FINANCIAL PERFORMANCE EVALUATION OF THE NIGERIA DEPOSIT MONEY BANKS (2003-2007) A TIME SERIAL AND CROSS SECTIONAL CASE STUDY OF THREE SELECTED BANKS

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Price: 2000 Naira (BSC, MSC)

ABSTRACT

Deposit Money Banks are the backbone of the economy of any country.
They are the institutions specifically designed to further the capital
formation process through the attraction of deposits and the extension of
credit ( Dhanuskodi, Thangavelu, Venkatachalam & Sudalaimuthn,
2007). Despite these important roles, deposit money banks are exposed to
financial risks among many other risks. Financial risks reflect possibility of
loss associated with liquidity, capital adequacy, credit, profitability and
market. These risks, if not properly identified, evaluated, monitored and
controlled could jeopardize a bank’s operations or undermine its financial
conditions. In extreme cases, it could lead to a distressed or failed bank
with its ripple effects on all bank stakeholders such as loss of deposits,
investments, employment, credibility by depositors, shareholders, banks
staff, and bank regulators, examiners, supervisors and auditors respectively.
This Project uses growth models, capital adequacy model, assets quality
models, earnings quality models, liquidity models, charts and tables to
analyze and evaluate the trend and comparative financial performance of
Oceanic Bank International Plc, First Bank Plc and Access Bank Plc for the
financial periods spanning 2003 to 2007. Based on the results of the
analytical models applied on the ratio type of data collected from the case
studied banks, it is discovered that the three reviewed banks are well
capitalized. They exhibited a stable trend in the quality of their earning
assets and are highly liquid. However, the earnings quality of these banks
have been a disturbing one as it continuously moved downwards year-wise.
To reverse this declining earnings quality trend, various cost reduction and
cost control measures are recommended given the fact that the quality of
these banks assets are in good shape.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study
Deposit Money Banks are the backbone of the economy of any
country. They are the determinant factors to bring the development of the
country; They serve as bridges between savings and investments. Furthermore, deposit money bank are the institutions specifically designed
to further the capital formation process through the attraction of deposits
and the extension of credit ( see Dhanuskodi, Thangavelu,
Venkatachalam & Sudalaimuthn, 2007:2).
Various work have been conducted to recognize the pivotal role of
deposit money banks, then referred to as commercial banks, in development
of a country. Salvage (1979), Kanu (2005), Adekanye (1986), Ekezie
(1997) and Rose & Hudgins (2008); highlight the important roles of
deposit money banks to include: acceptance of deposits, granting of credit
facilities, financing foreign transactions, offering of trust services,
discounting services, financing e-commerce, safe keeping of valuables,
managing investments, implementation of monetary policies and foreign
reserve management.
Despite these important roles, deposit money banks are exposed to a
wide array of risks: financial operations, business and events risks (see
figure below). Financial risks reflect possibility of loss associated with
liquidity, capital adequacy, credit, profitability and market. While
operational risks reflect uncertainty of earnings due to failures in
computer systems, management errors, and employee misconduct. Business
risks are associated with a bank’s business environment, including
macroeconomic policy concerns, legal and regulatory factors, and the
overall financial sector infrastructure and lastly, event risks are exogenous
risk like political crisis, that could affect bank’s operations.
Figure 1: The Banking Risk Spectrum
Banking Risk Exposures
Financial Risks Operational Risk Business Risks Event Risks
Balance Sheet
Structure
Income Statement
Structure/
Profitability
Capital Adequacy
Credit
Internal Fraud
External Fraud
Employment
Practices and
Workplaces
Safety
Clients,
Products, and
Business
Macro Policy
Financial
Infrastructure
Legal
Infrastructures
Legal Liability
Regulatory
Political
Contagion
Banking Crisis
Other
Exogenous
Source: (Greuning & Bratanovic, 2003:4).
These risks, if not properly identified, evaluated, monitored and
controlled could jeopardize a bank’s operations or undermine its financial
conditions. In extreme cases, it could lead to a distressed or failed bank
with its ripple effects on all bank stakeholders such as loss of deposits,
investments, employment, credibility by depositors, shareholders, banks
staff, and bank regulators, examiners, supervisors and auditors respectively.
In view of the dynamic nature of deposit money banking system
soundness and its susceptibility to financial risks, various evaluative
approaches have been developed by different scholars to provide early
warning signs about the health of banks.
Dick (2003) evaluated the capital adequacy impact on banking
operation of Societal General Bank Limited using chi-square technique of
analysis. This technique suffers from objectivity as data analyzed were
from questionnaire and interview (which are subjective opinions of individuals) and not from the bank financial statements.
Anyanwu (2002), in his research, evaluated the impacted of credit
and management on the commercial bank profitability using regression
analysis. This technique though appropriate for test of relations or impact,
is however dumb on the over all financial performance of the selected banks
he studied.
