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Saturday, 23 September 2017

DETERMINANTS OF FINANCIAL PERFORMANCE OF LISTED MEGA BANKS IN NIGERIA

MSC Project Topics in Accounting and Finance


ABSTRACT 
The performance of any business firm not only plays the role to improve the market value of that specific firm but also leads towards the growth of the whole sector which ultimately leads towards the overall prosperity of the economy. Assessing the determinants of the performance of organizations has gained importance in the corporate finance literature; however,this study examines the determinants of financial performance listed mega banks in Nigeria for a period of seven years. The population of this study comprises the 11 listed mega banks in Nigeria as at 31 December, 2013. A total of 8 banks that meet the criteria were duly selected as sample for the study. The audited annual reports (Balance sheet and Profit/Loss account) were obtained from Central Bank of Nigeria (CBN) and from selected mega banks’ annual publication reports.The result of random effect regression provides evidence that capital adequacy, bank size, cost income ratio and income diversification have significant impact on financial performance of the banks under study.Based on the findings, the study recommends among others that a policy that will encourages banks to engage in non-interest income activities should be put in place since non- interest income has positive impact on financial performance.

CHAPTER ONE
INTRODUCTION
1.1 Background to the study
As a key component of the financial system, banks play an important role in the operation of an economy. They channel funds from savers to borrowers for investment which increases economic growth rate and development of a country. The Central bank of Nigerian’s resolve to carry out reforms in the banking sector was borne out of the past of the nation’s banking industry. Between 1994 and 2003 due to insolvency problem, no fewer than 36 banks were closed. In 1995 and 1998, 4 and 26 banks were closed down respectively. Also in 2000, three ill banks were closed. In 2002 and 2003 at least one bank collapsed. The failed banks had two things in common – small size and unethical practices. Of the 89 banks that were in existence as at July 2004, when the banking sector reforms were announced, no fewer than 11 of them were in a state of distress. According to the CBN, between 69 and 79 of the banks were marginal or fringe players (Soludo, 2004).
The decade 1995 to 2005 were particularly traumatic for the Nigerian banking industry; with the magnitude of distress reaching an unprecedented level, thereby making it an issue of concern not only to the regulatory institutions but also to the policy analysts and the general public. Thus the need for a drastic overhaul of the industry was quite apparent. In furtherance of this general overhauling of the financial system, the Central Bank of Nigeria introduced major reform programmes that changed the banking landscape of the country in 2004. The main thrust of the reform agenda was the prescription of minimum shareholders' funds of 25 billion for Nigerian Deposit money bank not later than December 31, 2005. In view of the low financial base of these banks, they were encouraged to merge. Out of the 89 banks that were in operation before the reform, more than 80 percent (75) of them merged into 25 banks while 14 that could not finalize their consolidation before the expiration of the deadline were liquidated (Elumilade,2010; Afolabi, 2004). Following the increase in minimum capital requirements from 2 billion Naira ($17 million) to 25 billion Naira ($210 million), the Nigerian banking system consolidated and the number of banks dropped from 89 in 2003 to 24 by December, 2013. The total assets of the banking sector increased from NGN 2,767 billion ($23 billion) in 2003 to NGN 14,932 billion ($127 billion) in 2008. By the end of 2008, more than half of the 20 domestically owned Nigerian banks had subsidiaries in at least one other African country, compared to only two in 2002 (Alade, 2014). However, an assessment of the level of capitalization of an average bank prior to consolidation exercise indicates an equity base (Net worth) of N7.71 billion (US$0.06168 billion) rising to N38.83 billion (US$0.31064 billion) in2006, indicating a growth rate of 404 percent. The leverage ratio measured in terms of equity to total asset also declined from 18.28 per cent in 2004 to 14.52 per cent in 2006 for an average bank. This ratio compares favorably with the CBN minimum level of 10 per cent. The post consolidation ratio is also better in term of its distribution among the banks compared with the pre-consolidation ratio where more than 70 per cent of the equity and assets were concentrated in (the largest five banks) less than 5 percent of the existing banks. However, the intermediation activities of an average bank improved significantly by about 1,690 per cent from an average deposit base of N10.48 billion (US$0.08384) in 2004 to N188.48 billion (US$1.50784) in 2006 (Somoye, 2008).
As part of its ongoing banking industry reforms, the CBN reviewed the universal banking model which permitted banks to act as financial supermarkets. The implementation of the universal banking model was characterized by a number of worrisome features, including the following: inadequate capital and capacity to manage the wide range of business and products; excessive risk appetite and exposure, particularly to affiliate transactions (contagion risk); weak group corporate governance; complexity and opaque structures and processes; and inadequate regulatory/ supervisory capacity. The new banking model which is aimed at addressing these weaknesses categorized deposit money banks license to operate as regional, national or international (Mega) bank; their minimum capital requirements were specified as N10 billion, N25 billion and N50 billion for regional, national and international respectively. The regional banks are entitled to carry on banking operations within a minimum of 6 and maximum of 12 contiguous states, lying within not more than 2 geo-political zones of the federation and the Federal Capital Territory; national banks are authorized to carry on banking operations within every states of the federation, including the Federal Capital Territory while the international banks are permitted to carry on banking operations in all the states of the federation, as well as establishing offshore subsidiaries.A Mega bank (MB)is a bank that meet a minimum capital requirement of N50 billion and with a commercial presence outside its home country, by way of at least one branch or subsidiary. The failure of some DMBs to meet up with anticipated financial performance after consolidation requires a rethink to evaluate their performance thus this study is designed to evaluate the performance of Mega banks (MBs) using financial measures.
According to Hifza Malik, (2011), profitability is one of the most important objectives of financial management since one goal of financial management is to maximize the owners‟ wealth, and profitability is very important determinant of performance. A business that is not profitable cannot survive. Conversely, a business that is highly profitable has the ability to reward its owners with a large return on their investment. Hence, the ultimate goal of a business entity is to earn profit in order to make sure the sustainability of the business in prevailing market conditions. The determinants of banks profitability have attracted the interest of academic researchers, bank management, financial markets as well as bank regulators. There have been several studies on determinants of bank profitability which started with the early work by Short (1979). While the study of Smirlock (1985), Berger (1995), Kosmidou, Tanna, & pasiouras (2005), Dietrich and Wanzenried (2009) centered on individual countries, the works of Moulyneux and Thornton (1992), Goddard, Molyneux, & Wilson (2004), Al Hashimi (2007), Demirguc – Kunt and Huizinga (2000) and Heffernan and Fu (2008) focused on panel of countries. According to their studies, the factors determining the profitability of banks fall into two main groups. First, there is a group of determinants of profitability that is specific to each bank and that in many cases, are the direct result of managerial decisions (asset structure, asset quality, capitalization, financial structure, efficiency, size, and revenue diversification). The second group of determinants includes factors relating profitability to the industry structure and to the macroeconomic environment within which the banking system operates, such as industry concentration, economic growth, inflation, and interest rates (Almumani, 2013). Even though different studies were conducted on the determinants of banks performance, their results is not conclusive as far as the impacts of the factors are concerned.

