ABSTRACT
The
purpose of this study among others is to examine the effectiveness of
profitability and liquidity ratio as tool for performance evaluation in banks
through the analysis of financial statements. In this regards, Union Bank of
Nigeria Plc financial years of operation between 1999-2004 were used. In the
course of this study, some hypothesis were tested using coefficient of
correlation as a statistical tools, with the aid of SPSS, in which 12 years
data were employed. Annual Report of the bank within the period 1999-2004
supplied the major bulk of information needed in accomplishing the desire
objectives (purpose) of the study. One major finding of this research work was
that the bank performance was comparatively better in 2001, virtually all the
ratios computed proved this, in the light of this, the establishment of a
centralized and well managed account department capable of handling all the
problem of financial ratio in a way that useful information can always be
derived from them was recommended. Finally, it was concluded that equalization
factors, such as management quality, asset quality e.t.c, has to be considered
along with ratio analysis if a true performance evaluation must be achieved.
TABLE
OF CONTENT
Cover pages i
Certification iii
Dedication iv
Acknowledgement v
Abstract vii
Table of content viii
CHAPTER
ONE
INTRODUCTION
1.1
Background of study 1
1.2
Statement of research problem 3
1.3
Objectives of the study 4
1.4
Statement of research hypothesis 5
1.5
Scope of the study 5
1.6
Limitations of the study 6
1.7
Significance of the study 8
1.8
Background history of union bank of Nigeria PLC10
1.9
Definition of terms 12
References 15
CHAPTER
TWO
LITERATURE
REVIEW
2.1
Introduction 16
2.2
Users of financial statements and their information17
2.3
Ratio analysis 20
2.4
Trend analysis 32
2.5 Introduction of bank performance ratios 33
2.6
Significance of ratio analysis 41
2.7
Inflation and accounting ratios 42
2.8
Validity of ratio analysis 45
2.9
Limitation of ratio analysis 47
2.10
Summary 49
References
CHAPTER
THREE
RESEARCH
METHODOLOGY
3.0
Introduction 53
3.1
Research design 54
3.2
Sources of data 55
3.3
Method of data analysis 56
References
CHAPTER
FOUR
4.1
Data presentation and analysis 63
4.3
Profitability ratio 65
4.4
Liquidity ratio 79
4.5
Hypothesis testing 82
CHAPTER FIVE
SUMMARY, RECOMMENDATIONS AND
CONCLUSION
5.1 Summary 88
5.2 Recommendations 89
5.3 Conclusion 90
Bibliography 92
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF STUDY
This research work provides a framework
for analyzing the financial condition and performance of financial institutions
(Union Bank Plc). Banking fundamentals have not change much since the inception
of banking business. This involves accepting funds from those with surplus
funds (depositors) and lending them to those with the ability to use additional
funds for productive purpose (borrowers).
Financial analysis of a banking
institution is particularly challenging because of uncertainties in the
valuation of the loan that constitute a bank principal assets. Bartrop and Mc
Naghton (1994:1), if loans are reflected at book value without adjustment to
reflect recoverability through appropriate loan loss provision, the assets and
capital are overstated and profitability is inflated. A very basic requirement
of public confidence in the banking system is that the depositors should
believe that they can have access to their funds whenever they need them. With
this belief will be confident that they are incurring no risk in depositing
their money in the bank.
Thus depositors are just as are
regulators, bank managers and independent analyst.
The problem of weak management,
inadequate control system inadequate capital base and inadequate provision for
bad and doubtful debts has caused a greater deal of bank distress in the
banking sector and this has resulted to the general loss of confidence in the
entire financial sectors. The aspect of bank management which is mostly
significant is the management of liquidity. A bank should ensure that it does
not suffer from lack of liquidity also that it does not have excess liquidity.
The failure of a bank to meet its obligations due to lack of sufficient
liquidity, will result in poor credit worthiness, loss of creditors confidence
or even in legal angles resulting in the closure of the bank Pandey (1985:101).
Specifically efforts are made to
critically examine the effectiveness of profitability and liquidity ratios as
tools for performance evaluation. Particularly in Banks, necessary recommendations
are also made on how to improve on the use of ratio in the interpretation of
financial statement. Effort in this research is centered on profitability and
liquidity ratios as tool for accessing Union Bank of Nigeria Plc performance.
1.2 STATEMENT OF RESEARCH PROBLEM
This research work is designed to carry
out an analysis of profitability and liquidity as tools for performance
evaluation in banks and particularly in Union Bank of Nigeria Plc.
The following problems are examined and
answers are soughed to them in the course of this research:
1.
How effective is the analysis of
profitability and liquidity ratios on evaluating performance?
2.
Is the profitability of an
organization, such as bank solely determined by its assets base?
3.
What relation can be said to exist
between profit and liquidity of an organization such as bank?
4.
How dependent is the gross earning of
a bank on its assets employed?
1.3 OBJECTIVES OF THE STUDY
The objective of this study includes:
1.
To examine the use of ratio analysis
with emphasis on profitability and liquidity ratio as tools for performance
evaluation.
2.
To recommend a criterion through ratio
analysis that best summarize the performance of an organization particularly
banks.
3.
To establish a relationship between
the profitability and liquidity of a bank.
4.
To establish a relationship between
profitability assets employed and gross earnings.
1.4 STATEMENT OF RESEARCH
HYPOTHESIS
In this research study, the under listed
hypothesis are formulated for testing scientific tests of these hypothesis are
employed to arrive at a reasonable condition. The formulated hypothesis include
Ho and Hi.
Ho:
This represents the null hypothesis
Hi:
This represents the alternative hypothesis
1.
Hi: The profitability of a bank is
determined solely by its assets base.
2.
Ho: The profitability of a bank is
bound to increase as its gross earnings increase.
1.5 SCOPE OF THE STUDY
This study takes a review of ratio
analysis as tools for performance evaluation. The analysis employed the use of
ratios and statistical tool. The scope of the analysis represents an evaluation
of the profitability and liquidity of the case study between 1999-2004
financial years of operation. (but due to some problem at management level the
bank could not prepare financial statement in 2000 as a result 18 months
financial statement was prepared in 20001. the profitability and liquidity
ratios derived from the banks financial statements are used as tools for
evaluating the performance of the bank (Union Bank) during the years. The data
applied to achieve the desired analysis are limited to those contained in the
desired analysis of the bank for those five years.
1.6 LIMITATIONS OF THE STUDY
It is customary to encounter problem
which effect the quantity and quality of data collection and in executing the
project, the problem encountered are:
1.
Financial constraints: In view of the
present day economic crunch, it is expensive to undertake a project of this
nature, especially the cost of the materials input. However, fund was source
from various means to ensure that the research work was completed.
2.
Management policy: The request from
Union Bank Plc to give out copies of their financial statement and report for
some years was not entertained at first by management of Benin Branch for
strategic and security reasons. After due persuasion some years were given to
me.
3.
Time constraints: Due to insufficient
time for the completion of this project, it will be particularly impossible to
cover all area of accounting ratio i.e exhaust the study as an evaluation of
the bank performance.
4.
Test book constraints: Direct access
to textbook relevant to this study was of course a problem.
1.7 SIGNIFICANCE OF THE STUDY
With the galloping nature of inflation
in Nigeria economy, business environment and local investors are apparently
declining to commit their resources to business ventures there in, they are
also unwilling to commit their resources to business annually in the face of
the devastating efforts of the structural adjustment program (SAP), the
incessant devaluation of the naira and unstable political nature and crisis
prevailing the Nigeria economy. Against this background commercial banks, which
mobilize saving through the acceptance of deposit from the public sector need
to carry out both internal and external check or performance evaluation to enable
them internally evaluate management performance so as to ensure that the
payment of interest and repayment of deposit are effectively met as at when
due.
