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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ABTRACT

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‚Äôs   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‚Äôs operations.

Figure 1: The Banking Risk Spectrum

Banking Risk Exposures

Financial Risks    Operational Risk     Business Risks    Event Risks Balance Sheet Structure Income State- ment Structure/ Profitability

Capital Adequacy

Credit

Internal Fraud

External Fraud

Employment Practices and Work places

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‚Äôs  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‚Äô   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‚Äôs  stock  as  against   the  operating   performance   as disclosed in bank‚Äôs 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‚Äô 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‚Äô  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‚Äô   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‚Äôs   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‚Äô  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 ‚Äď total interest expenses.

    NDIC: Nigeria Deposits Insurance Corporation.

    OECD: Organization for Economic Cooperation and Development.

      Operational    Risk:   Uncertainty   surrounding   a   financial    firm‚Äôs 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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