A Comparative Performance Evaluation of the Nigerian Banking Sector in the Post 2005 Consolidation: Through the Camel Rating System

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1 International Journal of Business and Social Science Vol. No. ; July 0 A Comparative Performance Evaluation of the Nigerian Banking Sector in the Post 00 Consolidation: Through the Camel Rating System Kolade Sunday Adesina Department of Banking and Finance School of Management and Business Studies Yaba College of Technology Yaba, Lagos, Nigeria. Abstract Banking in Nigeria has undergone remarkable changes since 00 bank consolidation. The era of arm chair banking has gone. It has become a different ball game in terms of competition and its inherent strategies. This transition eventually brings the Nigerian banks to be in need of capital, asset creation, earnings, liquidity and the management to manage the risk exposure of the aforementioned. In this era of banking, customers must know and understand their banks so that they can differentiate between the degrees of performing and non-performing banks. In this context, the present study evaluates and compares the performance of the Nigerian banks in the post 00 consolidation: through the CAMEL rating system. Moreover, the Nigerian banks are ranked based on their performance. The ranking result can be used to analyse the strengths and weaknesses of a bank compared to its competitors. Keywords: CAMEL, performance, efficiency, and ranking. Introduction In order to strengthen the performance of Nigerian banks, the Central Bank of Nigeria (CBN) has been taking strong measures since 00 till date; this has made the landscape of Nigerian banking changed altogether. All the Nigerian banks were directed to follow the norms of capital adequacy, asset quality, provision for non-performing assets, prudential norms, disclosure requirements, acceleration of pace and reach of latest technology, streamlining the procedures and complying with accounting standards and making financial statements transparent and using the same financial calendar. Because of these factors, the interest of the analysts and researchers got developed to evaluate the financial performance of the Nigerian banks. In this direction, the researchers like Sanni (00), and Uhomoibhi (00) have attempted to make a contribution in the field. Among those researchers, no one used the latest technique of CAMEL Parameters to study the financial performance of the Nigerian banks in the post-00 consolidation. It is against this backdrop that the present study has been undertaken to fill up this gap. In the light of the above, this study looks at levels of efficiency of Nigerian banks, based on the CAMEL rating system. The CAMEL acronym stands for Capital adequacy, Asset quality, Management, Earnings and Liquidity.. Objectives The main objectives of the study are: (i) to analyse the financial performance of the banks under study; and (ii) to highlight the comparison of financial performance of the banks.. Literature Review Various studies relating to the financial performance of banks have been conducted by researchers. Sanni (00) took a look at the 00 consolidation of banks exercise in Nigeria with a view of finding out the short term effect of increase in the minimum paid-up capital of banks on their performance. After an examination of thirteen banks, Sanni had a mixed result for his selected banks. K.V.N. Prasad and A.A. Chari (0) conducted a study to evaluate financial performance of public and private sector banks in India. In this study they compared financial performance of top four banks in India viz., SBI, PNB, ICICI and HDFC and concluded that on overall basis HDFC rated top most position.