This study will therefore:
1.
Assist management and investors to
appreciate the need to carefully analyze financial statement in order to
enhance a better and more effective business policy and decisions.
2.
Assist managers to improve on the use
of available resources, minimize business risk and enhance decision making
process in order to achieve an overall operational efficiency and performance.
3.
Assist customer particularly that of a
bank in accessing the ability of the bank to meet up with their demand and
obligation effectively by evaluation the liquidity and current financial
position of the bank.
4.
Help to inform actual and potential
investors in how the funds invested is being managed in generating profit,
since they are concerned with their return on investment.
5.
It will assist users of financial
statement and the bank under study to appreciate how ratio analysis can
disclose areas of strength and weakness of a bank as different from the result
shown by the income state and the balance sheets.
6.
Serve as references for future
research purpose and for other interested parties thereto.
1.8 BACKGROUND HISTORY OF UNION
BANK OF NIGERIA PLC
Union Bank of Nigeria Plc has its origin
dating back to the year 1917 when the colonial bank authorized by the British
Act of 1961 started operation in Nigeria.
In 1925 Barclays Bank (Dominion colonial
and overseas) was formed to take over the activities of the colonial bank. The
name of the bank was abbreviated bank and co. in 1950 and a Nigerian head
office established in Lagos
a year later. The bank became largely incorporated in Nigeria in the
year 1969 as a wholly owned subsidiary of Barclay Bank & Co. But as Private
Limited Liability Company. This structure of ownership remain until 1970 when
8.3% of the banks share were offered to Nigerian and the share capital was
listed on the Nigeria stock exchange for the first time. Thus it become a
public limited company in 1979, the bank changed its name to Union Bank of
Nigeria limited to reflect is new ownership structure where 52% of its share
were owned by the federal government through the ministry of finance. 28% by
the Nigeria public while 20%
was retained by the Barclays International Bank Plc. Sold its remaining share
holding to Nigerians, by this at, the hands of Barclay bank was completely out
of the ownership of the Union Bank and the bank later became wholly owned by
the Nigeria
citizens and the federal government.
However, in compliance of dictate of the
federal government policy on privatization and commercialization the government
relinquished all it 52% equity share holding in the bank to the Nigeria populace.
The policies of the bank are determined by the board of directors. Having its
wish executed by the managing director assisted by four executive directors who
each control one of the four divisions into which the bank is directed for easy
administration. The financial year of Union Bank of Nigeria Plc runs from 1st
April to 31st March.
In a nutshell, Union Bank is presently a
very successful bank and it is one of the leading commercial bank in Nigeria.
1.9 DEFINITION OF TERMS
1. User
of financial statement: These are individual or groups of individuals and
corporate bodies who for one reason or another have reasonable right to
information about the affair of the company SAS vol. II (2001:3).
2. Publish
accounts: These are account required by law to be published by the bank (i.e.)
to include the income statement, the balance sheet and notes to the account.
3. Income
statement: This is a statement of income and expenditure of a Bank, it is the
same thing as the profit and loss account.
4. Net
income: This refers to the profit of a firm after all expenses have been
deducted from income or revenue. When expenditure exceed income, a net loss
arises. Net income is the same as net profit.
5. Profit
before tax: This is the same thing as the net income profit defined in No 4
above.
6. Liquid
asset: These are asset held as cash and near cash which can readily be
available to meet customer obligations.
7. Loan
and advances: These are funds given by the bank to business men repayable at
agreed terms.
8. Statutory
reserves: This refers to the reserves to be maintained by all banks under
section 16 of the bank and other financial institution decree (BOFID) No 25 of
1991.
9. Cash
reserves requirement: This is a mandatory balance to be maintained at the CBN
by the commercial bank in accordance with section 15 of BOFID No 25 of 1991 and
as specified from time to time in the monetary and credit policy guideline.
10. Capital
employed: This is the aggregate of all the long term capital supplied to the
firm. It includes shareholders funds, reserves and debenture. ANAO (1989:325).
REFERENCES
Anao A.R (1982): An Introduction to Financial
Accounting Longman, Nigeria Ltd.
BOFID (1991)
Chris J. Barctrop & Diana Mc Naugton (1994):
Banking Institution in Development Market vol. II World Bank Washington D.C.
Pandey I.M (1985): Element of Management
Accounting 1st Edition Vikas Publishing House.
CHAPTER TWO
LITERATURE REVIEW
2.1 INTRODUCTION
Performance is usually commonly base on
ratio analysis. This is because the computation of a ratio is not so much a
difficult task. However, the computation of ratios must be correctly
interpreted to yield the appropriate information necessary for users decisions
making the people that assess the performance of a company through financial
analysis are the various parties interested in affairs of the company. These
people are known as users of financial statement.
This chapter therefore examines the
various users of financial statement and their information needs, and broadly
review some literature on ratio analysis.
2.2 USERS OF FINANCIAL STATEMENTS
AND THEIR INFORMATION
Vickery (1973:686) opines that the
principal parties interested in financial or groups who for one reason or the
other have reasonable right to information about the reporting organization.
Arguing further he suggest that the
various users of financial statement and their information needs can be
summarized as follows:
1.
Managing director and other top
management executive e.g. the sale manger or work director who needs to know if
their organization is efficient or otherwise. The published accounts will
summarize for management information already disclose by detailed account.
2.
Credits: The creditors point of view
is based entirely upon the satisfaction of their claim against the company.
Thus the amount of any prior changes and secured liabilities must be clearly
indicated together with the value of the current assets. In other words, this
class of interested party desires to know whether there will be an adequate
surplus of liquid assets to satisfy its claim against the company.
3.
Banker: The point of view of the
banker is to a certain extent identical with that of the creditors i.e. they
are concerned with the realizable value of assets and the sufficiency of assets
(after payment of prior charges) to cover the advance made or contemplated.
4.
Debenture holders: The point of view
of this class of interested party differ from that of bankers, in as much as
although they are concerned with realizable value, they are also concerned with
‘going concern’ values.
5.
Preference holder: This class of
shareholder is concerned with the maintenance of profit with a view of ensuring
the regular payment of the fixed dividend rather than with the value of assets.
The question of capital repayment on liquidation is usually deemed to be of
secondary importance to dividend maintenance.
6.
Ordinary shareholder: Similarly to
preference share holders, ordinary shareholders are not greatly concerned with
the actual value of assets but are interested primarily in dividend possibly.
7.
Other various user of financial
statement and their information needs are: competitors, government agencies,
credit rating agencies, investment analysis, those interested in merger and
acquisitions.
2.3 RATIO ANALYSIS
Financial statement analysis consist of
applying analytical tools and techniques to financial statement and other
relevant data to obtain useful information. The information obtained is useful
in assessing post performance and current financial position, which result to
prior decision. According to Vickery (1973:698) ‘accounting ratio provide a
means by which various item in the final accounts are related to an appropriate
base, usually the sales or the capital of a business and the re by enable items
to be required proper perspective.
Pandey (1985:97) states, ‘in financial analysis,
a ratio is used as an index or yardstick for evaluating the financial position
and performance of a firm. The absolute accounting figure reported in the
financial statement do not provide a meaningful understanding of the
performance and financial position of a firm.
He went further to stress that ratio
helps the analyst to make qualitative judgment about the firms financial
position and performance.
The principle of ratio analysis attempt
to determine historically or by reference to other firms, in the same industry,
some notions of the standard relationship, which ought to exist between any two
factors and to interpret the specific relationship in any one form in terms of
the extent to which the firm attain stated standard. The attainment of firm
attain stated standard. The attainment of that standard would be interpreted as
good performance or healthy financial condition as the case may be. However
failure to obtain it would imply poor performance Anao (1989:324).
