RATIO ANALYSIS AS A STRATEGY FOR PREDICTING FAILURES IN NIGERIAN BANKS
(A CASE STUDY OF FIRST BANK PLC AND DIAMOND BANK PLC ABAKALIKI)
ABSTRACT
This project focuses on ratio analysis as a strategy for predicting failures in Nigeria banks. The project work was set out to highlight and analyze the importance of ratio analysis as a strategy for predicting failure in the Nigerian banks. The objectives of study includes, examining the meaning and uses of ratio analysis, the users of financial ratio analysis as well as the standards for comparing ratios. The role of ratio analysis, the significance and the limitations of ratio analysis. Data were collected for the study using questionnaires and interviews. The data collected were analyzed tabulated and presented using simple percentages and T test. The major findings made in the course of this study were that ratio analysis is a good financial tool for predicting failures and provides the framework or planning and control. The study also reveals that ratio analysis is very useful in evaluating the efficiency and effectiveness of the Nigerian banks thereby determining the level of their performance. It was recommended that banks, business firms and organizations should adopt ratio analysis and apply it as a good financial tool for predicting business failures.
TABLE OF CONTENT
CHAPTER ONE
Introduction
1.1      Background of the study
1.2      Statement of the problem
1.3      Purpose of the study
1.4      Scope of the study
1.5      Research questions
1.6      Limitation of the study
1.7      Definition of terms
CHAPTER TWO
Literature Review
2.1      Meaning of Conflict
2.2      Types of Conflict
2.3      Sources of Organizational Conflicts
2.4      Management conflicts
2.5      Impact of conflict
2.6      Importance of conflict in an organization
CHAPTER THREE
3.0      Research Methodology
3.1      Research design
3.2      Area of study
3.3      Population of study
3.4      Sample and sampling procedure
3.5      Instrument of data collection
3.6      Reliability of the instrument
3.7      Method of data collection
3.8      Method of data analysis
CHAPTER FOUR
4.0      Data presentation and analysis
4.1      Presentation and analysis
4.2      Test of hypothesis
4.3      Summary of findings (Result)
CHAPTER FIVE
5.0      Discussions, Recommendations and Conclusions
5.1      Discussion of findings (Result)
5.2      Implication of the research findings
5.3      Conclusions
5.4      Suggestion for further studies
Bibliography
Appendices
CHAPTER ONE
INTRODUCTION
     Background of the Study
Ratio analysis is a very important tool of financial analysis. Financial analysis is the process of evaluating accounting data in order to determine the operational performance as well as the financial position of the firm. Financial analysis provides information as to the financial strength and weakness of a firm and this helps in building up the framework for future plans of the firm. Hence financial analysis is the first in making plans as it clears ground for sophisticated forecasting and actual planning activities since a good understanding of the past is a pre-requisite for future predictions.
       Udeh (2006. P 251) defined ratio analysis as quotient of two mathematical expressions and or as the relationship between two or more items expressed in figures. A ratio is used in financial analysis as a yardstick for evaluating the financial positions and performance of a firm as the absolute figures contained in the financial statements do not provide meaningful information on the performance and financial position of a firm.Ratio analysis is a very useful tool in raising relevant questions on a number of managerial issues and provides dues to investigate those issues in details.
       The financial sector with special reference to banking has come under the search light in recent years not only because of its strategic role as mediator of funds between the surplus and the deficit units but also as a result o the problem rocking the industry in terms of failure and eventual death (bankruptcy).
       Although, the sector serves as the nerve center of every modern economy being the repository of peoples wealth and supplier of credits which lubricates the engine growth of the entire economic system. The failure experienced in the sector over the years can be captured by the number of failed banks, the debt and extent of required capitalization, the proportion of non performance creditors, loss of depositors funds and the general impact on the economy all of which underscores the importance of the sector.
       While the target and result of banking business are to be achieved through adherence to laid down rules and regulations, the causes of the unhealthy deviation from set rules have been discussed at various times to indulge inadequate supervision, weak management and offensive government policies. Ogunteye (2002) classified the cause of banks failure into institutional economic and political factors as well as regulatory and supervisory inadequacies. While Ebhodaghe (1995) attributed bank failure to economic downturn, inhibitive policy environment and management problems.
       The impact of ill health in the banking sector left nobody untouched ranging from the government, the regulatory authorities, the bankers as well as the general public. It is in this spirit that predicting the potential of failure and remedies in the banking sector becomes imperative of these actor players are to be rightly guided in their decision making ventures.
