The Role of Mergers and Acquisitions in Bank Performance

Abstract

This study aimed to evaluate the role of mergers and acquisitions in the performance of Iranian banks by examining their effects on two-stage efficiency, liquidity creation, potential merger synergies, and financial resilience. This applied descriptive–analytical study examined a selected sample of 32 Iranian public, private, and interest-free banks over approximately 2005/06–2025/26. Bank-level financial data were obtained from official banking statistics, published financial statements, the Central Bank of Iran, and the Statistical Center of Iran. Liquidity creation was measured using the Berger–Bouwman balance-sheet weighting approach. Bank efficiency was estimated through a two-stage network data envelopment analysis framework incorporating fixed assets, shared personnel and administrative expenses, deposits and interbank borrowing as intermediate products, desirable banking outputs, and undesirable credit-related outputs. Seven merger scenarios were analyzed, including state-owned, private, mixed-ownership, and the actual Bank Sepah consolidation. Potential post-merger efficiency was decomposed into scope/composition efficiency, size efficiency, learning efficiency, and coordination efficiency. Variance decomposition and impulse-response analysis were additionally used to assess macro-financial transmission and stress-related resilience. Post-merger liquidity creation improved in five of the seven scenarios, with the strongest increase observed in the Bank Sepah consolidation, where the index reached 2.31. Overall post-merger efficiency exceeded the performance of the weaker constituent banks in most scenarios and reached 0.89 in Scenario 2 and 0.78 in the actual consolidation scenario. The two-stage DEA results showed that pre-merger inefficiency was concentrated mainly in the first production stage and that post-merger gains depended on structural complementarity rather than consolidation alone. Variance decomposition indicated that the contribution of KHB to GDP fluctuations rose progressively to 65.58% by the tenth period, while the contribution of GDP's own shocks declined to 30.40%, confirming the growing macroeconomic importance of banking balance-sheet and liquidity conditions. Bank mergers and acquisitions can improve efficiency, liquidity creation, and resilience when participating institutions are structurally compatible and when stronger banks successfully transfer managerial, financial, and operational capabilities to weaker institutions; however, poorly matched mergers may transmit existing inefficiencies instead of eliminating them.