Anao (1989:324) argued that there is
nothing too sacrosanct or serotype about ratio: they are determined by
convention or conditions in the state of the particular industry. This
characteristic makes ratio analysis both realistic and dynamic.
Walter et al (1963:917) states that
ratios may be expressed as percentages, as fraction, as a stated comparison
between simple numbers.
2.3.1 RATIO
ANALYSIS AND PERFORMANCE EVALUATION
Various categories of users of financial
statement required different information to enable them access the performance
of a firm.
A trade creditor is primarily interested
in liquidity position of the firm since his claims or interest in the firm is short
term. The debenture holder n the other hand has a long term claim and so his
concern is usually on the long term cash flow ability of the firm to service
debt.
He may list this ability by analyzing the
capital structure of the firm, the major sources and users of funds, its
profitability, overtime and the projection of future profitability. Accounting
figure convey meaning only when it is related to other relevant information.
The function of ration analysis therefore is to allow comparison to be made
which aid their decision making process.
Therefore, ratio analysis is a technique
or means of reducing total financial/data contained in the final accounts into
meaningful ratio for the purpose of obtaining desirable measure like liquidity,
solvency, stability and profitability of a company to satisfy the various needs
of information of varying users. Different types of ratios are usually
calculated. This is usually obtained by company ratio between similar business
to se if the firm under examination is improving or declining within its
particular business sector or industry.
Douglas
(1985:677), stressed that accounting ratios, although useful do not provide
complete financial information, they must be considered along other types of
financial data.
2.3.2.1 TYPES OF RATIOS
The following ratios are among those in
popular use as can be observed from their classification into groups
(profitability, liquidity, leverage and activity) which suggest the range of
objectives (or aspect of performance) which ratios may be expected to high
light Anao (1989:324).
PROFITABILITY RATIOS
1. Return
on assets managed (ROAM)
2. Return
on capital employed (ROCE)
3. Return
on equity (ROE)
LIQUIDITY RATIOS
1. Current
ratio
2. Quick
assets ratio (acid test)
LEVERAGE RATIOS
1. Debt
ratio
2. Capital
gearing
3. Time
interest cover
ACTIVITY RATIO
1. Total
assets turnover
2. Average
collection period
INVESTMENT RATIOS
1. Earning
yield
2. Dividend
yield
3. Price
earning multiple
2.3.2.1 PROFITABILITY RATIOS
Profitability is essential and it is a
fact that sufficient profit must be earned to sustain the operation of the
business.
Profit is the difference between total
revenue and total expenses over a period of time. Since it is the final output
of a company, the financial manager should continuously evaluate the efficiency
of its companies in terms of profit.
These ratios are indicators of how
efficient management has utilized the various resources at its disposal in generating
income. They are a measure of the over performance of the organization in terms
of profitability. The ratio indicate the profitability of a firms operation
management efficiency as measured by return on capital employed and the rate at
which the capital investment is turned over.
1.
Return on capital employed (ROCE):
This ratio according to Glantier et al (1983:318) interprets the capital
employed as being the value of fixed assets to that of current assets and
deducting the total of current liability. In effect, the interprets to the
shareholder equity plus long term borrowing calculated as
PBIT x 100 = 000%
NVV
2.
Return on assets managed (ROAM):
Profit is sometimes seen as a function of the size of the total asset placed at
the disposal of management for operating the business. A large amount of assets
is therefore essential to generate more profit than a smaller volume of asset.
The ratio of profit to total asset is thought to be a suitable way of
companying the efficiency of capital in two or more firms.
3.
Return on equity (ROE): The equity
fund in a business (ie. Share capital plus all retained surplus) represent the
book value of the total investment by the ownership class. The net profit after
tax, on the other hand, represent the ownership class, the total surplus
generated by their investment. For equity holder, the efficiency with which
their funds are employed is reflected by the ratios of net profit after tax to
the total equity fund. This is expressed as:
ROE = NPAT = Net profit after tax
SE Shareholders equity
2.3.2.2 LIQUIDITY RATIOS
These are ratio used to denote a
company’s ability to settle its current financial obligations as they fall due
Anao (1989:326). A company is said to be liquid if it can conveniently meets
its current obligations as they fall due. Thus, the greater amount of cash and
near cash items a firm has in relation to its debt and other business obligation,
the more liquid the firm is said to be. So solvency refers to the underlying
financial strength of a firm that enables it to meet its maturity obligation
Garbutt (1972:2916).
Ratios are employed in evaluating the
ability of a firm to meet its short term financial obligations, which usually
relates to a current accounting period. Under liquidity there are two ratios.
These which relates current liabilities and those which indicates the rate at
which short term assets such as stock and debtors are turned into cash
1.
Current ration: This could also be
referred to as working capital ratio. It is a barometer for measuring a firm’s
short term solvency and financial strength. It measures the short term ability
of a company to convert its current assets (stock, debtors, marketable
securities and cash) into cash in order to meet its current liabilities
(creditors, bank drafts, taxation, provision and dividend due) the ratio is
determined by dividing total current assets by total current liabilities
pickles (1982:3144).
That is;
current ratio = Total current assets
Total
current liabilities
2.
Quick or acid test ration: The quick
ratio compares current liabilities to those assets which can quickly be
converted into cash. However, current assets which are not readily realizable
are excluded, as are also current liabilities the payment of which could not be
readily demanded e.g. taxation liabilities due after nine month. Pickles
(1982:3144)
This ratio is express as:
Liquidity
ratio = Quick assets
Current liabilities
2.3.2.3 LEVERAGE RATIOS
This class of ratio can be examined
thus:
1.
Debt ratio: This ratio is the total
debt to total asset. The ratios is primarily aimed at measuring the proportion
of the firm total assets which are paid for by both long term and short term
debt.
Debt ratio = Total
debt
Total assts
Or
Current
liabilities + long term loan
Total assets
2.
Capital gearing: This ratio measure
the relationship between the ordinary share capital of a company and fixed interest
capital in the form of preference and debenture. A company with a preponderance
of ordinary share (or equity) capital is said to be low geared, while a company
with a capital structure in which fixed interest capital is higher, is said to
be high geared Spicer et al (1980:251).
2.3.2.4 ACTIVITY RATIO
A number of ratios which throw light on
different aspect of a firms activity are generally compared. But for the
purpose of this study, we shall concentrate on only debt collection activities.
The principle can generally be extended to other area of performance.
Debtor
collection period: This ratio indicates the efficiency at the firm credit
department in collecting debt owned to the firm. It measures the speed of receivable
collection, it tells how low it will take the debtor to pay its debt.
Average
collection period: This is a ratio of total debtors to the average sales per
day where average daily sales is the year turnover divided by 365 or simply 360
days Anao (1989:328).
Average collection period = Debtor
Average sales per day
2.4 TREND ANALYSIS
This is the most useful form of
horizontal analysis. It is especially helpful in revealing proportionate
changes over time in selected financial statement data Walgenbach and Dittrich
(1973:419) also, Weygandt et al (1993:811) stress further that, it is a
technique for evaluating a series of financial statement data over a period of
time.
PERCENTAGE ANALYSIS
This is where a company carries out a
yearly percentage analysis, the financial statement in this type of analysis,
the items appearing in the income statement and balance sheet are express as
percentage of total sales and total assets respectively Horngren (1981:738).
2.5
INTRODUCTION OF BANK PERFORMANCE RATIOS
The purpose of this study is to explore
some comparative approach to banking financial statement by looking at some key
ratios that indicates the underlying level of performance and health of a bank.
Here, we provide an overview of the most frequently used ratios.
These ratios required a good
understanding of the balance sheet and the compoenents of the statement of
profit and loss.