Dhanuskodi, Thangavelu, Verkatachalam & Sudalaimuthu (2007)
compared the profitability performance of commercial banks in Ethiopia
using profitability ratios and percentage growth ranking. Their work focus
on profitability to the detriment of capital ratios, liquidity and assets
quality ratios which are measures of capital adequacy, liquidity sufficiency
and assets quality. Besides, foreign banks were used which did not relate to
the Nigeria environment.
Pak & Huh (1993), compared Korean banks’ performance with
Asian and American banks using financial ratios. The study made use of
aggregate ratios as against individual bank ratios and hence do not reflect
the individual performance of those banks.
Other bank evaluation model is stock valuation model. This tied to
market price of bank’s stock as against the operating performance as
disclosed in bank’s financial statements.
Having reviewed the shortcomings of various banks performance
evaluation models used by different scholars, the purpose of this study is to
analyze the trend and comparative financial performance of three selected
Nigerian deposit money banks for the financial periods spanning 2003-2007
using Uniform Financial Institutions Rating System (also known as
CAMELs Rating). CAMELs rating involves rating the overall financial
performance of banks based its capital adequacy, asset quality, management
efficiency, earnings Quality, liquidity sufficiency, and sensitivity to market
risks. The First Bank of Nigeria Plc, Oceanic Bank International Plc and
Access Bank Plc are cases under review.
To assure the tentativeness and credibility of this study, the follows
tools will be employed: textbooks, various annual reports of selected banks,
journals, Central Banks of Nigeria publications, World Bank Publications, Basel Agreement on International Capital Standards, analytical tables,
charts, financial ratios or models, and percentage growth analytical
techniques.
The data collected for the purpose of this study will be presented in a
non-technical descriptive and pictorial manner. And finally, the conclusions
to be reached and the recommendations to be made would assist depositors,
shareholders, creditors, bank staff, bank management and auditors to
identify a sound or a problem bank before making an interested decision.
1.2 Statement of the Problem
Stakeholders in the Nigeria deposit money banks are exposed to high
risk of loss of their interest holdings due to their inability to identify and
evaluate a problem or distressed bank until declared failed bank by the
Central Bank of Nigeria.
This apparent lack of practical guide to evaluation of sound or
problem banks, led Alashi (2002) as cited in CBN (2004:15), to reveal that
bank crisis becomes serve when a bank shows most or all of the following
conditions.
i. Gross under-capitalization in relation to the level and
character of the bank business;
ii. High deteriorating credit or assets quality;
iii. Illiquidity as reflected in banks in ability to meet customers’
cash withdrawals and/ or a persistent overdrawn position with
the Central Bank;
iv. Low earnings resulting in huge operational loss;
v. Weak management as reflected by poor assets quality, insider
abuse, inadequate internal controls, fraud, including unethical
and unprofessional conduct, squabbles and a high staff
turnover among others.
vi. Mkila (2002) added infrastructural inadequacies e.g. matters
to do accounting law and the judiciary, to the list.
1.3 Objectives of the Study
Having identified the problem, the following objectives are pursued in this
study:
i. To assess the deposit money banks’ financial performance
based on equity, earnings, deposits and earning assets.
ii. To analyze the performance of these banks based on their
capital adequacy, assets quality, earnings quality and liquidity
sufficiency.
iii. To rank the performance of the selected deposit money banks
based on the above two assessments.
1.4 Research Questions
The above objectives of this study are operationalised into the
following investigative research questions to give this study a direction:
i. What are the financial performance of the selected deposit
money banks on equity, earnings, assets and deposits?
ii. What are the performance of the banks understudy based on
capital adequacy, assets quality, earning quality and liquidity
sufficiency?
iii. What financial performance ranking or ratings be assigned to
the selected deposit money banks year wise?
1.5 Scope and Limitations of the Study
This study is intended to cover five-year financial performance
evaluation counting from 2003 to 2007, of the First Bank of Nigerian Plc,
Oceanic Bank International Plc and Access Bank Plc on the basis of capital
adequacy, assets quality, liquidity and profitability or earnings.
However, this research is not intended to cover evaluation of
management efficiency and sensitive to market risks of the mentioned banks
neither will it measure financial performance of micro finance banks and
other non-banks financial institutions.
1.6 Significance of the Study
This study through its findings and recommendations, will be significant in
the following ways.
i. This study will provide banks’ stakeholders (depositors,
investors, bank staff and legislators information in following
safety and soundness trend in the Nigeria deposit money
banks.
ii. It will serve as a useful reference material for lecturers and
financial analysts in future assessment of cases of sound and
problem deposit money banks.
iii. It will also bring to bare to bank stakeholders the practical
evaluation statistics (models) to assessing a deposit money
bank financial strengths and weaknesses.
iv. It will be useful to the bank regulatory and supervisory
agencies like are the Central Bank of Nigeria (CBN) and the
Nigerian Deposit Insurance Corporation (NDIC) in fulfilling
their collective mission of maintaining stability and public
confidence in the Nigeria banking sector.
v. And lastly, it will assist bank management to appropriately
focus attention on the bank performance area(s) exhibiting
adverse or weak trends.
