The Effect of Acquisition on Financial Performance of Commercial Banks in Kenya: a Case Study of National Bank of Kenya

Abstract

The study focused on establishing the effect of acquisition on the financial performance of NBK by comparing five measures of profitability in the banking industry. The study compared net interest ratio, efficiency ratio, non-performing loans, returns on assets, and loans to deposit ratio before and after acquisition. The study used longitudinal descriptive research design to achieve achieved this objective. Data was collected for three years before and three years after KCB Group completed 100% acquisition in 2019. Three years of data points were collected from the audited financial statements of NBK for the period between 30th December 2016 and 30th December 2019 to represent before acquisition. in addition, the study collected three-year data points for the period between 30th December 2020 to 30th December 2022 to represent the sample after acquisition. Descriptive summary tests were conducted to describe all datasets within the target variables. Moreover, the analysis of variance (ANOVA) statistical test was used to compare the ratios before and after the acquisition for each measure to test whether they are statistically significant different. The results showed financial performance at NBK may not be influenced by acquisition, albeit moderate differences in ratio scores before and after acquisition. critical to note, is that findings showed lack of statistically significant effect of acquisition across all the financial performance ratios. Nonetheless, the results indicated pronounced trend that the ratios decreased reflecting poor performance in net interest margin, returns on assets, and loans to deposit ratio. Moreover, there was an increase in non-performing loans displaying instances associated with defaulting loans beyond the agreed period to pay principal and interest charges. Since its acquisition, NBK has not managed to generate more returns from it loans. It is recommended that the KCB Group should use the concept of agency theory to lead NBK with clear policy guidelines. Management at KCB Group should consider investing in reputation for them to be perceived as bold with focus on collaboration. The study made three policy recommendations. First, the KCB Group leadership should understand the core financial performance metrics that can create value for shareholders. Moreover, the board of directors should provide an oversight authority to ensure that NBK management follows strategic moves of improving core drives of long-term value as opposed to short-term value drivers of profitability. Second, KCB Group management should consider invest in reputation to become bold on its collaboration. Management to allow the managers at NBK to see how they can now succeed in the new collaboration to enable aggressive growth vision of NBK. Third, management at NBK to focus on long-term value drivers to sustain core business, capture new growth opportunities, develop new culture, skills, and talent among employees