Reading through a bank financial
statement can give some understanding of what the bank does, what the numbers
in the financial statement indicates, and to some extent how they have been
manipulated. But how does the analyst know when to be concerned with the banks
financial conditions. A bank major role is to take in fund primarily through
deposit and equity, and invest them in productivity assets, resulting in
interest differential income. In addition, the bank provides some financial
services on a fee basis, resulting in commission and fee income. It takes a
sound management to ensure that the optimum degree of expenditure is made.
2.5.1 TYPES OF BANK RATIOS
Ratio classification for this study was
employed by Bartrip and Mc Naughton (1994:5)
Performance
rations:
Return
on assets
Net
spread
Net
interest margin
Fee
income
Net
operating margin
Administration
expenses (% total assets):
Staff
expense
Other
operating expense
Total
operating expense
Loan
loss provision expense
Net
income before tax
2.5.2 MEASURE OF PROFITABILITY
The two most important measure of bank
profitability are return on assets and return on equity. These ratios are
descried below:
Return
on assets (%): This ratio related operating profit to total resources under
management. This ratios is considered by many to be the best single ratio for
evaluating the performance of management s. it is calculated as
Net income
after tax x 100
Average
total assts
The
denominate would be average daily outstanding. However, in most countries this
figure is not available.
Return
on equity (%)
These ratios measure the return on
shareholder equity. It is desirable to calculate it using on average denominator
as below
Calculation: Net income after tax x
100
Average
equity capital
2.5.3
MEASURES OF OPERATING EFFICIENCY
There is no universally accepted
definition of these ratios. The term spread, net interest margin and cost of
intermediation are referred to some what interchangeably especially outside the
narrow circles of bank analysts.
Net
interest margin (%):
This
ratio identified the core earning capacity of the bank, its interest
differential income as a percentage of average total assets.
Calculation: Interest income –
interest expenses x 100
Average total assets
Other
operating income to total assets (%): This ratio shows the dependence on
‘non-tradition’ income. Growth in this ratio can indicate a healthy
diversification into fee based financial services or an unhealthy reaching of speculative
profit to make up for deficiencies in the banks core interest differential
income.
Calculation: Other operating income
x 100
Average
total assets
Net
operating income to total asset: This ratio differs from the return on assets
ratio by the amount of non-interest operating expenses, taxes paid, and any
extra ordinary income or loss.
Calculation:
Net interest income + other operating income x 100
Average
total assts
2.5.4 MEASURE OF STAFF EFFICIENCY
Staffing generally represent the major
component of a banks non interest cost. Staff productivity, as measured either
against staff expense or number of staff, can provide insight into a bank’s
efficiency. Staff productivity should be viewed with caution however, since
current period saving through excessive restrictions on salary levels can lead
to a decline in the quality and motivation of the staff.
Net
income per staff
Calculation: Net income after tax
Total
staff count
This ratio measures the average income
generated by each staff members
Net
income to staff expense
Calculation: Net income after tax
Staff
expenses
This ratio measures return on investment
in staffing costs. This ratio is probably a better measure than net income per
staff since it enable institution of different types to be compared to some
degree.
2.5.5.1 PERFORMANCE ANALYSIS
By this study, we have seen that the
most useful approach to analyzing a bank performance is shown in the
performance analysis section in 2.5.1. The analysis takes either quarterly or
annually profit and loss data, calculates the average of key balance sheet
categories over the period covered by the profit and loss data and calculates.
1. Earning
performance through return on average assets and return on capital.
2. Growth
rate for key loans, deposit capital and staff.
3. Staff
productivity measured by earning per staff and return on the staff expense.
4. Average
interest rate earned and paid cost of interest remediation.
This
approach combines balance sheet and profit and loss data to produce key
performance indicator (ratios) that are independent of the size of the bank and
are thus directly comparable over time and with other banks.
6. LIQUIDITY MANAGEMENT
Liquidity is the ability to mobilize
cash or to convert an asset into cash with minimum delay and minimum loss.
Virtually all economic units including banks need liquidity. Banks must
maintain a substantial part of their assets in cash and in assets that can be
converted into cash quickly in meeting their liquidity needs, banks have wide latitude
in asset management and in recent years have begun to use that attraction of
liabilities to assist in this task Asemota (2003: 156).
In a relatively simple banking
environment in which the banks predominately take short-term deposit and make
short term loans and there is little or no reallocation of resources between
banks, liquidity can quite be easily measured by this ratio Barltr9op and Mc
Naughton (1994:2).
Current assets – current liabilities x
100
Total
assets
2.6 SIGNIFICANCE OF RATIO
ANALYSIS
In order to measure the success of a
business in achieving its aims and objectives, the financial statement must be
analyzed. This is because the absolute information contained in the account would
not give objective indication as the performance of the business. Ratio
analysis is therefore an important technique for interpreting and companying
financial reports. Ratio analysis makes it possible for the reduction of the
aggregate data contained in the financial statement into meaningful ratio or
percentages thereby highlighting the salient features of the statement of a
company. It can also be used for purpose of comparison between different form
and between different time periods for the same firm. Again, the various items
in financial statement may be difficult to interpret in the form in which they
are presented e.g. profitability of a firm may be difficult to access by
looking at the amount of net income alone. It is helpful to compare them in the
financial statement earning with the assets or capital required to generate
those earnings. Davidson et al (1976:213).
Where ratios are used to denote past
trend they may give an indication as to future. The ratio analysis is a
powerful tool of financial analysis many diverse group of people are interested
in analyzing the financial information to indicate the operating efficiency and
the various aspect of the firms financial position.
2.7 INFLATION AND ACCOUNTING
RATIOS
According to Aboyade (1983:272)
inflation is basically a disequilibrium phenomenon, arising largely form an
imbalance between an economy’s spending power and the availability to its
supplies (represented by the sum of its productive capacity and its import)
while on the other hand Afolabi viewed inflation as a persistent increase in
the general level of prices.
Afolabi (1982:425), however, in a
inflationary period not all times under 90 the same price changes. These are
therefore no absolute measure of inflation. However, as it can be imagined due
to changing value of currency, a financial statement drawn up on the basis that
such currency has an unchanging value can be regarded to be misleading.
Consideration must be given to make the necessary allowance for inflation when
preparing any financial statement from which the accounting ratio can be
computed and analyzed for management control technique. Since inflation may
have effect on accounting ration, a cost for evaluating performance of
management and as a control technique. These are still problems caused by
changes in the value of money, which can weaken the validity of the profit
figure.
Companying say the growth of assets over
a period of five years of Union Bank of Nigeria Plc given result could suggest
highly satisfactory progress, changing situation implies a need for rethinking
another historical accounting of which accounting ratio is based and the
substitution with what has been called purchasing power accounting. Despite the
inevitability of changing prices during a period of inflation, the accounting
profession still follows the stable monetary unit assumption in the preparation
of a company’s primary financial statement. Weygand et al (1993:522) the most
important effect of inflation in a continued process on financial statement is
that by allowing fixed assets to remain in the book at cost less depreciation.
The value of the key ratio of return on capital employed (ROCE) shows profit at
face value as being proportionately better than what they really are.
The second effect is in respect of the
capital itself being subject to the same monetary erosion of purchasing power.
The capital therefore needs the
injection of fresh funds over the years to maintain the status.
The
advantages of making this comparison is to enable users to classify the
company’s performance, poor or bad. Nonetheless, standard for companies are
relative to various companies.
2.8 VALIDITY OF RATIO ANALYSIS
Ratio analysis is generally used as a
technique for measuring performance of a business. It has suffered some short
comings, which questions its validity. In the analysis of financial statement,
it is action as presented is accurate and reliance and provides a suitable data
base for study. This in all cases is not true Geoff (1986:204).
