth mentioning that the seventh scenario is the one which has occurred in real in which banks which are related to military system have been merged in to the Sepah bank. Profitability efficiency before and after the merger was evaluated through Stochastic Frontier Analysis (SFA) methods as well as adjusted profit to Risk Weighted Assets (RWA). Additionally by the aim of analyzing the situation and figures pre and post-merger and acquisition we applied Monte Carlo Markov Switching (MCMC) method and at the end the stress test for the designed scenarios, the conditions before and after the integration were evaluated to assess the results of shocks on banking sector. in the stress test section, the dynamic response of model variables caused by structural shocks of one standard deviation for the next 10 years are analyzed cumulatively with the help of variance decomposition approach. Because the investigated banks have different situations before and after the merger, they show different reactions in dealing with banking and non-banking shocks.

Findings: The results of the SFA approach show that in the first scenario (Tosee Saderat and Sanat o Madan) and the sixth scenario (Tose-e-Taavon, Gardeshgari, Day and Khavare Miyaneh), the profitability of all sample banks has increased. Also, in the second scenario, one bank (Tosee Taavon), in the third scenario, Iran-Zemin Bank, in the fourth scenario, Gardeshgari, in the fifth scenario, Sanat and Madan Bank, and in the seventh scenario, Sepah, Hikmat Iranian, Mehr Eghtesad, Kosar, Ansar and Khavare Miyaneh banks with Increased profitability after the merger. Also, based on the results of the Monte Carlo Markov Switching (MCMC) approach, the average and standard deviation of the profitability index has improved by 36.13 percent in post-merger conditions. Also, the results of the stress test show that A shock or a sudden change as much as one standard deviation in the GDP increases profitability both in the pre- and post-merger conditions, but the difference between the two situations mentioned in this index is such that the profitability index after From integration, they increase at a higher rate in response to an increase in GDP. In other words, this increase has more growth in post-merger conditions. Therefore, it can be concluded that in post-merger conditions, banks' profitability reacts more to macroeconomic shocks, so that if a favorable index increases, the profitability index also increases at a higher rate, and if a favorable index decreases, this index decreases at a higher rate. Therefore, it cannot be said that the economic shocks on the banking system in post-merger conditions will affect the banking system less, and this solution has more stability for the banking system due to the influence of macroeconomic indicators. Also, A shock or a sudden change as much as one standard deviation occurs in the facility will increase the profitability both in the conditions before and in the conditions after the merger, but the difference between the two situations mentioned about these indicators is such that the profitability index after Mergers are increasing at a more modest rate in response to the increase in facilities

Conclusion: findings shows that with analyzing the situation through balance sheets and income state of banks and merge them with regards to their characteristics there may be benefits in shape of enhance in efficiency and profitability of post-merger banks. Additionally with regard to financial distress and crisis mergers may not be the best practice. Solutions such as merger and acquisition, despite the fact that they prevent these risks from entering the system to a small extent, but still cannot prevent the risk in a relatively acceptable way.