Capital adequacy and return ratios of banks in Bulgaria in mergers and acquisitions transactions

Daniel Valentinov Dimitrov

doi:10.37075/FABA.2024.2.04

Authors

Daniel Valentinov Dimitrov Department of Finance, University of National and World Economy, Sofia, Bulgaria https://orcid.org/0009-0009-3528-6639

DOI:

https://doi.org/10.37075/FABA.2024.2.04

Keywords:

banks, M&A, capital adequacy, financial performance

Abstract

Purpose: The coefficients for capital adequacy, return on assets, and return on equity are crucial metrics for assessing the impact of mergers and acquisitions within Bulgaria's banking sector. The present study aims to enhance understanding of mergers and acquisitions in the Bulgarian banking sector and their consequences. The paper analyzes the variation in the coefficients of banks that have undergone an M&A transaction, comparing two periods: prior to the transaction and subsequent to its execution.

Design/Methodology/Approach: The study analyzes banking institutions undergoing mergers and acquisitions in Bulgaria during the period 2010-2024, focusing on a four-year and five-year period before and after the completion of the transaction.

The study assesses two hypotheses: (1) M&A transactions do not substantially enhance ROE, ROA, and CAR, and (2) M&A transactions result in a significant enhancement of these metrics. The study used descriptive statistics, including standard deviation, arithmetic mean, and hypothesis testing, to evaluate the changes in the ratios of the examined banks.

Findings: The research findings indicate an enhancement in the capital adequacy ratio and the stabilization of ROE and ROA following the execution of merger and acquisition operations. The total impact on returns in the medium run is not statistically significant. Besides the impact of transactions, exogenous circumstances like the COVID-19 epidemic and political instability in Bulgaria also influence the coefficients.

Practical Implication: The study offers practical insights for policymakers, bank management, and investors considering M&A transactions in emerging markets. It highlights the importance of external factors, such as political and economic stability, on the success of these deals. The findings provide a useful reference for strategic planning and risk assessment in future M&A activities within the banking sector.

Originality/Value: The study enhances the existing literature on the banking market and M&A transactions, and more specifically in the part on the Bulgarian banking market - which is insufficiently researched. It also highlights the influence of external factors in the realization of M&A transactions, which contributes to a deeper understanding of these transactions and providing a foundation for future research.

Paper Type: Research Paper

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