Some of the short coming it has suffered
includes:
1.
The frequent changes in prices level
have left interpretation in ratios unreasonable.
2.
Ratios are generally computed from
financial statement so, they cannot be a good indicator to the future.
3.
It is difficult to determine an
appropriate basis upon which comparison will be made, although it has been
recommended that industry average should be used, but not easily available.
4.
Ratio based on accounting record will
inherit its many of the deficiency of the accounting data.
5.
Whatever method is used to compute the
balance sheet figures, they still reflect the financial position of an
organization at a particular point in time, this ratio such as current ratio
and other ratio calculated with reference to the balance sheet tends to be less
informative and more effective as they suffer short term changes.
2.9 LIMITATION OF RATIO ANALYSIS
In analyzing financial statement, it
should be appreciated that not all relevant data are reflected in such
statement Afolabi (1982:570).
Financial statements have a temporary
impact hen they are published, but they form a very small part of the total
information flow used Glautier et al (1981:316).
1.
Ratio analysis can ensure many
questions above relative performance, but cannot go beyond the accounts
themselves. Financial statements do not answer the most important question like
what will happen in the period to come? They are confirmed to reporting on the
immediate past.
2.
The difference in the definitions of
items in the balance sheet and the income statement make the interpretation of
ratio difficult.
3.
The ratio calculate at a time are less
information and are detective as they suffer short term changes.
4.
In interpreting the financial
statement of an enterprise both qualitative and quantitative input are
necessary if an objective and good quality performance evaluation is to be
achieved. Therefore, the need arises to look beyond the reported figure in the
financial statement in other to evaluate the financial position and performance
of the enterprise.
5.
The financial state from which the
ratios are built suffers some limitation tool. Accounting data such as
depreciation, provision for bad debt and other provisions are at best more
estimates and may not reflect economic depreciation, bad debt and other losses.
6.
Individual ratios in isolation cannot
provide sufficient information required for performance evaluation. A
reasonable judgement can only be made using a combination of ratios and the
comparison of computed ratio to industry average or by developing a relative
trend.
2.10 SUMMARY
The understanding of the financial
position and the overall performance evaluation of a company is obviously not
revealed by the financial statement. It is able to form an informed judgement
with respect to the performance of a firm.
The financial statement must be
interpreted and analyzed. An idea way of doing this is through the use of ratio
analysis. Ratio analysis is a direct numerical test on the strength and
weakness of a company through the computation of ratio and the development of
trends or by comparing the ratios of industrial average.
However, ratio analysis as tools for
analyzing financial statement for the basis of performance evaluation,
effectively depends on the reability and the reliability of the financial
statement.
In spite of its limitations, ratio
remains an invaluable tool in the hands of users of financial statement for
appraising a firm’s present position and predicting its future course.
They can serve as a basis for
highlighting of concern for further investigation.
REFERENCES
Anao A.R (1989): An Introduction to Financial
Accounting, Longman Nigeria Limited.
Afolabi Soyede (1982): Financial Accounting
Principles and Practice, Published by Graham Burn in Association with Fand A
Published Ltd.
Aboyede Ogetunji (1983): Integrated Economic
Addison Welsey Publishers.
Asemota Abel (2003): Bank Management Imprint
Service.
Christ J. Barltrop & Diana MC Naugton (1994):
Banking Institution in Developing Market Vol. II World Bank Washington D.C
Davidson Sidney (1976): Financial Accounting, an
Introduction to Concept Method and Uses, forth edition Holt Sender International Edition.
Douglas Cloud (1985): College Accounting
Procedure.
Garbutt Douglas (1972): Accounts Seventh Edition
Pitman Publishign Limited, London.
Geoff Black (1986): Financial Accounting Wood Head
Faulkner Ltd England.
Glamtler MWE (1985): Basic Financial Accounting
Pitman Publishing Ltd.
Horngren T. Charles (1981): Introduction to
Financial Accounting 2nd Edition Prentice Hall Inc Eaglewood Cliffs, New Jersey.
Millicharp A.M (1992): Foundation Accounting 3rd
Edition DP publishing certain limited Aldine
Place London.
Pandey I.M (1985): Element of Management Accounting
1st Edition Vikas Publishing House.
Paul H. walgenbach
Norman E. Dittrich (1973): Accounting an
Introduction Harcourt Brace Jovano Vichinco U.S.
Weygandth J. (1993) Accounting Principle 3rd
Edition John Wiley and Son, Inc USA.
CHAPTER THREE
RESEARCH METHODOLOGY
3.0 INTRODUCTION
This chapter shows the methods and
materials used in collecting data fro this research work. It also explain the
procedures that are followed in collecting the data.
The main aim of any research enquiring
is to find solution to a particular problem that forms the research topic.
According to Longman dictionary
(1988:407), a research is a scientific or scholarly enquiry, especially study
or experiment aimed at the discovery interpretation or application of new facts
theories or laws.
A research can also be defined as s
systematic controlled, empirical and unbiased investigation of the hypothesis
between proposition about a presumed relationship between the variable that
create a particular state of affairs, Agbonkhese (1999:1).
Tull and Hawkings, (1980:12) opined that
research methodology is the specification
of procedures for collecting and analyzing the data necessary to help solve the
problem at hand, such that the different between obtaining various of the
information associated with each level of accuracy is minimized.
The data shall be restricted to only
major profitability ratios and liquidity ratios computed by the bank under
study.
3.1 RESEARCH DESIGN
This is the framework of plan for the
study, which guide the collection and analysis of data. Research design is
concerned with the sources and means available for the acquisition of needed
information to enable the analysis of data towards making an empirical
judgment, which could be used to solve the problem on ground Ogunsolv
(1993:12).
According to Green and Tull (1990:67)
research design is the specification of methods and procedure for acquiring the
information needed to structure or solve a problem.
3.2 SOURCES OF DATA
In collecting data for this research
work, only secondary source of data was employed.
3.2.1 SECONDARY SOURCES
For the collection of secondary data
used in this study, the following sources were employed.
3.2.1.1 ANNUAL REPORT
The various annual report and financial
statement published by the bank under study were also used.
3.2.1.2 TEXTBOOKS
Textbooks on the topic under study were
used. These are listed in the bibliography and reference.
3.2.1.3 ACCOUNTING STANDARDS
Accounting standards such as statement
of accounting standard etc were also used.
3.2.1.4 OTHERS
Lectures notes and past project work
were also consulted.
3.3 METHOD OF DATA ANALYSIS
In
analysis the data collected, two types of analytical techniques are adopted.
The first is the descriptive, techniques which employs the use of ratio
analysis expressed in percentages, illustrative diagrams and notes are used in
analyzing the trend of the events of the bank understudy, based on the
observation from the collected data.
This forms the basis of our performance
evaluation. Secondly, statistically tools are applied in analyzing the annual
reports/financial relationship in the respective hypothesis. Observation from
the above methods serves as a basis for testing the hypothesis stated in
chapter one.
Repression analysis and the coefficient
of correlation are the major statistical tools applied. In order to test the
significance of the relationship between the variable in taking decision, the
student. t –test statistic are utilized.
3.3.1 REGRESSION ANALYSIS
This
tool is very useful for empirical investigation about the relationship between
variable. The linear regression model is adopted. In consideration of some
possible error the model is used in explaining the relationship between
variable called the dependent and independent variable.