1.7 Profile of Selected Deposit Money Banks
Among the 24 re-capitalized deposit money banks, three of which are
selected for review in this study. This sample selection is judgmental and
the banks include: the Oceanic Bank International Plc, the First Bank of
Nigeria Plc and the Access Bank Plc.
1.7.1 Oceanic Bank International Plc
The bank was incorporated in Nigeria under the companies and Allied Act
of 1990 as a private limited liability on March 26, 1990. it was granted
license on the 10th of April 1990 to carry on the business of commercial
banking and commenced business on June, 12 1990. the bank was converted
into a public limited liability company 2004. Its shares were listed on the 25th of June 2004 on the floor of the Nigerian Stock Exchange by way of
introduction. The bank is wholly owned by Nigerian citizens.
The principal activity of the bank is and has always been the provision of
comprehensive universal banking services to all its corporate, commercial
and individual customers from its headquarters in Abuja, corporate offices
in Victoria Island and other branches/ cash centres spread across the
country ( Oceanic Bank Plc, 2007: 21).
1.7.2 First Bank of Nigeria
The Bank was incorporated as a limited company on March 31, 1984
as Bank of British West Africa Limited with Head Office in Liver Pool,
UK. In 1969, the Bank was incorporated locally as the Standard Bank of
Nigeria Limited in Line with the Companies Decree of 1968. The Bank was
converted to Public Company in 1970 and got listed on the Nigerian Stock
Exchange (NSE) in March 1972. Changes in the name of the Bank occurred
in 1979 and 1991, to First Bank of Nigeria Plc, respectively.
The Bank engages in the business of Universal Banking. That is, it
carries on the business of commercial banking, registrar, trusteeship and
capital market (First Bank of Nigeria Plc, 2004, 2006, 2007).
1.7.3 Access Bank Plc
The Bank was incorporated as a private limited liability company on
8 February, 1989 and commenced business on 11 May 1989. The Bank was
converted to a public limited company on 24th March, 1998 and its shares
were listed on the Nigeria Stock Exchange on 18th November 1998. The
Bank was issued a universal banking licence by the Central Bank of Nigeria
on 5th February 2001.
The Principal activity of the Bank continues to be the provision of
money market activities, retail banking, granting of loans, and advances,
equipment leasing, corporate finance and foreign exchange operations.
1.8 Operational Definition of Key Terms
Banker’s Acceptance: A short term credit investment which is
credited by a non-financial firm and whose payment is guaranteed by
a bank.
BOFIA: Banks and Other Financial Institutions Act.
CAMD: Companies and Allied Matters Decree
Capital: Funds subscribed and paid by stockholders representing
ownership in a bank. Regulatory capital also includes debts
components and loss reserves.
CBN: Central Bank of Nigeria.
Commercial loan: An unsecured obligation issued by a corporation
or bank to finance its short-term credit needs, such as accounts
receivables and inventory.
Credit risks: The probability that the issue of a loan or security will
fail and default on any promised payment of interest or principal or
both.
Demand Deposits: A Deposit that may be withdrawn at anytime by
cheque without prior written notice to the depository institution.
Distressed bank: A bank undergoing or expected to undergo
liquidation or restructuring in an effort to avoid insolvency.
Earning Assets: Loans, investment securities and short term
investment that generate interest and yield related fee income.
Governor: Means the Governor or any of the Deputy Governments
of the CBN.
Guarantee: A contractual engagement to answer for the debt, default
or failure of another person.
Insolvency: A situation where banks’ realisable assets value is less
than the total value of its liabilities.
Lease: A written agreement under which a property owner allows a
tenant to use the property for a specified period of time and rent.
Loan: A sum of money transferred to another for temporary use to be
repaid with or without interest according to terms of the loan
agreement.
Liquid Assets: Consist of cash, balance held with the CBN, Treasury
bills, balances held with other banks, certificate of deposits, bankers
acceptances.
Liquidity: Inability of bank to meet its liabilities as they mature for
payment.
Market risk: The potential for loss on net interest income or market
value of securities due to rising and falling of interest rate.
Net interest income: Total interest income – total interest expenses.
NDIC: Nigeria Deposits Insurance Corporation.
OECD: Organization for Economic Cooperation and Development.
Operational Risk: Uncertainty surrounding a financial firm’s
earnings or rate of return due to failures in computer systems,
management errors, employee misconduct, fraud, floods and similar
events.
Saving Deposits: Interest-bearing funds left with a depository
institutions and withdrawable upon demand.
Subordinated Debts: Type of capital represented by debt
instruments whose claim against the borrowing institution legally
follows the claims of depositors but come ahead of the stockholders.
Trust Services: refer to the management of property and other
valuables owned by a customer under a contract (the trust agreement)
in which the bank serve as trustee and the customers becomes the
trustor during a specified period of time.

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