ANALYSIS OF FINANCIAL STATEMENTS IN PERFORMANCE ASSESSMENT OF SELECTED BANKS IN NIGERIA

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ANALYSIS OF FINANCIAL STATEMENTS IN PERFORMANCE ASSESSMENT OF SELECTED BANKS IN NIGERIA

CHAPTER I INTRODUCTION

1.1     Background to the study

The banking industry plays a vital role as channel through which economic and financial resources flow into the economy. It’s therefore imperative to continually evaluate their performance status with a view to ensuring that banks remain sound, stable and safe in order to continually support sustainable economic growth and development. Financial statements are critical reports used for assessing and evaluating the performance of an organization. These statements are prepared by management to reflect an organization’s health and position over a period of time. Furthermore, financial statements provide a summary of accounts of an organisation, the statement of financial position indicating the liabilities, capital and assets, as well as the statement of comprehensive income depicting the outcome of operations over a timeframe. (Meyer, 2009).

There is a high premium placed on financial statements as a veritable source of information for assessing performance and decision making, the onus therefore is to ensure that the facts obtained from financial statements exhibit the highest level of reliability, accuracy and relevance. Financial statements analysis enables the ascertainment of the soundness, stability and safety of banks using various methodologies and techniques. Banks in Nigeria are statutorily required to obtain the Central Bank of Nigeria approval before publication of their audited financial statements. This is to enable the monetary authority ascertain the soundness, stability and safety of the banks as well as provide assurance on the accuracy and reliability of the statements of financial information.

The objectives of analysing financial statements are largely attributed to examining financial data

(past and present) so as to evaluate the financial performance of a company and facilitate efficient assessment of potential shortcomings (Woelfel, 1988).  It was observed that from a study by Saoud, (2020), that Financial statement analysis could be defined as a technique of analysing and reviewing an organisation’s financial statements in an attempt to determine or scale its past, present or projected future performance, which enables more efficient economic decision making.

Financial performance is a monetary assessment of organization’s financial and economic activities. When evaluating financial performance, cash flow statements, income statement, and financial position are relevant reports, as they are reliable sources of useful information concerning the health of an organization. It also provides detailed justification to stakeholders’, owners and analysts on changes in a company’s cash balances over an accounting period. It is pertinent to note that financial ratios are useful in obtaining information for determining financial performance of banks. Furthermore, by analysing financial ratios companies operating efficiency and financial performance could be assessed. Therefore, enabling factors such as solvency and efficiency to be viewed objectively. It is imperative to note that Deposit Money Banks (DMBs) have been inundated by globalization, macroeconomic distortion, new technology, supervisory challenges, stiff competition and highly risky business environment. Banks must continually evolve and adopt new strategies to overcome the onerous challenges and improve. Banks contribute significantly to economic development and greater attention must be placed on their performance. Although, significant progress had been achieved by the Nigeria banking industry, continuous effort is still required to keep pace with domestic and global macroeconomic development, technological innovations and pro-active regulatory and supervisory policy options.

 

1.2       Statement of Problem

This research work evaluates the extent to which analyses of banks financial statement are used in assessing their performance and the reliance on the result of the analysis for decisions making purpose by the various stakeholders. The cogency of financial statements has attracted diverse opinions from financial analysts, tax authorities, potential investors, the general public shareholders, and creditors. They argue that the financial reports are not an accurate representation of the reflection of business activities, hence meaning that it is not a suitable means of performance evaluation. for example, the idea of stating assets at their historical cost do not take cognizance of the effect of inflation though the real value of such assets might have been eroded or the fact that financial statements do not cover variables that are relevant in determining the overall performance of banks such as: customer satisfaction, risk, etc. This study probes further into the relationship between financial statements and performance evaluation mainly focusing on financial system using selected banks.

1.3     Objectives of the Study

Banks in Nigeria are statutorily required to prepare and present credible financial statement in line with the International Financial Reporting Standard (IFRS) to the various stakeholders at end of each accounting period. Therefore, the objectives of the study are to:

  1. Examine how financial statements reflect the performance of financial institutions with focus on banks.
  2. Evaluate the use of financial statements in performance improvement of banks. iii. Determine the decision-support role of financial statements in banks.

1.4     Research Questions

The above research objectives motivate the following research questions.

  1. How do financial statements capture the performance of financial institutions? ii. Are financial statements useful in supporting performance improvement in banks? iii. Do financial statements support decision-making in banks?

1.5     Research Hypothesis

Following the research questions and objectives of this study, the following working hypotheses

are formulated:

H o1: Financial statements do not adequately capture the performance of financial institutions

H 02: Financial statements are not useful in supporting performance improvement of banks

H 03: Financial statements do not support decision-making in banks

1.6    SCOPE OF THE STUDY

The study analyses the financial statements of Zenith bank, GTB and UBA over a period of tenyear period (2010–2019), This is due to the fact that ten-years is sufficient enough time to raise determine thorough results due to nature of the research undertaken. The choice of banks is as a result of being 3 out of the 5 Tier 1 banks in Nigeria i.e. The largest banks in Nigeria. This was opted for with the purpose of assessing their performance and make observations. The choice of this period is also meant to reflect both pre and post IFRS adoption era, so as to be a dynamic analysis in terms of the relationship between financial statements and bank performance in Nigeria. The study is focused on financial variables that can be extracted from financial statements in determining bank performance as it does not consider non-financial factors such as: customer satisfaction, etc. that are not found in financial statements.

1.7     Significance of the Study

The relevance of the study is to recognise the need for organization to prepare financial statements in the most transparent and acceptable standard consistent with international best practice. This is to ensure that greater attention is given to the preparation of financial statements as it provides a basis for analysis and performance evaluation of any organization as well as contribute to quality decision making.

In view of the above, it is imperative to periodically carry-out a critical analysis of bank’s financial statements in order to assess their performance with a view to determining their profitability stability and viability. Also, financial analysis helps to recognise changes in financial trends, evaluate progress, identify relationship among financial variables and draw-up logical conclusion on the performance of the organization. Similarly, comparing the performance of the company with its competitors is another major aspect of financial analysis (Laitnen, 2006). Financial analysis also provides basis for making better economic decisions that drives organizational growth and development.

 

1.8    DEFINITION OF OPERATIONAL TERMS

BANK: Banks are financial intermediaries that regulate the economic flow of resources by taking finances from those with surplus (through deposits) and giving it to those with deficits(through loans).

BANK PERFORMANCE: Progress made by a bank in the utilization of its resources to achieve

its objectives.

FINANCIAL ANALYSIS: It is often based on information extracted from financial statements.

FINANCIAL STATEMENTS:  These are documents that portray recorded accounting

information in monetary terms e.g. statement of financial position, statement of changes in equity, cash flow statement, statement of comprehensive income.

ROA: The return on assets(ROA) shows the percentage of how profitable a company’s assets are in generating revenue.

ROE:  a measure of the profitability of a business in relation to equity.

ANALYSIS OF FINANCIAL STATEMENTS IN PERFORMANCE ASSESSMENT OF SELECTED BANKS IN NIGERIA

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