CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Deposit money banks are the backbone of the economy of any country. They are key drivers of national development because they serve as the bridge between savings and investment. They are institutions specifically designed to advance the process of capital formation by attracting deposits and extending credit (Ogundajo, Onakoya, Enyi & Siyanbola, 2019).

Many studies have recognized the pivotal role that deposit money banks, formerly referred to as commercial banks, play in the development of a country. The important functions they perform include accepting deposits, granting credit facilities, financing foreign transactions, offering trust services, providing discounting services, financing electronic commerce, safekeeping valuables, managing investments, implementing monetary policy, and managing foreign reserves. Evidence from Nigeria shows that the intermediation activities of financial institutions, and in particular their lending to the private sector, have a significant effect on economic development (Ogundajo et al., 2019).

Despite these important roles, deposit money banks are exposed to a wide array of risks, which fall broadly into financial, operational, business and event risks, as summarized in Figure 1. Financial risks reflect the possibility of loss associated with liquidity, capital adequacy, credit, profitability and the market. Operational risks reflect uncertainty about earnings arising from failures in computer systems, management errors and employee misconduct. Business risks are associated with the bank's business environment, including macroeconomic policy concerns, legal and regulatory factors, and the overall infrastructure of the financial sector. Lastly, event risks are exogenous, such as political crises, which can disrupt a bank's operations. Research on Nigerian deposit money banks continues to examine how exposure to such risks relates to financial performance (Gwamna, Miko & Abdullahi, 2022).

Figure 1: The Banking Risk Spectrum

Source: Synthesis of the risk categories described in the text.

These risks, if not properly identified, evaluated, monitored and controlled, can jeopardize a bank's operations or undermine its financial condition. In extreme cases they can lead to a distressed or failed bank, with ripple effects on all its stakeholders: depositors lose deposits, investors lose their investments, staff lose their jobs, and confidence is lost among depositors, shareholders, bank staff, regulators, examiners, supervisors and auditors. Recent work stresses that early detection and prevention models are needed in the Nigerian financial services sector precisely to limit the recurrence of bank failure and its consequences (Udofia & Okhae, 2024).

In view of the dynamic nature of the deposit money banking system and its susceptibility to financial risks, scholars have developed various evaluative approaches to give early warning signs about the health of banks. Each approach has strengths and shortcomings, which are reviewed below.

Studies that evaluate the effect of capital adequacy on banking operations by means of techniques such as the chi-square test, using questionnaires and interviews, suffer from a lack of objectivity, because the data reflect the subjective opinions of individuals and not the figures in the bank's financial statements. Studies that use regression analysis to assess the impact of credit and management on bank profitability are appropriate for testing relationships or impact, but they say little about the overall financial performance of the individual banks studied. Macro-level time-series studies of financial intermediation, which relate bank activity to national output (Ogundajo et al., 2019), likewise tell us about the economy as a whole rather than about the soundness of any particular bank.

Comparative studies that rank banks using profitability ratios and percentage growth alone concentrate on profitability to the neglect of capital ratios, liquidity and asset quality, which measure capital adequacy, liquidity sufficiency and asset quality respectively. Where such comparisons use foreign banks, their findings may also fail to relate to the Nigerian environment. Studies that compare banks using aggregate ratios instead of individual bank ratios do not reflect the performance of the individual banks concerned. Another evaluation approach, the stock valuation model, ties the assessment to the market price of the bank's stock instead of to operating performance as disclosed in its financial statements.

Recent Nigerian studies have increasingly turned to the CAMELS framework to address these weaknesses. Yusuf and Tijani (2019) used it to compare the financial health of domestic systemically important and non-systemically important deposit money banks over 2010 to 2017, and Lucky and Akani (2017) used it to examine the soundness of Nigerian commercial banks before and after consolidation. Asimiyu, Oladejo and Oladejo (2025) applied the framework to 14 listed deposit money banks, and Udofia and Okhae (2024) found that asset quality, management quality and earnings quality are significant predictors of bank financial health in Nigeria, whereas capital adequacy and liquidity were not significant in their sample.

Having reviewed the shortcomings of the various bank 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 over the financial periods 2003 to 2007 using the Uniform Financial Institutions Rating System, also known as the CAMELS rating. CAMELS rating involves rating the overall financial performance of banks on the basis of capital adequacy, asset quality, management efficiency, earnings quality, liquidity sufficiency and sensitivity to market risk. The First Bank of Nigeria Plc, Oceanic Bank International Plc and Access Bank Plc are the cases under review.

To ensure the reliability and credibility of the study, the following sources and tools will be employed: textbooks, the annual reports of the selected banks, journals, Central Bank of Nigeria publications, World Bank publications, the Basel Accord on international capital standards, analytical tables, charts, financial ratios or models, and percentage growth analytical techniques.