It
is expressed as follows
Y
= a + bx …………………………(1)
In order to capture the effect of the
other unexplained variables in starting the relationship between the dependent
and independent variable, an error term is introduced. Ikharehon (2000:28) when
an error term is introduced into the model. It is express as:
Y
= a + bx + e………………….(2)
Where
y = dependent variable
a = (Σy) (Σx2 – (Σx)
(Σxy)
NΣx2)
– (Σx)2
b = NΣxy – (Σx) (Σy)
NΣx2 – (Σx)2
X
= independent variable
Y
= estimated value of y
N
= sample size
‘a’
is the portion of y not determined by changes in x, it is the intercept of the
regression time on y
‘b’
gives information about the contribution of x and y, it is slope of the
regression line.
3.3.2 CO-EFFICIENT OF CORRELATION
In order to indicate the strength of the
linear relationship between two or more variable that is independent of their
respective scale of measurement, correlation of analysis is used.
r = (NΣy) - (Σx) (Σy)
NΣX2 – (Σx)2 (NΣy2 – (Σy)2
Y
= dependent variable
X
= independ variable
N
= number of sample
In
using any of the above statistical produces, the following assumptions are made
1.
The relationship between the
indepednent and dependent variable must be linear.
2.
All variable must be measured at
interval level.
3.
For each set of value for the
independent variable (x) the error term is normally distributed.
4.
For each set of value for the
independent variable (x), the variance of the error term is constant.
3.3.3 TEST OF HYPOTHESIS
A statistical hypothesis is a testable
statement or assumption about the relationship between two or more variable
which may or may not be true and can be rejected or accepted after some finding
through study. An hypothesis is therefore a theoretical proportion which may be
true or false.
The rejection of the Ho leads to the
acceptance of an alternative hypothesis or vice versa.
Whereas, Ho state that there is no
problem with the relationship between the variable under study. Hi states that
there is a problem.
In view of the ample size involves in
this study, the significance of the relationship between the variable under
investigation are tested using the t-test statistic.
Thus
Where
r = coefficient of correlation
r2
= coefficient of determination
N-2
= degree of freedom
T
= test
The coefficient of determination (r2)
gives a more meaningful interpretation of the strength of the relationship
between two or more variables. Thus, it shows the degree of the relationship
that ‘r’ as expressed above r2 is calculated by squaring the value
to r.
REFERENCES
Agbonkhese A. (1999): Research Methodology
Unpublished Material Ekpoma.
Green R. and Tull P. (1990): Research Marketing
Decision 4th Dimension, Eliss, London.
Ikharehon J.I (2000): Business Statistics. Vol.
11, Ekpoma.
Longman Family Dictionary (1988): Research
Chancellor Press, London.
Ogunsolu P.K (1993): Research and Its Benefit
Illupeja Press, Byos.
Tull D.S and Hawkings
D.I (1980): Marketing Research Analysis Measurement and Methodology 2nd
Edition,
Macmillan
Press, New York.
CHAPTER FOUR
4.1 DATA PRESENTATION AND
ANALYSIS
This chapter contains the analysis of
the data collected. Here, the profitability ratio and liquidity ratio of the
bank under study are computed and the various result interpreted and some
deduction hypothesis formulated were also tested and the appropriate
relationship between the variable understudy were established based on the
finding from the test.
This chapter enable us to reach various
conclusion. Below is a table showing the five year summary of the financial
statement of Union Bank of Nigeria.
Table 4.2.1
Assets
year ended 18 months year ended.
31st
March ended 31st - 30th Sept
|
|
2004
|
2003
|
2002
|
2001
|
1999
|
|
Cash
and other short term funds
|
22,872
|
29,090
|
20,814
|
15,291
|
8354
|
|
Balance
with other bank and financial institution
|
180,500
|
149,195
|
14,638
|
104,189
|
53,330
|
|
Bill
discounted
|
50260
|
71336
|
39933
|
40462
|
22581
|
|
Other
investment
|
9059
|
3173
|
727
|
741
|
192
|
|
Investment
in subsidiaries and associated companies
|
1205
|
1054
|
994
|
781
|
569
|
|
Loan
and advances
|
78338
|
54560
|
45486
|
36925
|
27874
|
|
Other
asset
|
130709
|
11861
|
10984
|
7198
|
5228
|
|
Equipment
on lease
|
93
|
102
|
268
|
2
|
95
|
|
Fixed
assets
|
12401
|
11212
|
10350
|
9296
|
8011
|
|
|
367798
|
329583
|
275194
|
214885
|
126234
|
|
Liabilities
|
|
|
|
|
|
|
Deposits
current and other account
|
241585
|
224347
|
204347
|
170977
|
93035
|
|
Taxation
|
344
|
3161
|
2776
|
2474
|
861
|
|
Deferred
tax
|
2353
|
1911
|
822
|
-
|
-
|
|
Dividend
|
4698
|
3398
|
3146
|
2298
|
1402
|
|
Other
liabilities
|
79733
|
64036
|
33801
|
25350
|
20304
|
|
|
331813
|
296853
|
244892
|
201099
|
115602
|
|
Core
capital
|
34492
|
31239
|
28809
|
12298
|
9139
|
|
Revaluation
|
1493
|
1493
|
1493
|
1493
|
1493
|
|
Reserve
shareholder fund
|
35985
|
32730
|
30302
|
13,786
|
10632
|
|
|
367798
|
329583
|
275194
|
214885
|
126234
|
|
Contingent
liabilities
|
27316
|
21874
|
33992
|
34683
|
28121
|
|
Banking
operation income
|
39185
|
34712
|
31846
|
35394
|
18250
|
|
Profit
before tax
|
10210
|
10154
|
7490
|
7058
|
3860
|
|
Profit
offer tax and other minority interest
|
7750
|
6660
|
4726
|
5035
|
3127
|
|
Dividend
|
4698
|
3398
|
3146
|
1888
|
1321
|
|
50
kobo per share data earning
|
|
|
|
|
|
|
Earning
|
#2.31
|
#2.62
|
#1.88
|
#2.00
|
#1.24
|
|
Dividend
|
#1.40
|
#1.35
|
#1.25
|
#0.75
|
#0.53
|
|
Dividend
over
|
#1.64
|
#1.94
|
#1.50
|
#2.66
|
#2.36
|
|
Net
|
10.72
|
14.36
|
12.04
|
5.48
|
4.22
|
|
Total
assets
|
109.59
|
130.99
|
109.38
|
35.41
|
50.17
|
|
Stock
exchange
|
#27.50
|
#26.50
|
#24.91
|
#32.50
|
#11.30
|
|
Quotation
|
|
|
|
|
|
Source: Annual Report 2013.
4.3 PROFITABILITY RATIO
The profitability ratios computed are as
follows:
1. Return
on assets %
2. Return
on equity %
3. Net
spread %
4. Net
interest margin %
5. Other
operating income to asset %
6. Net
operating income to total assets %
7. Net
income for staff
8. Net
income to staff expense
Measure
of profitability
4.3.1 RETURN ON ASSETS
This ratio relates operating profit to
total resources under management. It shows the efficiency of management. It
shows the efficiency of management in the utilization of the assets of the firm
in generating profit. It is computed thus:
Return on assets = Net income after
tax x 100
Average
total assets
Table 4.3.1.1
|
|
2004
N’M
|
2003
N’M
|
2002
N’M
|
2001
N’M
|
1999
N’M
|
|
Income
after tax x 100
|
775
x 100
|
29,090
|
20,814
|
15,291
|
8354
|
|
Average
assets
|
348691
|
302389
|
245040
|
170560
|
114333
|
|
Return
on assets
|
2.3%
|
1.93%
|
2.95%
|
2.95%
|
2.7%
|
Table 4.3.1.1
From the above table, there was an
increase in return on asset from 2.7% in 1999 to 2.95% in 2001. this shows that
the management was very dynamic and effective in the utilization of its assets
in generating profit.
However, this ratio falls to 1.95% in
2.18% in 2003 and marginally increased to 2.2% in 2004.
