Comparative Analysis of the performance of selected financial institutions using financial ratios
Research Project
By
CHAPTER ONE
INTRODUCTION
Information is an essential ingredient in assessing an organisation’s
performance. A business entity must have financial statements that are
capable of providing reliable and relevant information about all the
important aspects of an entity’s performance. Obtaining and assessing
information about corporate performance is essential to investors in
their decision either to invest or not to invest in an organisation’s
share. Financial statements are used to make decisions. They are used by
shareholders and investors, and also by lenders, as well as by
management. Financial statement analysis is important to the management,
owners, personnel, customers, suppliers, competitors, regulatory
agencies, tax payers, lenders, academics and others, each having their
views in applying financial statement analysis in their evaluations and
making judgments about the financial health of organization. The
financial statements contain a large number of figures, but the figures
themselves do not necessarily have much meaning to a user of the
financial statements. One widely accepted method of assessing financial
statements is ratio analysis, which uses data from the statement of
financial position and other comprehensive income and statement of
profit or loss to produce values that have easily interpreted financial
meaning.
All banks, banking systems and other financial organizations routinely
evaluate their financial health by calculating various ratios and
comparing the values to those for previous periods, looking for
differences that could indicate a meaningful change in financial
condition. Many financial organizations also compare their own ratio
values to those for similar organizations looking for differences that
could indicate weaknesses or opportunities for improvement. Financial
statements analysis is information processing system designed to provide
data for decision making. The information is basically derived from
published annual financial statements and accounts of the companies.
Meaning of Financial Statement
Financial Statement of a company can therefore be defined as a statement
written in monetary terms that shows all the activities of an entity
within a particular reporting period, including the entity’s financial
position, financial performance and cash flows of an entity that is
useful to a wide range of users in making economic decisions. Financial
statement is a formal record of the financial activities of a business,
person or other entity, prepared by the management of an entity to
account for the business activities that have been performed over a
specified period of time usually a year; it also states how the
company’s resources have been managed effectively and efficiently. The
objective of financial statement is to provide information about the
financial position, performance and changes in financial position of an
enterprise that is useful to wide range of users in making economic
decisions. Financial statements also state how company’s resources have
been managed effectively and efficiently for a given financial period,
usually a year.
Meaning of Performance measures and Financial Analysis
According to Zayyad Abdul-Baki et al (2014) Performance measure entails
comparing actual results with an established standard. For example, the
comparison of actual results with standards as in variance analysis or
actual results with budgets as in budgetary control system or comparison
of a company’s financial ratios with the industry average as in ratio
analysis or comparing a company’s performance with best practices as in
benchmarking.
Financial analysis is the selection, evaluation and interpretation of
financial data, along with other pertinent information, to assist in
investment and financial decision-making. Financial analysis may be used
internally to evaluate issues such as employee performance, the
efficiency of operations, and credit policies, and externally to
evaluate potential investments and the credit worthiness of borrowers
and other information. The analyst draws the financial data needed in
financial analysis from so many sources. The primary source is the data
provided by the company itself in its annual report and required
disclosures. The annual report comprises the statement of profit or
loss, statement of financial position and other comprehensive income and
the statement of cash flows as well as notes to these statements.
Certain businesses may also be required by securities laws and other
industry regulators to disclose additional information.
Meaning of Financial Ratio
A ratio is mathematical relation between on quantity and another. Ratio
analysis is a good means of measuring the performance of an organization
and it shows the relationship between financial data in the financial
statements, and indicates the quotient of two mathematical expressions,
(Abdulraheem A., 2004).
Introduction to the Nigerian Banking Sector
In Nigeria, the banking sector forms one of the pillars of economic
development. It intermediates funds between the surplus and the deficit
units, thus stimulating and promoting investments as well as economic
growth and development. It follows that increase of investments in the
banking sector will lead to improved performance of the economy.
However, for any meaningful investment to occur in the banking sector,
quality accounting information regarding share price and other
performance indicators are essential. Investors, who are usually
different from the management of investments, only rely on the
information supplied by the management in the financial statement, in
assessing the risk and value of a firm before deciding either to invest
or disinvest. It is therefore important to use the appropriate
accounting standards in preparing financial statements as it is an
indicator of the performance of a firm.
1.2 Statement of the Problem
The scenario of commercial banking in Nigeria has been characterized by
low capitalization which consequently affected their financial
performance. While re-capitalisation of Nigerian banks may address this
concern, the effect of the exercise on banks performance remains an
empirical one. Before the capitalization exercise that took place some
years back, many Nigerian banks were sick and unhealthy financially.
Huge unsecured loans were given by the banks; their CEOs allegedly
manipulated bank books and helped themselves to customer funds. Above
all, bank shares were manipulated to deceive. Things were presented from
a public relation (PR) perspective and many were led to purchase bank
shares which were almost worthless. While this alleged scam was on, the
banks presented a polished image by maintaining an elaborate scheme of
deceit. Many Nigerians were ruined by a number of banks who loaned them
money to purchase their worthless shares. Bank CEOs in a number of
instances criminally used their customers’ accounts to borrow money from
banks under their charge (Okoye and Gbegi, 2013).
There is therefore the need for investors and other users of
financial information to be provided with reliable and up to day
information with which they can assess the healthiness of the banking
institutions before they make their purchase decisions of whether to
invest or not to invest in a banks share. Such information when provided
and analyzed shall save such potential investors from making useless
investment decisions.