2 Centre for Promoting Ideas, USA Nimalathasan B. (00) highlighted comparison of financial performance of banking sector in Bangladesh using CAMELS rating system. Accordingly CAMELS rating system shows that banks was 0 or Strong, banks were rated 0 or Satisfactory, rating of banks was 0 or Fair, banks were rated or Marginal and banks got 0 or Unsatisfactorily rating. NCB had Unsatisfactorily rating and other NCBs had Marginal rating. Based on the above literature, we can say that there are some studies about banks in various countries; however a detailed study (through the CAMEL rating system) has not yet been conducted for post-00 bank consolidation in Nigeria. Hence the present study is made on A Comparative Performance Evaluation of the Nigerian Banking Sector in the Post 00 Consolidation: Through the CAMEL Rating System using all the quoted banks on the Nigerian Stock Exchange as at April, 0.. Methodology This study adopts the CAMEL approach to evaluate the performance of banks and to determine their soundness/safeness. The CAMEL parameters are predicted by using the ratios tabulated in Table in the Appendix. The ratios used for the CAMEL parameters are calculated based on the annual reports of the individual bank. The calculation is done separately for each of the parameters and the ratios related to each parameter are taken on an average over the five-year period (00-00) for each bank. The average values are used to rank the banks. Higher average value of the ratios got ranked higher. The best ratio got rank one followed up to rank fifteen with an interval of one. In case of equal average ratio, the average rank was assigned to the banks. All the average ratios having higher value got higher rank except for the ratios of non-performing loans and advances to total loans and advances, interest expenses to total deposits, and operating expenses to total assets that are ranked in reverse order. Lower rank is assigned to higher ratio under the three ratios. The averages of all the parameters rankings are used for the final ranking of the banks.. Capital Adequacy (C) Capital adequacy is a measure of the financial strength of a bank, usually express as a ratio of its shareholders fund to total assets. The ratio reflects the ability of a bank to withstand the unanticipated losses. This ratio has a positive relationship with the financial soundness of the bank... Asset Quality (A) Asset quality is an important measure of the strength of banks. The ratio of non-performing loans and advances as a share of total and advances is considered for the purpose of analysis. In addition, the ratio of total loans and advances to total assets is utilized to measure the extent of deployment of assets in earning assets.. Management Quality (M) The capacity/efficiency of the management of a bank can be measured with the help of certain ratios. To capture the possible dynamics of management efficiency, the following ratios are considered: total loans and advances to total deposits, interest expenses to total deposits, and operating expenses to total assets... Earnings Ability (E) Two ratios are used to assess the earnings ability of the banks under study. The first ratio is the net income to total assets or ROA. The second ratio used is interest income to total assets. The two ratios have positive relationship with the financial performance of the bank and negative relationship the risk of bank failure... Liquidity (L) Two ratios are employed in this study to assess the liquidity level of the banks. The first one is total liquid assets to total assets. The second ratio is liquid assets to customers deposits.. Results and Discussion of the Camel Analysis The indicators of the financial health of the banks are discussed under the following:. Capital Adequacy Analysis The capital adequacy ratios of the banks under study are given in Tables 0

3 International Journal of Business and Social Science Vol. No. ; July 0 Table shows that Bank Plc maintained a CAR of.% on an average over the five-year period and is ranked first compared to its peer group. Whereas, WEMA Bank Plc has maintained on an average a CAR of -.% which is least amongst its peer group and is thus ranked last. The average capital of the WEMA Bank Plc is negative due to the heavy accumulated losses in 00 and 00.. Asset Quality Analysis Table depicts the highest average value of non-performing loans and advances as a percentage of total loans and advances of WEMA Bank at.% and is ranked last. Whereas, Zenith Bank exhibited remarkable asset management ability and the average value of its non-performing loans and advances/total loans and advances is only.% which is the lowest. Thus Zenith Bank is ranked first in this parameter. Table depicts the series for the total loans and advances/total assets ratios in order to assess the banks ability in earning return on their assets. As can be seen in the Table, Nigeria Plc has average ratio of.% which is highest amongst its group members and is thus ranked first on the parameter of loans and advances to total asset ratio. The average ratio of.% for Union Bank Plc. indicates that the bank has the lowest earning capacity (assets) in the whole sample period.. Management Capability Analysis Table exhibits the total loans and advances to total deposits ratio of the selected banks. Amongst the banks, Bank exhibits ratio which is at 0.0% and is ranked first, whereas, the ratio of Unity Bank Plc is lowest at.% amongst the group and is thus ranked last. The managerial quality concerning the cost management of the banks over deposits is presented in Table. The average of interest expenses to total deposit ratio of First Bank of Nigeria Plc is lowest at.% amongst the group and thus tops the table followed by. Whereas the ratio of Bank is.%, which is highest amongst the group and thus ranked last. The efficiency of the banks operations measured by operating expenses/total assets ratio is presented in Table. It is quite clear from the Table that maintained ratio of.% which is lowest amongst its group members and is thus ranked first. It is also evident from the table that the ratio of Unity Bank is.%, which is highest compared to its peer members (on the average) and is thus ranked last.. Earnings Analysis It is exhibited in Table that the average value of net profit to total assets ratios of Plc is.% which is highest amongst its peer group and is thus ranked first. The average of net income/total assets ratios of WEMA Bank Plc is -.% which is lowest among its group and is ranked last. The net interest income to total asset ratio is presented in the Table. The average of interest net income to total asset ratios of Sterling Bank Plc is highest at 0.0% and is ranked first. A further analysis of the Table reveals Plc to have the lowest average of net interest income to total assets ratios at.0% and is thus ranked last.. Liquidity Analysis Table 0 depicted the liquid assets (which consist of cash and treasury bills) to total assets ratios of the selected banks. The average of liquid assets to total assets ratios of Zenith bank Plc is highest at.% amongst the group and thus tops the chart whereas the average of liquid assets to total assets ratios of Bank Plc is.%, which is lowest and ranked lowest amongst the group. Table exhibits the trends for the liquid assets to customers deposits ratios. Zenith Bank Plc demonstrated better management of its liquidity and was able to garner an average of liquid assets to customers deposits ratios to the tune of.%. This is highest of all banks and thus Zenith Bank Plc is ranked first. The average of liquid assets to customers deposits ratios of Sterling Bank Plc is at.% which is lowest compared to other banks and is ranked last.. Group Ranking of the Banks Understudy on the CAMEL Parameters The Group Ranking on the CAMEL parameters is exhibited in Table, Table, Table, Table, and Table. Each parameter is ranked based on the average of individual bank s sub-parameter ranks.