Though, greater steps were taken by the
management in 2003 and 2004 to optimize its resource.
4.3.2 RETURN ON EQUITY (%)
It measures the return on shareholder
equity. It is calculated as:
Return on equity = Net income after
tax x 100
Equity
capital
|
|
2004
N’M
|
2003
N’M
|
2002
N’M
|
2001
N’M
|
1999
N’M
|
|
Net income after taxation
|
7750 x 100
|
6600 x 100
|
4726 x 100
|
5035 x 100
|
3127 x 100
|
|
Equity
|
35985
|
32730
|
30302
|
13786
|
10632
|
|
Return on equity
|
21.53%
|
20.16%
|
15.59%
|
36.52%
|
29.41%
|
Source: Table 4.3.2.1
The table above shows that return on
asset increased from 29.41% in 1999 to 36.52% these after it falls to 15.59% in
2002. However, it increase to 20.16% on 2003 to 21.53% in 2004.
From the ratio computed between
1999-2001, there was a serious drive by the management to enhance profitability
with respect to the utilization of equity capital. In the same vein, 2003 and
2004 witness growth, 2002 was ranked as the worst year measures of operating
efficiency.
4.3.3 NET SPREAD (%)
This ratio seeks to give a better
understanding of the source of bank profitability and consequent of
vulnerability of bank earning. It is calculated as:
Interest earned x 100 – interest paid
Loan interest
bearing deposit
2004 NM:
29924 x 100 – 5711 x 100 = 34.9%
78334 173149
2003 NM:
27020 x 100 – 5709 x 100 = 45.6%
54560
146251
2002 NM:
24427 x 100 – 6244 x 100 = 49.17%
45486
137897
2001 NM:
26005 x 100 – 3195 x 100 = 4.3%
27894
63927
Table 4.3.3.1
From the above table, calculated ratio
increased from 43% in 1999 to 63.62% in 2001 and declines to 49.17% in 2002 and
further declined respectively. Therefore the source of the bank profitability
was high in 2001.
4.2.4 NET INTEREST MARGIN %
This ratio identifies the core earning
capacity of the bank i.e. it measures a bank ability to maximize profit from
core banking operations. It is calculated as:
Interest income – Interest expense x
100
Average total assets
Table 4.3.4.1
|
|
2004
|
2003
|
2002
|
2001
|
1999
|
|
Interest
income
|
29924
-
|
27020
-
|
24429 -
|
26005
-
|
13450
-
|
|
Interest
expense x 100
|
5711
x 100
|
5709
x 100
|
6244
x 100
|
8112
x 100
|
3195
x 100
|
|
Net
interest margin
|
6.94%
|
7.04%
|
7.42%
|
10.49%
|
8.96%
|
The
banks ability to maximize profit from core banking operations rose from 8.96%
to 10.49% in 2001. In 2002 it experiences a sharp fall to 7.42% and a further
decline to 7.04% in 2003 and a sharp fall to 6.94% in 2004.
Therefore, in 2004 the bank’s ability to
maximize profit from core banking operations was low and recorded appreciable
height in 2001.
4.3.5 OTHER OPERATING INCOME TO
TOTAL ASSETS (%)
This ratio shows the dependence on
‘non-traditional’ income growth in this ratio can indicate a health
diversification into fee-based financial services or an unhealthy reaching for
speculative profit to make up for deficiencies in the banks core interest
deferential income.
It
is calculated as:
Other operating income x 100
Average
total assets
|
|
2004
|
2003
|
2002
|
2001
|
1999
|
|
Other
operating income x 100
|
9261
x 100
|
7642
x 100
|
7417
x 100
|
9389
x 100
|
4800
x 100
|
|
Average
total asset
|
348691
|
302389
|
245040
|
170560
|
114333
|
|
Other
operating income to total assets %
|
2.65%
|
2.54%
|
3.02%
|
5.50%
|
4.19%
|
 |
This ratio relates further operating
income to total assets. It is increased from 4.19% in 1999 to 5.50% in 2001 and
declined to 3.02% in 2002 and a further decline to 2.54% and marginally
increased to 2.65% in 2004. From the ratio computed 2001 ranked the highest
dependence on ‘non-traditional’ income which therefore indicates a healthy
diversification.
4.3.6 NET
OPERATING INCOME TO TOTAL ASSETS (%)
The ratio shows how a bank is making an
improvement in the area of gross income.
It
is calculated as:
Net interest income + other operating
income x 100
Average
total assets
Table 4.3.6.1
|
|
2004
|
2003
|
2002
|
2001
|
1999
|
|
Net
interest
|
24214
+
|
21311+
|
18185+
|
17893+
|
102554+
|
|
Income
+ other operating income x 100
|
9261
x 100
|
7692
x 100
|
7417
x 100
|
9389
x 100
|
48000
x 100
|
|
Average
total
|
348691
|
302389
|
245040
|
170560
|
114333
|
|
Net
operating income to total assets (%)
|
2.72%
|
3.24%
|
3.10%
|
5.60%
|
4.28%
|
 |
From
the table above, the gross rapidly increase from 4.28% in 1999 to 5.6% in 2001
and subsequently falls to 3.10% and slightly increased to 3.24% in 2003 and
recorded a fall to 2.72% in 2004.
MEASURES OF STAFFING EFFICIENCY
4.3.7 NET INCOME PER STAFF
This ratio reveals the average income
generated by each staff member.
It is calculated as: Net income
after tax
Total
staffs count
Table 4.3.7.1
|
|
2004
|
2003
|
2002
|
2001
|
1999
|
|
Net
income
|
7750,000
|
660,000
|
4726,000
|
5035000
|
3127000
|
|
After
tax
|
000
|
000
|
000
|
000
|
000
|
|
Total
staff count
|
7643
|
7645
|
7644
|
7496
|
8593
|
|
Net
income per staff
|
#1.03m
|
#0.86m
|
#0.61m
|
#0.67m
|
#0.36m
|
Table
4.3.2.1 shows that over the years, the staff or employee productivity rose from
#0.3m in 199 to #0.6m in 2001 and reduces to #0.61 in 2002 and further recorded
appreciable height to #0.86m in 2003 and #1.03 in 2004. The sharp increase to
1.03 in 2004 mean that the staff contributed #1.03m each to its profit after
tax.
4.3.8 NET INCOME TO STAFF EXPENSE
Measure return on investment in staffing
cost. it is calculated as:
Net income
after tax
Staff expense
Table 4.3.8.1
|
|
2004
|
2003
|
2002
|
2001
|
1999
|
|
Net
income after tax
|
7750
|
660
|
4726
|
5035
|
3127
|
|
Staff
expense
|
11733
|
9211
|
9214
|
10640
|
4845
|
|
Net income to staff expense
|
#0.66m
|
#0.716m
|
#0.51m
|
#0.47m
|
#0.64m
|
Table 4.3.8.1
In 1999, the bank recorded a high return
on investment in staffing cost and falls to #0.47m in 2001 and thereafter it
increase to #0.51m in 2002 and further increased to #0.716 and witness a fall
to #0.66m in 2004. 2003 recorded the highest return on investment in staffing
cost and the computed ratio revealed 2001 as the worst year.