The data collected for the study will be presented in a non-technical, descriptive and pictorial manner. The conclusions reached and the recommendations made are intended to help depositors, shareholders, creditors, bank staff, bank management and auditors to identify a sound or a problem bank before making an informed decision.

1.2 Statement of the Problem

Stakeholders in Nigerian deposit money banks are exposed to a high risk of losing their interest holdings because they cannot identify and evaluate a problem or distressed bank until it is declared a failed bank by the Central Bank of Nigeria. The risk is real: in the banking context, failure occurs when a bank faces a liquidity shortage or insolvency, and the Nigerian literature continues to call for models that detect deterioration early (Udofia & Okhae, 2024).

The apparent absence of a practical guide to evaluating sound and problem banks is evident in the conditions that characterize a severe bank crisis. A bank crisis becomes severe 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's business;

ii. high and deteriorating credit or asset quality;

iii. illiquidity, reflected in the bank's inability to meet customers' cash withdrawals and/or a persistent overdrawn position with the Central Bank;

iv. low earnings resulting in huge operating losses;

v. weak management, reflected in poor asset quality, insider abuse, inadequate internal controls, fraud, unethical and unprofessional conduct, squabbles and high staff turnover, among others; and

vi. infrastructural inadequacies, for example in matters relating to accounting law and the judiciary, which are an additional item on the list.

These conditions correspond closely to the capital, asset quality, management, earnings and liquidity dimensions of the CAMELS framework, which recent studies continue to use to assess the health of Nigerian banks (Yusuf & Tijani, 2019; Udofia & Okhae, 2024).

1.3 Objectives of the Study

Having identified the problem, the following objectives are pursued in this study:

i. To assess the financial performance of the deposit money banks based on equity, earnings, deposits and earning assets.

ii. To analyze the performance of these banks based on their capital adequacy, asset quality, earnings quality and liquidity sufficiency.

iii. To rank the performance of the selected deposit money banks on the basis of the above two assessments.

1.4 Research Questions

The above objectives are operationalized into the following research questions, which give the study its direction:

i. What is the financial performance of the selected deposit money banks in terms of equity, earnings, assets and deposits?

ii. What is the performance of the banks under study in terms of capital adequacy, asset quality, earnings quality and liquidity sufficiency?

iii. What financial performance ranking or rating can be assigned to the selected deposit money banks year by year?

1.5 Scope and Limitations of the Study

This study covers a five-year evaluation of financial performance, from 2003 to 2007, of the First Bank of Nigeria Plc, Oceanic Bank International Plc and Access Bank Plc, on the basis of capital adequacy, asset quality, liquidity, and profitability or earnings.

The research is not, however, intended to evaluate the management efficiency or the sensitivity to market risk of these banks, nor will it measure the financial performance of microfinance banks and other non-bank financial institutions.

1.6 Significance of the Study

Through its findings and recommendations, this study will be significant in the following ways:

i. It will provide bank stakeholders (depositors, investors, bank staff and legislators) with information for tracking the trend of safety and soundness in Nigerian deposit money banks.

ii. It will serve as a useful reference for lecturers and financial analysts in future assessments of sound and problem deposit money banks.

iii. It will bring to the attention of bank stakeholders practical evaluation statistics (models) for assessing the financial strengths and weaknesses of a deposit money bank.

iv. It will be useful to bank regulatory and supervisory agencies such as the Central Bank of Nigeria (CBN) and the Nigeria Deposit Insurance Corporation (NDIC) in fulfilling their collective mission of maintaining stability and public confidence in the Nigerian banking sector. Recent evidence recommends tighter prudential oversight of deposit money banks (Yusuf & Tijani, 2019).

v. Lastly, it will help bank management to focus attention appropriately on the performance areas that show adverse or weak trends.

1.7 Profile of Selected Deposit Money Banks

Three banks, among the 24 recapitalized deposit money banks, are selected for review in this study. The selection is judgmental. The banks are Oceanic Bank International Plc, First Bank of Nigeria Plc and Access Bank Plc.

1.7.1 Oceanic Bank International Plc

The bank was incorporated in Nigeria under the Companies and Allied Matters Act as a private limited liability company on 26 March 1990. It was licensed on 10 April 1990 to carry on the business of commercial banking and commenced business on 12 June 1990. It was converted to a public limited liability company in 2004, and its shares were listed on the floor of the Nigerian Stock Exchange on 25 June 2004 by way of introduction. The bank was wholly owned by Nigerian citizens.