4 Centre for Promoting Ideas, USA Table shows the capital adequacy ratios by type of banks and the rank position of the banks. As it is evident from the Table, has the highest capital adequacy ratio and topped the Table. is followed by Stanbic IBTC, Fidelity Bank, and Access Bank occupying the second, third, and fourth position respectively. The last position is occupied by WEMA Bank. The group ranking of all the selected banks under the asset quality parameter of is shown in Table. Zenith Bank ranked first in the first sub-parameter i.e. non-performing loans and advances (NPLA) to total to total loans and advances of the main parameter of asset quality while First Bank ranked second in the second sub-parameter i.e. total loans and advances to total assets ratio. The rankings of the two sub parameters are averaged out and the final group ranking is reached. First Bank demonstrated excellent asset management capability and topped the Table in the parameter of asset quality followed by Diamond Bank and both sharing the same rank. Sterling Bank is ranked last in the group on the parameter of asset quality. The group ranking of the selected banks under the parameter of management quality is shown in Table. Access Bank is ranked first followed. The last two positions are occupied by WEMA Bank (rank ) and Unity Bank (rank ). Table shows the earning ability by type of banks and the rank position of the banks. Stanbic IBTC Bank demonstrated excellent ability to generate income on its assets and thus commands the first position amongst the group. Unity Bank, Access Bank, and Union Bank were not so successful in generating income on their assets and thus ranked,, and respectively. The ability of the banks understudy to meet their short-time obligation is exhibited in Table under group ranking on liquidity parameter. Zenith Bank demonstrated first-rate ability to manage its liquidity under the two sub-parameters and thus commands the first position amongst the group. Fidelity Bank is ranked last in the group on the parameter of liquidity management.. Overall Ranking Based on the CAMEL Parameter The overall capital adequacy, asset, managerial, earning, and liquidity performance of the banks for the study period (00-00) is exhibited in Table based on the CAMEL parameters. ranked first for the overall ranking. Diamond Bank, Zenith Bank, and First Bank are ranked second, third, and forth respectively. Unity Bank, Union Bank, and WEMA Bank were not so successful based on the overall CAMEL parameters and thus ranked,., and. respectively for the period Conclusion This study has analyzed the performance of the Nigerian banking sector in the post 00 through the CAMEL rating system. The study revealed that, Plc is the most capitalised bank (shareholders fund/total assets) while WEMA Bank Plc depicted the least rating of capital adequacy during the study period. First Bank of Nigeria Plc. outperformed other banks in asset quality perspective. Access Bank Plc performed better than any other bank in term of management quality. Stanbic IBTC Bank Plc proved to be the best bank in utilising assets to generate return. Zenith Bank Plc excelled over other banks in protecting the short-term creditors. Two banks [Guarantee Bank Plc () and Diamond Bank Plc.] demonstrated sterling performance by consistently ranked among the first best 0 performing banks based on all the Group Ranking on the CAMEL parameters for the study period (00-00). WEMA Bank Plc was not so successful in financial performance by consistently ranked among the last performing banks based on all the Group Ranking on the CAMEL parameters for the study period (00-00). The study also revealed that Plc rated top on the basis of overall performance.