       In beavers Univariate study of 30 ratios he concluded that cash flow to what debt was the best single ratio predictor. In a subsequent study he found that changes in prices of common stock as if investors rely upon ratios as predictors of failure. Recently, Altman extended Beavers analysis by developing as discriminate function which combines ratios in multivariate’s analysis. Altman found that this five ratios outperformed beavers cash flow to total debt ratio.
       Building upon Altmans discriminate analysis, blam Incorporated trend and volatility measures constructed from ratios, in all of these studies, the statistical fits were quite good supposedly justifying the practical value of ratio analysis for predicting firm failure prior to the date of failure.
       Hence this research work would be handled as follows:
     Meaning o ratio analysis
     Uses of ratio analysis
     Users of ratio analysis
     Standard for comparing ratios
     Significance of ratio analysis
     Limitation of ratio analysis
     The role of capital ratio in banking analysis and supervision
     The relationship between ratios and bank failures.
1.2  HISTORY OF FIRST BANK PLC AND DIAMOND BANK PLC
This research work is using first bank of Nigeria plc, Abakaliki and Diamond bank Plc Abakaliki respectively as its case study.
According to Nduka (2010), First bank of Nigeria Plc (First bank )established in 1894 is a premier bank in west Africa and the leading financial service solution provider in Nigeria. The bank has international presence through its subsidiary, FBN Bank (UK) Limited in London with a branch in Paris and its representative office in Johannesburg and Beijing with 1.3milion shareholders globally. First bank is quoted on the Nigerian Stock Exchange (NSE), where it issued paid u share capital as at March 31 2009 was 24.89 billion units. First bank also has an unlisted Global depository receipt (GDR) programmes.
As the global operating environment evolve over the decades, first bank has kept pace responding satisfactorily to the increasingly dynamic needs of its customers, investors, regulatory authorities, host communities, employees and other stakeholders. Through a sustained strategy, with a trans generational relevance approach, the bank had continuously boosted its essential customers base of both individual and institutions which cut across all segments in terms of size, structures and  sect oral affiliations leveraging experience that spans over a century of what services.
First bank has continued to build relationship and alliance with key sectors of the economy that have been strategic to the well being, growth and development of the country. With its huge asset base and expansive branches network as well as continuous re-inventing first bank has created one of Nigeria’s strongest banking franchise and remains a market leader in the Nations financial service industry.  Delighted returns and superior value, the 2005 consolidation of the financial services industry in Nigeria as anticipated boosted first banks performance indices as accompanying opportunities yielded an unbeatable response to market dynamics.
Today, the bank remains one of the most profitable financial groups in Nigeria which Abakaliki branch is one of the branches in Nigeria. As discussed by Nduka (2010), in repositioning the bank for both domestic and global competition, it hand recourse to raising additional capital the hybrid offer popularly called the “BIG OFFER” set an unprecedented landmark with a subscription in excess of 75% and was lauded as the biggest and most successful in the history of public offer in Nigeria. The banks epoch making achievement was again reinforced when it become the first quoted company oil Nigeria to achieve the feat of hitting the trillion naira mark in market capitalization, the clearest evidence of market estimation of its worth till date and deposit the down turn in the stock market, the bank remains the most capitalized stock on the floor of the Nigerian Stock exchange (NSE).
Diamond bank – Wikipedia the free Encyclopedia (2011), Diamond bank Plc began as a private limited liability company on march 21, 1991 ( the company was incorporated on December 20, 1990). Ten years later in February 2001,it became a universal bank. In January 2005, following a highly successful private placement share offer which substantially raised the banks equity base diamond became a public limited company. In may 2005, the bank was listed on the Nigerian stock exchange. Moreover in January 2008, diamond banks global depository receipts (GDR) was listed on the professional securities the first bank in Africa to record that feat.
Today, Diamond bank is one of the leading banks in Nigeria respected for its excellent service delivery, driven by innovations and operating on the most advanced banking technology plat form in the market. Diamond bank has over the years leveraged on its underlying resilience to grow its asset base and to successfully retain its key business relationship. And like a diamond, our strength makes use ever more value and valuable. Diamond bank has been several awards including the prestigious most improved bank of the year”. This day Newspaper, Best bank in Nigeria acquisition. We have retained excellent banking relationship with a number of well known international banks allowing us to provide a bouquet of world class banking services to suit the business need of our clients. International harmony partners includes Citibank, HSBC bank, ANZ banking group, ING BHF banks AG, standard chartered  bank belgolaise bank S.A Deusthe bank, commerz bank and Norden bank plc (www.diamond bank.com 2011.)
