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.
TABLE OF CONTENTS
Title Page i
Certification ii
Dedication iii
Acknowledgement iv
Abstract v
Table of Contents vi-x
List of Boxes xi
List of Figures xii
List of Tables xiii
Chapter One: Introduction
1.1 Background of the Study 1
1.2 Statement of the Problem 4
1.3 Objectives of the Study 5
1.4 Research Questions 5
1.5 Scope and Limitations of the Study 6
1.6 Significance of the Study 6
1.7 Profile of Selected Deposit Money Banks 7
1.7.1 Oceanic Bank International Plc 7
1.7.2 First Bank of Nigeria 7
1.7.3 Access Bank Plc 8
1.8 Operational Definition of Key Terms 8
References 11-12
Chapter Two: The Review of Related Literature
2.1 The Development of Banking System 13
2.1.1 Definition and Classification of Banking Institutions 13
2.1.2 Development of Deposit Money Banks in Nigeria 14
2.1.3 Functions of Deposit Money Banks 17
2.2 Organisational Structure of a Typical Nigerian Bank 17
2.3 Regulatory Environment of Banks in Nigeria 19
2.3.1 Reasons for Bank Regulation 19
2.3.2 Major Banking Laws, Guidelines & Standard in Nigeria 20
2.3.2.1 Banks and Other Financial Institutions Act of 1991 (As Amended) 20
2.3.2.2 Companies and Allied Matters Act of 1990 21
2.3.2.3 Bank Employees Etc (Declaration of Assets)Act of 1986 As Amended 21
2.3.2.4 Failed Bank (Recovery of Debts) and Financial Malpractices in Banks Act 1994 as Amended 2004 21
2.3.2.5 Nigerian Deposit Insurance Corporation Act 2006 22
2.3.2.6 Central Bank of Nigeria Act, 2007 22
2.3.2.7 Dishonoued Cheque (Offences) Act, 1977 22
2.3.2.8 Prudential Guidelines for Licensed Banks 23
2.3.2.9 SAS 10: Accounting by Banks and Non Bank Financial Institutions (Part I) 23
2.3.3 Regulators of Banks in Nigeria 23
2.3.3.1 Central Bank of Nigeria 23
2.3.3.2 Nigerian Deposit Insurance Corporation 24
2.4 Banking Distress and Crisis 25
2.4.1 Condition Occasioning Bank Crisis 25
2.5 Financial Statements of Banks 25
2.5.1 Meaning and Objectives of Financial Statements 25
2.5.2 Bank Income Statement Format 26
2.5.3 Bank Balance Sheet Format 27
2.5.4 Types of Financial Statement Analysis 27
2.6 Frame Work for Evaluating Bank Performance 28
2.6.1 Analyzing Bank Performance using Financial Ratios 28
2.6.2 Analyzing Bank Performance using CAMELs Rating 29
2.7 Capital Adequacy 30
2.7.1 Meaning, Characteristics and Functions of Bank Capital 30
2.7.2 Basel Agreement on International Capital Standards 31
2.7.2.1 Basel I 32
2.7.2.2 Basel II 33
2.7.3 Comparison of the Changing Rules for International Regulation of Bank Capital 34
2.7.3.1 Features of Basel I Rules 34
2.7.3.2 Features of Basel II Rules 35
2.8 Assets Quality (Credit Risk Analysis) 36
2.8.1 Credit Facilities – Defined 36
2.8.2 The Six Basic C’s of Lending 36
2.8.3 Important Elements in Establishing a Well-Written Loan Policy 38
2.8.4 Classification of Credit Facilities and Provisioning 39
2.8.4.1 Performing Credit/ Provisioning 39
2.8.4.2 Non-Performing Credit/ Provisioning 39
2.8.5 Loan Review Procedures 40
2.8.6 Warning Signs of Weak Loans and Poor Lending Policies 41
2.9 Management Quality 43
2.9.1 Introduction: Corporate Governance Principles 43
2.9.2 Corporate Governance: Regulatory Authorities 44
2.9.3 Corporate Governance: Supervisory Authorities 44
2.9.4 Corporate Governance: Equity Ownership 44
2.9.5 Corporate Governance: Board of Directors 45
2.9.6 Corporate Governance: Management 46
2.9.7 Corporate Governance: Internal Auditors 46
2.9.8 Corporate Governance: External Auditors 47
2.10 Earnings 48
2.10.1 Meaning and Functions of Bank Profit 48
2.10.2 Composition of Bank Profit 49
2.10.3 Banks Earnings Evaluation Factors 49
2.11 Liquidity 50
2.11.1 Functions of Bank Liquidity 50
2.11.2 Theories of Bank Liquidity 51
2.11.3 Considerations in Selecting Liquidity Sources 52
2.11.4 Bank Liquidity Evaluation Factors 53
2.12 Sensitivity to Market Risk 53
2.12.1 Market Risk Evaluation Factors 54
References 55-58
Chapter Three: Research Design and Methodology:
3.1 Research Design 59