5 International Journal of Business and Social Science Vol. No. ; July 0 References Gunsel, N. (00), Financial Ratios and the Probabilistic Prediction of Bank Failure in North Cyprus, European Journal of Scientific Research, -00. Nimalathasan B. (00), A Comparative Study of Financial Performance of Banking Sector in Bangladesh an Application of CAMELS Rating System, Annals of University of Bucharest, Economic and Administrative series, nr. (00), -. Prasad. K.V.N, & Chari A.A. (0). Financial Performance of Public and Private Sector Banks: An Application of Post Hoc Tukey HSD Test, Indian Journal of Management Sciences, Vol., No., -. Reddy. D.M. & Prasad K.V.N. (0), Evaluating Performance of Regional Rural Banks: an Application of CAMEL Model, Journal of Arts, Science & Commerce Vol. II, Issue,Oct. 0, -. Sangmi M. & Nazir T. (00), Analyzing Financial Performance of Commercial Banks in India: Application of CAMEL Model, Pak. J. Commer. Soc. Sci. 00 Vol. (), 0-. Sanni, M. (00), Short Term Effect of the 00 Consolidation on Profitability of Nigerian Banks, a publication by the Institute of Chartered Accountants of Nigeria, Vol., No., 0-. Subroto, C. (0), An Inquiry into the Financial Soundness of Commercial Banks in India Using Camel Approach, Journal on Banking Financial Services & Insurance Research, Volume, Issue (October, 0), -. Uhomoibhi, T.A. (00), Determinants of Bank Profitability: Company-Level Evidence from Nigeria. [Online] Available at [May 0, 0]. Appendix Table : Ratios Used for the Five Elements of CAMEL Analysis Parameter Ratio Source Capital Adequacy *Shareholders Fund to Total Asset Gunsel N.(00) Asset Quality *Non-Performing Loans and Advances to Total Nimalathasan B. (00) Loans and Advances *Total Loans and advances to TotalAssets Gunsel N.(00) Management *Total Loans and Advances to Total Deposit Reddy and Prasad (0) Quality * Interest Expenses to Total Deposit *Operating Expenses to Total Assets Gunsel N.(00) Gunsel N.(00) Earning Ability *Net Income to Total Assets * Net Interest Income to Total Assets Gunsel N.(00) Gunsel N.(00) Liquidity * Liquid Asset to Total Asset Gunsel N.(00) * Liquid Asset to Total Customers Deposit Gunsel N.(00) Table : Capital Adequacy Ratio of the Selected Banks BANK AVG RANK.%.%.%.%.0%.0%.0%.%.%.%.%.0%.0%.%.%.%.%.% 0.%.%.0%.%.0%.%.%.0%.%.%.%.% FIRST 0.% 0.%.%.%.%.%.%.%.%.%.%.0%.%.%.%.%.%.% STANBIC.%.%.%.% 0.%.%.0%.0%.% 0.% 0.%.%.%.%.%.0%.0%.% UNION.%.%.% -.% -.0% 0.% UNITY.%.0% 0.% -.%.%.% WEMA.%.0% -.0% -.%.0% -.%.%.% 0.% 0.%.%.%

6 Centre for Promoting Ideas, USA Table : Non-Performing Loans and Advances as a Share of Total Loans and Advances BANK AVG RANK.%.%.%.%.% 0.%.%.%.0% 0.%.0% 0.0%.%.%.%.%.%.%.%.%.%.%.0%.0% 0.0%.%.%.%.%.0% 0 FIRST.%.%.%.%.%.%.%.0%.%.0%.0%.%.%.%.%.%.%.% STANBIC.%.0%.%.%.%.% 0.0%.% 0.%.%.%.%.%.0%.%.0%.0%.% UNION 0.%.%.% 0.%.%.% UNITY.0% 0.%.00%.%.%.0% WEMA.% 0.%.%.%.%.%.%.%.%.%.% Table : Total Loans and Advances as a Share of Total Assets BANK AVG RANK.%.%.0%.%.%.%.% 0.%.%.0%.%.%.%.%.%.% 0.%.%.%.0% 0.0%.%.0% 0.%.%.%.%.%.%.% FIRST.%.%.%.%.%.%.%.%.0%.%.% 0.%.%.0%.%.0%.%.% STANBIC.%.%.%.%.0%.%.%.%.%.00%.%.% 0.%.0%.%.%.%.% UNION.%.0%.%.%.%.% UNITY.%.%.%.%.%.% WEMA.%.%. 0.0%.0%.%.%.0%.%.%.%.0% Table : Total Loans and Advances as a Share of Total Deposit BANK AVG RANK.0%.0%.%.0%.% 0.0%.0%.%.%.0%.% 0.%.%.%.%.%.% 0.%.%.%.%.%.%.%.%.% 0.% 0.0%.%.% FIRST.%.%.%.%.%.%.%.0%.%.%.0%.0%.%.0%.% 0.%.% 0.0% STANBIC.% 0.% 00.%.%.% 0.0%.%.%.%.%.%.%.%.%.%.0% 0.%.0% UNION.%.%.%.0%.%.% UNITY.%.0%.% 0.%.%.% WEMA.%.%.% 0.%.0%.0% 0.%.%.% 0.%.%.% 0