4.4 LIQUIDITY RATIO
It is calculated as:
Current asset – current liabilities
Total
assets
Table
4.4.1
Current
assets
|
|
2004
|
2003
|
2002
|
2001
|
1999
|
|
Cash
and other short term funds
|
22,872
|
29,090
|
20,814
|
15,291
|
8354
|
|
Balance
with other bank and financial institution
|
180,500
|
149,195
|
14,638
|
104,189
|
53,330
|
|
Bill
discounted
|
50260
|
71336
|
39933
|
40462
|
22581
|
|
Loan
and advances
|
78338
|
54560
|
45486
|
36925
|
27581
|
|
Other
asset
|
13070
|
11861
|
10984
|
7198
|
5228
|
|
Total
|
34040
|
314042
|
262855
|
204065
|
117367
|
|
Current liabilities
|
|
|
|
|
|
|
Deposits
current and other account
|
241585
|
224347
|
204347
|
170977
|
93035
|
|
Taxation
|
3444
|
3161
|
2776
|
2474
|
861
|
|
Deferred
tax
|
2353
|
1911
|
822
|
-
|
-
|
|
Dividend
|
4698
|
3398
|
3146
|
2298
|
1402
|
|
Other
liabilities
|
79733
|
64036
|
33801
|
25350
|
20304
|
|
Total
|
331813
|
296853
|
244892
|
201099
|
115602
|
|
Using the formula
|
|
|
|
|
|
|
|
2004
|
2003
|
2002
|
2001
|
1999
|
|
Current
assets
|
345040
|
314042
|
262855
|
204065
|
117367
|
|
Current
liability
|
331813
|
296853
|
275194
|
214885
|
126234
|
|
Total
asset
|
367798
|
32583
|
275194
|
214885
|
126234
|
|
|
3.59%
|
5.21%
|
6.52%
|
1.38%
|
1.39%
|
Table
4.4.1
From the table above, there was a
marginal fall from 1.39% in 1999 to 1.38% in 2001 and a sharp increase to 6.52%
in 2002 and a decline to 5.21% in 2003 and a further decline to 3.59% in 2004.
Therefore, the ratio computed revealed
that the bank was highly liquid in 2002.
4.5 HYPOTHESIS TESTING
The verification of the proposed
relationship between the variables stated in the respective hypothesis
postulated for this study employs the use of coefficient correlation. The two
different hypothesis are structured in line with the regression model using
SPSS. On this ground, the extent of the validity of the relationship between
these variables serve as the basis for accepting or rejecting the hypothesis.
4.5.1 HYPOTHESIS
1.
Ho: The profitability of a bank is determined solely by its asset base
Hi:
The profitability of a bank is not determined solely by its asset base.
The two variables of the first
hypothesis are profit after tax and asset employed.
Table 4.5.1.1
Regression table using SPSS
|
Year
|
Profit
after tax
|
Total
assets
|
|
1990
|
97699000
|
924156900
|
|
1991
|
9738000
|
13166437000
|
|
1992
|
8353000
|
23869626000
|
|
1993
|
452367000
|
32008096000
|
|
1994
|
420199000
|
43514733000
|
|
1995
|
574459000
|
79413319000
|
|
1996
|
1046000000
|
81254000000
|
|
1999
|
5127000000
|
126234000000
|
|
2001
|
5035000000
|
214885000000
|
|
2002
|
4726000000
|
275194000000
|
|
2003
|
6600000000
|
329583000000
|
|
2004
|
7750000000
|
367798000000
|
Model
summary
|
Model
|
R
|
R square
|
Adjusted R square
|
Std. error of the estimate
|
|
1
|
984
|
969
|
965
|
24186666791.80
|
A
predicators: (constant) profit after tax
Coefficient
Unstandardized standard t sign
Coefficients
coefficients
|
Model
|
B
|
Std. error
|
Adjusted R square
|
Std. error of the estimate
|
|
1
(constant)
|
984
|
969
|
965
|
24186666791.80
|
Using
0.05 as level of significance
Tc
= 17.553
tT
= 0.05 = 2.228
therefore, Tc > tT
DECISION RULE
Since Tc > tT the null hypothesis Ho
which states that profitability of the bank is determined solely by its assets
base is rejected, we therefore accept the alternative hypothesis Hi, which
states that the profitability of a bank is not determined solely by its assets
base.
From the table of coefficient of
correlation it indicates that there is a strong positive correlation between
the profitability and the total asset employed.
HYPOTHESIS II
2.
Ho: The profitability of a bank is bound to increase as its gross earnings
increase.
Hi:
The profitability of a bank is not bound to increase as its gross earnings
increase.
Table 4.5.2.1
Regression table using SPSS
|
Year
|
Profit after tax
|
Total assets
|
|
1990
|
97699000
|
7420778000
|
|
1991
|
9738000
|
1824117000
|
|
1992
|
8353000
|
2699987000
|
|
1993
|
452367000
|
3937714000
|
|
1994
|
420199000
|
5794505000
|
|
1995
|
574459000
|
9868523000
|
|
1996
|
1046000000
|
10817000000
|
|
1999
|
5127000000
|
18250000000
|
|
2001
|
5035000000
|
35394000000
|
|
2002
|
4726000000
|
31846000000
|
|
2003
|
6600000000
|
34712000000
|
|
2004
|
7750000000
|
39185000000
|
|
Model
|
R
|
R square
|
Adjusted R square
|
Std. error of the estimate
|
|
1
|
977
|
955
|
951
|
3302005577.85
|
A
predicators: (constant) profit after tax
Coefficient
Unstandarized
A
dependent variable: 9 earning
Using
0.05 level significance
Tc
= 14.569
tT
= 0.05 = 2.228
Therefore,
tc: tT
DECISION RULE
Since tc > tT the null hypothesis Ho
which states that a bank’s profitability is bound to increase as its gross
earning. Increase is rejected, we therefore accept the alternative hypothesis
Hi which states that the profitability of a bank is not bound to increase as
its gross earnings increase.
From the table of coefficient of
correlation, it indicates that there is a strong positive correlation between
the profitability and gross earning.
CHAPTER
FIVE
SUMMARY,
RECOMMENDATIONS AND CONCLUSION
5.1 SUMMARY
Based on profitability and liquidity
ratio computed and analyzed, the findings includes:
1. Union
Banks performance was completely better in 2001 virtually all ratios computed
for the bank proved this, the reason behind this fact is because of the
eighteen months extended financially year summary report.
2. Under
measures of profitability the two most important measure of bank profitability
are return on asset and return on equity, Union Bank of Nigeria Plc performance
under this profitability ratio in 2001 specifically was very low. The reason is
that too much idle funds in 2001 were kept which invariably impared the
profitability. This was further proved by the liquidity ratio.
3. The
liquidity of the bank has been on the increase over the years under
consideration. The situation is rather dangerous as it may have a constraining
effect on its profitability.
5.2 RECOMMENDATIONS
In this competitive banking environment,
the ability of the bank to compete in volume and quality output depends on the
nature quality and quantity of competent staff that are employed by the bank.
1. The
establishment of a centralized and well managed account department capable of
handling all the problems of financial ratio, in a way that useful information
can always be derived from them.
2. Based
on the analysis carried out, a lot has to be done by the team of management to
improve its staffing efficiency.
3. The
bank should be more conscious in the determination of its liquidity position in
other not to impair its profitability.
4. In
other to ensure that are more realistic comparison can be made, the bank should
adjust its account or financial statements to take care of the effects of
inflation.
5.3 CONCLUSION
The principal purpose of this research
is to ascertain the performance evaluation of Union Bank of Nigeria Plc.
Through the use of ratio analysis, necessary recommendations can be made as a
way of improving steps are taken by Union Bank of Nigeria Plc management to
optimize its resources.
Some recommendations are made which is
hoped would assist the management in efficient management of its resource
through the use of ratio analysis and its interpretation.
To a substantial extent, there is need
for users of financial statements particularly management and investors to
obviously appreciate the enormous importance of ratio analysis as tool for
performance evaluation.
However, the quantitative factors
obtained from such an exercise must be set against qualitative factors before
final decision is made.
Such quantitative factor are management
quality, asset quality etc. has to be considered along with qualitative
factors.
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