3.2 Nature and Sources of Data 59
3.2.1 Secondary Sources 59
3.3 Method of Data Collection 60
3.3.1 Validity and Test of Validity 60
3.3.2 Reliability and Test of Reliability 61
3.4 Population and Sample Determination 61
3.5 Methods of Data Presentation 62
3.5.1 Data Presentation 62
3.5.2 Data Analysis 62
3.5.3 Research Questions and Analytical Techniques or Models 62
References 71
Chapter Four: Data Presentation and Analysis of Findings:
4.1 Introduction 72
4.2 Data Presentation and Analysis I 72
4.2.1 Comparison of Banks Equity 72
4.2.2 Comparison of Banks Deposits 76
4.2.3 Comparison of Banks Earnings 78
4.2.4 Comparison of Banks Earning Assets 81
4.3 Data Presentation and Analysis II 83
4.3.1 Bank Performance Based on Capital Adequacy 84
4.3.2 Bank Performance Based on Assets Quality 85
4.3.3 Bank Performance Based on Earnings Quality 89
4.3.4 Bank Performance Based on Liquidity Sufficiency 93
4.3.5 Bank Performance Ranking Sector-Wise 98
References 99
Chapter Five: Summary of Research Findings, Conclusions and Recommendations
5.1 Introduction 100
5.2 Summary of Research Findings 100
5.3 Conclusions 102
5.4 Recommendations 103
Bibliography
Appendices
LIST OF Boxes
Box 1: Bank Income and Expenses 49
Box 2: Shareholder Funds Growth Model 63
Box 3: PAT Growth Model 63
Box 4: Deposits Growth Model 64
Box 5: Earning Assets Growth Model 64
Box 6: Tier 1 Risk Base Capital Model 65
Box 7: Total Risk Base Capital Model 65
Box 8: Provision for Loss Model 66
Box 9: Loan Loss Expenses to Net Interest Income Model 66
Box 10: Non-Performing Loan Model 66
Box 11: Loan Loss Expenses to Gross Earnings Model 67
Box 12: Net Interest Margin Model 67
Box 13: Return on Total Assets Model 68
Box 14: Return on Equity Model 68
Box 15: Loan Advances to Total Deposits Model 68
Box 16: Liquid Assets to Total Deposits Model 69
Box 17: Savings-Demand Deposits to Total Deposits Model 69
Box 18: Time or Term Deposits to Total Deposits Model 70
LIST OF FIGURES
Figure 1: The Banking Risk Spectrum 2
Figure 2: Organisational Chart for Typical Deposit Money Bank 18
Figure 3: Bank Equity Sizes Chart 73
Figure 4: Equity Growth Chart 74
Figure 5: Bank Deposit Sizes Chart 76
Figure 6: Deposits Growth Chart 77
Figure 7: Profit After Tax Chart 79
Figure 8: Profit After Tax Growth Chart 79
Figure 9: Earning Assets Chart 82
Figure 10: Earning Assets Growth Chart 82
Figure 11: Loss Ratio Chart 86
Figure 12: Loan Loss Expenses to Net Interest Income Chart 86
Figure 13: Non-Performing Loan Ratio Chart 87
Figure 14 Loan Loss Expenses to Gross Earnings Chart 87
Figure 15: Net Interest Margin Ratio Chart 90
Figure 16: Return on Total Assets Chart 91
Figure 17: Return on Equity Chart 91
Figure 18: Loan Advances to Total Deposits Chart 94
Figure 19: Liquid Assets to Total Deposits Chart 95
Figure 20: Savings-Demand Deposits to Total Deposits Chart 95
Figure 21: Time or Term Deposits to Total Deposits Chart 96
LIST OF Tables
Table 1: Banking Type Firm 14
Table 2: Deposit Money Banks in Nigeria 1892-1959 15
Table 3: Consolidated Banks and their Component Members Banks 15
Table 4: Components of On-Balance Sheet Risk Weighted Assets 33
Table 5: Non-Performing Credit and Provisioning 40
Table 6: Indicators of Weak Loan and Inadequate Lending Policies 42
Table 7: Key Players and their Responsibilities in Bank Governance and Risk Management 43
Table 8: Banks Equity Size 73
Table 9: Equity Growth Indicator 73
Table 10: Deposit Size 76
Table 11: Deposit Growth Indicator 76
Table 12: Banks Year-Wise Earnings 78
Table 13: Earnings (PAT) Growth Indicator 79
Table 14: Banks Earnings Assets 81
Table 15: Earning Assets Growth Indicator 81
Table 16: Bank Capital Adequacy as at 2007 84
Table 17: Assets Quality Statistics for three Banks 85
Table 18: Earnings Quality Statistics for three Banks 90
Table 19: Liquidity Sufficiency Statistics for three Banks 94
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.
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.