Diamond bank continues to develop and to build on its core competencies. By continually from the rough they have improved their services and the banking facilities.
     OBJECTIVES OF THE STUDY
As discussed by ogunleye (2002.p24) bank liquidation does not happen in a day ,its always preceded by one form of performance or the other whether obvious or obscured. In this spirit, this study therefore, evaluates the bankruptcy states of Nigerian banks using first bank plc and diamond bank plc with a view to determining their probability of failure and remedies in Nigeria commercial banks. It also assesses the stock market performance investor ratio of these banks within a period of 5 years covered between 2006 and 2010.
For the objectives of the study to be successfully achieved, the following objectives will be noted.
     T give meaning of ratio analysis
     To examine the uses of ratio analysis
     To examine the users of financial ratio analysis.
     To give the standards for comparing ratio
     To examine the significance of ratio analysis
     To identify the role of capital ratios in bank analysis and supervision.
     To identify the role of capital ratios in bank analysis and supervision
     To identify the limitations of ratio analysis.
     To examine the relationship between ratio and bank failure.
      STATEMENT OF HYPOTHESIS
Ho: Ratio analysis is not a strategy for predicting failure in Nigerian banks
Hi: Ratio analysis is a strategy for predicting failure in Nigerian banks
Ho: There is no adequate confidence in using ratio analysis for decision making.
Hi: There is adequate confidence in  using ratio analysis for decision making.
     RESEARCH QUESTION
     Could the staff and management of first bank plc and diamond bank plc be able to give the meaning of ratio analysis?
     Could the staff and management of first bank plc and Diamond bank plc be able to identify the uses of ratio analysis?
     Could the staff and management of first bank plc and Diamond plc be able to mention the users of financial ratio analysis?
      Could the staff and management of first bank plc and Diamond plc be able to discuss the standards for comparing ratios?
     Could the staff and management of first bank plc and Diamond plc be able to discuss the importance of ratio analysis
     Could the staff and management of first bank plc and Diamond plc be able to identify the limitations of ratio analysis?
     Could the staff and management of first bank plc and Diamond plc be able to say that ratio analysis is a strategy for predicting failures in Nigerian banks?
      SIGNIFICANCE OF THE STUDY
The researcher believes that this research will be very significance in various ways when completed thus;  It would add to the knowledge reservoir in the library. It would form reference material to other students in the field of study. It would create awareness of ratio analysis as a strategy for predicting failures in Nigeria banks. It would guide investors and shareholders in investing and carrying out business.
     SCOPE OF THE STUDY
This study is basically aimed at finding the usefulness of ratio analysis as a strategy for predicting failures in Nigeria banks.
This study is obviously delimited to such areas as
Meaning of ratio analysis user of ratio analysis.
Users of financial ratio analysis.
Standard for comparing ratios.
Significance of ratio analysis.
Limitation of ratio analysis.
The role of capital bank analysis? supervision and the relationship between ratios and bank failures.
     DEFINITION OF TERMS
Ratio: ratio expresses the relationship between two or more figures in the financial statement. Ratios are useful tolls of financial statement analysis because they conveniently summarize date in a form that is easily understood, interpreted and compared (Dicionary 1995)
Ratio Analysis: it is defined as quotient of two mathematical expressions and or as the mathematical relationship between two or more items expressed in figures (Udeh,2006)
Strategy: According to Hornby, (2000) it is a plan that is intended to achieve a particular purpose.
Predicting: To say or forecast that something will happen in the future (Horn by S.A (20000 Oxford advanced learners dictionary 5th edition).
Failures: According to Horn by (2000) it is defined as lack of success in doing or achieving something.
Remedies: A way of dealing with or improving unpleasant or difficult situation. (Horn by S.A (2000) advanced learners Dictionary 5th edition)
Bankruptcy:  According to Merriew (2010),it is the state of being bankrupt i.e without enough money to pay what you owe.
Banks: According merrier (2010), it is store depository, reservoir, stock collector, pool, stock pile.
  Global Depository Receipt / GDR: This is a certificate issued by depository bank, which purchase shares. Or a bank certificate issued in more than on country for shares in a foreign company. The share are held by a foreigner.