CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Deposit money banks (DMBs) are the backbone of the economy of any country. They act as a bridge between savers and investors, and they are the institutions specifically designed to support capital formation by attracting deposits and extending credit (Yusuf and Tijani, 2019; Asimiyu, Oladejo and Oladejo, 2025).

A large body of work recognizes the central role that deposit money banks, once called commercial banks, play in national development. Their important functions include accepting deposits, granting credit facilities, financing foreign transactions, offering trust services, providing discounting services, financing e-commerce and digital payments, keeping valuables in safe custody, managing investments, helping to implement monetary policy, and managing foreign reserves (Aliyu and Hassan, 2020; Olunuga and Akinrodoye, 2022; Asimiyu et al., 2025).

The operating environment of Nigerian banks changed markedly between 2021 and 2025. Exchange rate adjustments, high inflation and tighter monetary conditions raised the pressure on bank balance sheets. At the same time, the Central Bank of Nigeria (CBN) launched the Banking Sector Recapitalization Programme in March 2024. It raised the minimum capital for commercial banks with international authorisation to N500 billion, for those with national authorisation to N200 billion, and for those with regional authorisation to N50 billion, with a compliance window that ran from April 2024 to 31 March 2026 (CBN, 2024). Minimum capital adequacy ratios remain at 10% for national and regional banks and 15% for banks with international authorisation. A period of this kind, in which banks were adjusting to economic shocks and to a large increase in capital requirements, makes a careful evaluation of bank performance especially useful.

Despite their important roles, deposit money banks are exposed to a wide range of risks, which can be grouped into financial, operational, business and event risks (see 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 that arises from failures in computer systems, management errors and employee misconduct. Business risks come from the bank's business environment, including macroeconomic policy concerns, legal and regulatory factors, and the general state of the financial sector infrastructure. Event risks are exogenous, such as political crises, that can disrupt a bank's operations. The Basel framework, which sets international standards for bank capital and liquidity, was designed to contain risks of this kind (Basel Committee on Banking Supervision, 2017).

Figure 1: The banking risk spectrum

Source: Author's adaptation of the standard classification of banking risks (Basel Committee on Banking Supervision, 2017).

If these risks are not properly identified, evaluated, monitored and controlled, they can jeopardize a bank's operations or weaken its financial condition. In extreme cases a bank may become distressed or fail, with ripple effects on all of its stakeholders: depositors lose deposits, investors lose their investments, staff lose their jobs, and shareholders, regulators, examiners, supervisors and auditors lose confidence in the bank.

Given the dynamic nature of the soundness of the deposit money banking system and its exposure to financial risks, scholars have developed a number of evaluative approaches that give early warning of the health of banks. These approaches fall into several families, and each has limitations that this study seeks to address.

The first family relies on questionnaires and interviews to assess the effect of a factor such as capital adequacy on a bank's operations, and then tests the answers with a technique such as chi-square. The weakness of this approach is a lack of objectivity, because the data are the subjective opinions of individuals and not figures taken from the bank's financial statements.

The second family uses regression analysis. Recent Nigerian and African studies of this kind estimate how bank attributes, risk or CAMEL variables affect financial performance or share prices (Aliyu and Hassan, 2020; Gwamna, Miko and Abdullahi, 2022; Oke and Onwere, 2023). Regression is appropriate for testing relationships and the size of an effect, but it reports average effects across a panel of banks. It does not, on its own, give a view of the overall financial condition of each individual bank or a ranking of the banks. In the study by Oke and Onwere (2023), for example, the influence of individual CAMEL variables on share prices differed across Nigeria, Kenya and South Africa, and asset quality had an insignificant effect on share prices in the Nigerian sample.

The third family compares the profitability of banks using profitability ratios and percentage growth rankings. These studies concentrate on profitability at the expense of capital ratios, liquidity and asset quality, which measure capital adequacy, liquidity sufficiency and the quality of assets. Some of them also use banks from other countries, which do not reflect the Nigerian environment (Boateng, 2019, for Ghana).

The fourth family compares the performance of banks in one country with banks in other countries using aggregate ratios. Aggregate ratios hide the position of individual banks and therefore do not reflect the performance of each of them.

The fifth family is the stock valuation model, which ties the evaluation to the market price of a bank's shares and not to the operating performance disclosed in its financial statements (Oke and Onwere, 2023).