1.3 Aim and Objectives of the Study
The cardinal aim of this study is to carry out comparative analysis of
the performance of selected financial institutions using financial
ratios. Other objectives of this study include the following:-
(i) To investigate the significance of financial ratios in assessing the performance of banking institutions in Nigeria.
(ii) To investigate the impact of the adoption of IFRS on bank performance.
1.4 Research Questions
(i) What are the significance of financial ratios in assessing the performance of banking institutions in Nigeria?
(ii) What are the impacts of the adoption of IFRS on the performance of the banking institutions in Nigeria?
1.5 Significance of the Study
Financial sector is the backbone of economy of a country. It works as a
facilitator for achieving sustained economic growth through providing
efficient monetary intermediation. A strong financial system promotes
investment by financing productive business opportunities, mobilizing
savings, efficiently allocating resources and makes easy the trade of
goods and services. The efficacy of a financial system to reduce
information and transaction costs plays an important role in determining
the rate of savings, investment decisions, technological innovations
and hence the rate of economic growth. Banking has become an important
feature, which renders service to the people in financial matters, and
its magnitude of action is extending day by day. It is a major financial
institutional system in Nigeria (Sani J. and Alani G.O., 2013) of the
total assets of all the financial institutions. A profitable and sound
banking sector is at a better point to endure adverse upsets and adds
performance in the financial system (Athanasoglou et al., 2008).
Investing in such an important sector as the banking industry should be a
worthy decision. However, because the sector is currently faced with
numerous problems, it may be a risky venture to invest in an unhealthy
financial institution. Ratio analysis provides investors and other users
of financial statements important tools to analyze the healthiness of
such financial institution before making their financial decision. Such a
tool shall be able to save such investors from making a wrong
investment decision. This study shall therefore provide readers
information of the various ratio analytical tools they can use to guide
them in making their investment decision.
It is hoped that at the completion of this study, this work shall be
made accessible to other readers by making this study available on the
internet and in the library. This will inevitably make the materials a
tool of reference for future users.
1.6 Scope of the Study
This study focuses on the comparative analysis of the performance of
selected financial institutions using financial ratios. This study also
examines whether or not the performance of the financial institutions in
Nigeria have improved with the adoption of IFRS, The setting of this
study was limited to Lagos State.
1.7 Definition of Terms
Activity ratio: Activity ratio relates information on a company’s
ability to manage its Resources (that is, its assets) efficiently.
Financial Analysis: Financial analysis is the selection, evaluation and
interpretation of financial data, along with other pertinent
information, to assist in investment and financial
decision-making.
Financial Leverage ratio: This provides information on the degree of a
company’s fixed financial obligations and its ability to satisfy these
financing obligations.
Financial Ratio: A ratio is mathematical relation between on quantity
and another. Ratio analysis is a good means of measuring the performance
of an organization and it shows the relationship between financial
data in the financial statements, and indicates the quotient of two
mathematical expressions.
Financial Statement: Financial Statement of a company can therefore be
defined as a
statement written in monetary terms that shows all the activities of an
entity within a particular reporting period, including the entity’s
financial position, financial performance and cash flows of an entity
that is useful to a wide range of users in making economic decisions.
Financial statement is a formal record of the financial activities of a
business, person or other entity, prepared by the management of an
entity to account for the business activities that have been performed
over a specified period of time usually a year;
Liquidity ratio: This ratio provides information on a company’s ability to meet its short-term obligations as they arise.
Performance measures: Performance measure entails comparing actual results with an established standard.
Profitability ratio: Profitability ratio provides information on the amount of income from each Naira on sales.
Shareholder ratio: This ratio describes the company’s financial
condition in terms of amounts Share of stock.
Return on Investment ratio: Provides information on the amount of
profit, relative to the assets employed to produce that profit.
REFERENCES
Abdulraheem Abdulrasheed (2004) “Ratio analysis as a measure of
performance in the banking industry, a case study of selected banks”,
Journal of the Department of Business Administration
Athanasoglou P. P, Brissimis S. N, Delis M. D. (2008). “Bank-specific,
industry-specific and macroeconomic determinants of bank profitability.”
Int. Finan. Mark. Inst. Money, 18: 121-136.
Chen, H, Tang, Q. Jiang, Y. & Lin, Z. (2010), The Role of
International Financial Reporting Standards in Accounting Quality,
Evidence from European Union, Journal of International Financial
Management and Accounting, 21(3), 220-278.
Imhoff, E. (2003), Accounting Quality, Auditing and Corporate
Governance, Accounting Horizons, Special Issue on Accounting Quality,
117-128.
Institute of Chartered Accountants of Nigeria (2014), “Management,
Governance and Ethics”, London: Emile Woolf International
Sani John and Alani G.O. (2013) “A comparative analysis of pre and post
re-capitalization
financial performance of banks in Nigeria, International Journal of
Capacity Building in Education and Management, Vol. 2 No. 2
Zayyad Abdul-Baki, Ahmad Bukola Uthman and Mubaraq Sanni (2014)
“Financial ratios as performance measure: a comparison of IFRS and
Nigerian GAAP”, Accounting and Management Information Systems Vol 13,
No. 1 pp 82-97
INFORMATION ABOUT THIS PROJECT:-
| No. of Pages | 93 |
| References | 13 |
| Project Level | B.Sc./HND |
| Fee | N20,000 |
For More Information about this project call this number 234-08028177177
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