7 International Journal of Business and Social Science Vol. No. ; July 0 Table : Interest Expenses as a Share of Total Deposit BANK AVG RANK.%.%.%.0%.%.0%.%.%.%.%.%.0%.%.%.%.%.%.%.%.%.%.%.%.%.%.%.%.%.%.% FIRST.%.%.%.%.%.%.%.%.%.%.%.% 0.%.%.0%.%.%.% STANBIC.%.%.%.%.%.%.%.%.%.%.0%.%.%.%.%.%.0%.% UNION.%.0%.%.0%.%.00% UNITY.%.%.%.%.%.% WEMA.%.%.%.%.0%.%.%.0%.0%.%.%.0% Table : Operating Expenses as a Share of Total Assets BANK AVG RANK.%.%.%.0%.%.0%.%.%.0%.%.%.% 0.%.%.0%.%.%.%.%.0%.0%.0%.%.%.%.%.%.%.%.% FIRST.%.%.%.%.%.0%.00%.0%.%.%.%.%.%.%.%.%.%.%. STANBIC.0%.%.%.0%.00%.0%.%.%.%.%.%.0%.%.0%.%.%.%.%. UNION.%.%.%.%.0%.% UNITY.%.0%.%.%.%.% WEMA.%.%.0%.%.%.0%.%.%.0%.%.%.% Table : Net Interest Income as a Share of Total Assets BANK AVG RANK.0%.%.%.%.%.0%.%.%.%.0%.0%.0%.0%.0%.%.%.%.%.%.%.%.%.%.0%.%.%.% 0.0%.%.% FIRST.%.%.%.%.%.%.%.%.% 0.%.%.0%.%.%.0%.%.%.% STANBIC.%.0%.%.0%.0%.%.%.%.%.%.% 0.0%.%.%.%.%.%.% 0 UNION.%.%.%.%.00%.% UNITY.%.%.%.% 0.0%.% WEMA.0%.%..0%.%.%.%.0%.0%.%.%.%

8 0 Centre for Promoting Ideas, USA Table 0: Liquid Asset as a Share of Total Asset BANK AVG RANK.%.%.0% 0.%.0%.%.%.%.%.0%.0%.0%.%.%.%.%.% 0.%.%.0%.%.%.%.%.%.%.%.%.%.% FIRST.%.% 0.%.%.0%.%.0%.%.%.0%.%.% 0.%.0%.%.%.%.% STANBIC 0.%.%.%.%.0% 0.0%.%.0%.%.%.%.0%.%.%.%.%.%.% 0 UNION 0.%.%.%.%.0%.% UNITY.0%.0%.%.%.%.% WEMA.%.%.%.%.%.% 0.%.%.%.%.%.% Table : Liquid Asset as a Share of Total Customers Deposit BANK AVG RANK.% 0.%.%.0%.%.%.0%.%.%.%.0%.%.%.0%.% 0.%.%.%.% 0.%.%.% 0.%.0%.%.%.%.%.%.% FIRST.%.%.%.%.0% 0.0% 0.%.%.%.%.%.%.%.% 0.%.%.0%.% STANBIC 0.0%.%.%.%.%.%.%.% 0.%.%.%.%.%.%.%.% 0.%.% UNION.%.0%.%.%.%.% UNITY.%.%.%.%.%.% WEMA.% 0.%.%.0%.%.%.%.%.% 0.%.%.% Table : Group Ranking on Capital Adequacy Parameter RANK

9 International Journal of Business and Social Science Vol. No. ; July 0 Table : Group Ranking on Asset Quality Parameter NPLA to total loans and advances Total loans and advances to total assets Average Rank Table : Group Ranking on Management Quality Parameter Total loans and advances to total deposit Interest expenses to total deposit Operating expenses to total assets Average Rank Table : Group Ranking on Earning Quality Parameter Net income to total assets Net Interest income to total assets Average Rank

10 Centre for Promoting Ideas, USA Table : Group Ranking on Liquidity Quality Parameter Liquid asset to total asset Liquid asset to total customers deposit Average Rank Table : Overall Ranking Based on the CAMEL Parameters Capital Adequacy Ranking Asset Quality Ranking Management Ranking Quality Earnings Quality Ranking Liquidity Ranking Average Rank

Financial Performance Analysis of Selected Banks using CAMEL Approach

IMR (Indira Management Review) Volume XI, Issue II, December 2017 Financial Performance Analysis of Selected Banks using CAMEL Approach Vijay Hemant Sonaje 1 and Dr. Shriram S. Nerlekar 2 1 Assistant Professor,