Having reviewed the shortcomings of these approaches, the purpose of this study is to analyze the trend and the comparative financial performance of three selected Nigerian deposit money banks for the financial years 2021 to 2025, using the Uniform Financial Institutions Rating System, also known as the CAMELS rating. CAMELS rates the overall financial performance of a bank on its capital adequacy, asset quality, management efficiency, earnings quality, liquidity sufficiency and sensitivity to market risk. The closest Nigerian precedent is the evaluation of the financial health of Nigerian deposit money banks with the CAMELS model by Yusuf and Tijani (2019), and recent work continues to apply the framework to the determinants of bank performance in Nigeria (Asimiyu et al., 2025). This study adds to that literature by using a more recent window that covers the exchange rate adjustments, inflationary pressure and recapitalisation of 2021 to 2025, and by combining a time-series view of each bank with a cross-sectional comparison among the three banks. The banks under review are Zenith Bank Plc, First Bank of Nigeria (reported within First HoldCo Plc, formerly FBN Holdings Plc) and Access Bank Plc (reported within Access Holdings Plc).

To ensure the reliability and credibility of the study, the following tools will be employed: textbooks, the audited annual reports of the selected banks for 2021 to 2025, journal articles, Central Bank of Nigeria publications (including its financial stability reports, statistical bulletins and the recapitalisation circulars), Nigeria Deposit Insurance Corporation publications, World Bank publications, the Basel capital and liquidity standards, analytical tables, charts, financial ratios or models, and percentage growth analytical techniques. Where a bank's statements are published only as part of its holding-company group, the group statements will be used and clearly identified.

The data collected for the study will be presented in a non-technical, descriptive and pictorial manner. The conclusions and recommendations should help depositors, shareholders, creditors, bank staff, bank management and auditors to identify a sound bank or a problem bank before they make decisions that affect their interests.

1.2 Statement of the Problem

Stakeholders in Nigerian deposit money banks face a high risk of losing their interests in a bank, because they are often unable to identify and evaluate a problem or distressed bank until the Central Bank of Nigeria declares it a failed bank.

This apparent lack of a practical guide for distinguishing sound banks from problem banks matters because a banking crisis becomes severe when a bank shows most or all of the following conditions, which supervisory experience in Nigeria has repeatedly identified and which correspond closely to the CAMELS components used in recent studies (Yusuf and Tijani, 2019; Asimiyu et al., 2025):

i. Gross under-capitalization in relation to the level and character of the bank's business.

ii. Rapidly 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 that result in large operational losses.

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

vi. Infrastructural inadequacies, such as weaknesses in matters of accounting law and the judiciary.

The 2021 to 2025 period has made the problem more pressing. Banks had to raise large amounts of new capital to meet the recapitalisation deadline of 31 March 2026 while also operating under exchange rate and inflation pressures (CBN, 2024). In these conditions, stakeholders need a practical, objective and comparable way of judging the strength of individual banks.

1.3 Objectives of the Study

Having identified the problem, the study pursues the following objectives:

i. To assess the financial performance of the selected 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 two assessments above.

1.4 Research Questions

The objectives above are turned 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

The study covers the financial performance evaluation of Zenith Bank Plc, First Bank of Nigeria (within First HoldCo Plc) and Access Bank Plc over five years, from 2021 to 2025, on the basis of capital adequacy, asset quality, liquidity and profitability or earnings.

The study does not cover the evaluation of management efficiency or sensitivity to market risk for these banks. Nor does it measure the financial performance of microfinance banks or other non-bank financial institutions.

1.6 Significance of the Study

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

i. It will give bank stakeholders, namely depositors, investors, bank staff and legislators, information with which to follow the trend in the safety and soundness of 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 (Yusuf and Tijani, 2019).

iii. It will bring to the attention of bank stakeholders the 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 carrying out their joint mission of maintaining stability and public confidence in the Nigerian banking sector, including during and after the recapitalisation programme (CBN, 2024).

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

1.7 Profile of Selected Deposit Money Banks

Three banks are selected for review from among the Nigerian deposit money banks operating under the recapitalisation regime that the CBN introduced in 2024. The selection is judgmental. The banks are Zenith Bank Plc, First Bank of Nigeria (reported within First HoldCo Plc) and Access Bank Plc (reported within Access Holdings Plc), all of them large and long-established banks with a listing on the Nigerian exchange, directly or through a holding company.

1.7.1 Zenith Bank Plc

Zenith Bank was established in May 1990 as Zenith International Bank Limited and started operations as a commercial bank in July of the same year. It became a public limited company on 17 June 2004 and changed its name to Zenith Bank Plc. Its shares were listed on the Nigerian Stock Exchange on 21 October 2004 following an initial public offering. In 2013 the bank also listed shares worth US$850 million on the London Stock Exchange (Zenith Bank Plc, n.d.).