In Nigeria, different studies were conducted on the determinants of deposit money banks (DMBs) performance such as Ani, Ugwunta, Ezeudu and Ugwuanyi (2012), Aremu, Ekpo and Moustapha (2013), and Aminu (2013) but the authors did not include important variables like income diversification. This study examines the determinants of MBs financial performance in Nigeria, taking into cognizance income diversification, this is due to the fact that the profitability of banks which depends solely on interest income may be highly affected by interest fluctuation and loan default risk. But, banks which diversify their income source can increase their profit since non-interest income may not be affected by interest fluctuation and loan default. In view of the aforementioned and ongoing performance determinants debate around the globe, a study on the performance determinants on MBs in Nigeria is desirable. This study dwells on Internal factors that affect MBs financial performance because our purpose is to test the impact of capital adequacy, credit risk, bank size, cost income ratio, and income diversification on MBs financial performance.

MSC Project Topics in Accounting and Finance

DETERMINANTS OF FINANCIAL PERFORMANCE OF LISTED MEGA BANKS IN NIGERIA

Department: Accounting and Finance (M.Sc)
Format: MS Word
Chapters: 1 - 5, Preliminary Pages, Abstract, References, Appendix.
Delivery: Email
No. of Pages: 93

NB: The Complete Thesis is well written and ready to use. 

Price: 10,000 NGN
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