The principal activity of the bank was, and has always been, the provision of comprehensive universal banking services to corporate, commercial and individual customers from its headquarters in Abuja, its corporate offices in Victoria Island and other branches and cash centres spread across the country. The bank was later bailed out by the Central Bank of Nigeria in 2009 and in 2011 agreed to be acquired by Ecobank Transnational Incorporated (Bloomberg, 2011); the review in this study relates to its position during 2003 to 2007.

1.7.2 First Bank of Nigeria Plc

The bank traces its origin to 1894, when it commenced business as the Bank of British West Africa, with its head office in Liverpool, United Kingdom. In 1957 it changed its name to Bank of West Africa, and in 1969 it was incorporated locally as the Standard Bank of Nigeria Limited in line with the Companies Decree of 1968. It was converted to a public company in 1970 and listed on the Nigerian Stock Exchange (NSE) in March 1971. Its name was changed in 1979 and again in 1991, to First Bank of Nigeria Limited and then First Bank of Nigeria Plc respectively (FBN Bank (UK) Limited, n.d.).

The bank engages in universal banking; that is, it carries on commercial banking, registrar, trusteeship and capital market business.

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. It was converted to a public limited company on 24 March 1998, and its shares were listed on the Nigerian Stock Exchange on 18 November 1998. The Central Bank of Nigeria issued the bank a universal banking licence on 5 February 2001 (Access Holdings Plc, n.d.).

The principal activities of the bank continue to be money market activities, retail banking, the 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 instrument created 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 debt 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 receivable and inventory.

Credit Risk: The probability that the issuer of a loan or security will fail and default on any promised payment of interest or principal, or both.

Demand Deposits: Deposits that may be withdrawn at any time 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 investments that generate interest and yield-related fee income.

Governor: The Governor or any of the Deputy Governors of the CBN.

Guarantee: A contractual engagement to answer for the debt, default or failure of another person.

Insolvency: A situation in which the realizable value of a bank's assets 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 at an agreed rent.

Loan: A sum of money transferred to another for temporary use, to be repaid with or without interest according to the terms of the loan agreement.

Liquid Assets: Cash, balances held with the CBN, Treasury bills, balances held with other banks, certificates of deposit and bankers' acceptances.

Liquidity: The ability of a bank to meet its liabilities as they fall due for payment; its absence (illiquidity) is the inability to do so.

Market Risk: The potential for loss in net interest income or in the market value of securities due to rising and falling interest rates.

Net Interest Income: Total interest income minus total interest expense.

NDIC: Nigeria Deposit Insurance Corporation.

OECD: Organisation for Economic Co-operation 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.

Savings Deposits: Interest-bearing funds left with a depository institution and withdrawable on demand.

Subordinated Debts: A type of capital represented by debt instruments whose claim against the borrowing institution legally ranks after the claims of depositors but ahead of those of stockholders.

Trust Services: The management of property and other valuables owned by a customer under a contract (the trust agreement) in which the bank serves as trustee and the customer becomes the trustor for a specified period of time.

REFERENCES

Access Holdings Plc. (n.d.). Our history. https://theaccesscorporation.com/about/our-history/

Asimiyu, M. O., Oladejo, Z. A., & Oladejo, M. O. (2025). Assessment of critical factors shaping the performance of deposit money banks in Nigeria. LAUTECH Journal of Accounting, Finance and Contemporary Management Research, 1(1), 86–108.

Bloomberg. (2011, August 1). Ecobank Transnational agrees to acquire Oceanic Bank. https://www.bloomberg.com/news/articles/2011-08-01/ecobank-signs-transaction-agreement-for-acquisition-of-oceanic-bank

FBN Bank (UK) Limited. (n.d.). Our history. https://www.fbnbank.co.uk/our-history/

Gwamna, Y. J., Miko, N. U., & Abdullahi, M. (2022). Risk and financial performance of listed deposit money banks in Nigeria. Polac International Journal of Economics and Management Science, 8(1).

Lucky, A. L., & Akani, H. W. (2017). Comparative analysis of commercial banks soundness: A CAMELS study of Nigerian pre and post consolidation era. Research Journal of Finance and Accounting, 8(20), 149–173.

Ogundajo, G. O., Onakoya, A. B., Enyi, P. E., & Siyanbola, T. T. (2019). Financial institutions' intermediation and economic development in Nigeria. Journal of Accounting and Finance in Emerging Economies, 5(1), 33–46. https://doi.org/10.26710/jafee.v5i1.723

Udofia, I. E., & Okhae, E. A. (2024). CAMEL indicators as tools for predicting bank financial health conditions in Nigeria. International Journal of Business and Technopreneurship, 14(2), 121–134.

Yusuf, B. R., & Tijani, J. O. (2019). An evaluation of financial health of Nigerian deposit money banks using CAMELS rating model. Economics and Applied Informatics, 25(1), 48–61.