The bank provides universal banking services, including corporate and investment banking, commercial and consumer banking, personal and private banking, trade services and foreign exchange, and treasury and cash management services, from its head office in Lagos.

1.7.2 First Bank of Nigeria

First Bank traces its origin to 1894, when it was incorporated in Liverpool as the Bank of British West Africa. In 1957 its name changed to the Bank of West Africa. After the bank was acquired by Standard Bank, it operated as the Standard Bank of West Africa. 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 in March 1971. Its name changed to First Bank of Nigeria Limited in 1979 and to First Bank of Nigeria Plc in 1991 (FBN Bank (UK) Limited, n.d.).

In December 2012 the bank became a subsidiary of a new holding company, FBN Holdings Plc, and the parent was renamed First HoldCo Plc in 2025 (Brandcom, 2019; African Financials, 2025). The bank engages in universal banking, that is, commercial banking together with related financial services.

1.7.3 Access Bank Plc

Access Bank was incorporated on 8 February 1989 as a privately owned commercial bank and commenced operations on 11 May 1989. It became a public limited company on 24 March 1998 and was listed on the Nigerian Stock Exchange on 18 November 1998. It received a universal banking licence from the Central Bank of Nigeria on 5 February 2001 (Access Holdings Plc, n.d.).

The bank acquired Intercontinental Bank in 2012 and merged with Diamond Bank in 2019. In 2022 the group was restructured into a holding company, Access Holdings Plc (Access Holdings Plc, n.d.). The principal activities of the bank are 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 (as re-enacted in 2020).

CAMA: Companies and Allied Matters Act (formerly the Companies and Allied Matters Decree, CAMD; re-enacted in 2020).

CAMELS: The Uniform Financial Institutions Rating System, which rates a bank on capital adequacy, asset quality, management efficiency, earnings quality, liquidity sufficiency and sensitivity to market risk.

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: A loan that a bank extends to a business 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 that is undergoing, or is 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 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 realisable 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 and 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 mature for payment. A bank that cannot do so is illiquid.

Market risk: The potential for loss in net interest income or in the market value of securities as a result of rising and falling interest rates.

Net interest income: Total interest income less 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 because of failures in computer systems, management errors, employee misconduct, fraud, floods and similar events.

Recapitalisation: The process of raising a bank's minimum paid-up capital, as in the CBN's Banking Sector Recapitalization Programme of 2024.

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

Subordinated debt: A type of capital represented by debt instruments whose claim against the borrowing institution legally follows the claims of depositors but ranks ahead of the claims 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/

African Financials (2025). First HoldCo Plc (FIRST.ng): Company profile. https://africanfinancials.com/company/ng-fbnh/

Aliyu, A. and Hassan, S. U. (2020). Bank attributes and financial performance of listed deposit money banks in Nigeria: The moderating role of information technology. International Journal of Auditing and Accounting Studies, 2(1), 67-94.

Asimiyu, M. O., Oladejo, Z. A. and Oladejo, M. O. (2025). Assessment of critical factors shaping the performance of deposit money banks in Nigeria. Published online 5 February 2025 by LAUTECH, https://jafacomar.lautech.edu.ng/index.php/jafacomar/article/view/16

Basel Committee on Banking Supervision (2017). Basel III: Finalising post-crisis reforms. Basel: Bank for International Settlements.

Boateng, K. (2019). Credit risk management and performance of banks in Ghana: The 'CAMELS' rating model approach. International Journal of Business and Management Invention, 8(2), 41-48.

Brandcom (2019). FirstBank @ 125: The quasquicentennial narrative of a mega African brand. https://brandcom.ng/

Central Bank of Nigeria (2024). Banking Sector Recapitalization Programme 2024: Frequently asked questions (Circular FPR/DIR/PUB/CIR/002/009 of 28 March 2024). Abuja: Central Bank of Nigeria.

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

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

Oke, B. O. and Onwere, H. I. (2023). Evaluating the impact of CAMEL variables on the share price of banks in Sub-Sahara Africa. Journal of Accounting, Finance and Auditing Studies, 9(2), 46-73. https://doi.org/10.32602/jafas.2023.012

Olunuga, O. and Akinrodoye, O. (2022). Financial management practices and performance of deposit money banks in emerging market. Economic Insights - Trends and Challenges, 11(1), 67-75.

Yusuf, B. R. and 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.

Zenith Bank Plc (n.d.). About Zenith Bank: Corporate history. https://www.zenithbank.com/