Using a few financial ratios to assess the performance of any corporate entity is a way of painting clearer picture of financial statements. During the week ending March 29, 2019, 22 quoted firms declared their results.

Fourteen firms declared growth in revenue. But when financial institutions among these firms are assessed using such tools as Cost to Income Ratio, Capital Adequacy Ratio (CAR), Liquidity Ratio, and Return on Average Equity among others, it becomes clear that only profit does not tell the whole story.

Financial experts have a consensus  that  stakeholders need not wait for the central bank or even analysts to tell if a bank is financially sound or not. There are ratios that the investors and regulators use to identify banks that are not in good financial state which are available for use.

For example, there are minimum regulatory liquidity ratios of: 30.0 per cent for commercial banks; 20.0 per cent for merchant banks; and 10.0 per cent for non-interest banks, at end-December 2018. The ratios are indicators and not necessarily a confirmation that the banks are about to collapse; however, they are acceptable benchmarks.

Indeed the financial system was awash with announcement of results  in which lenders said they recorded growth in their interest income, deposits, assets and overall profit, etcetera. A closer look showed that majority experienced decrease in interest income as the environment in which they operated remains restrictive to asset creation.

Stanbic IBTC

Stanbic IBTC has Capital Adequacy Ratio (CAR) which improved to 24.7 per cent relative to 23.5 per cent  the preceding year. This is well above the regulatory limit of 10.0 per cent for national banks and can accommodate the forecast growth in loan book for Financial Year (FY):2019.

It also means that Stanbic IBTC Bank has ensured that the capital held is commensurate with the bank’s overall risk profile. In simpler terms, its qualified capital (equity) is about 24 times above total risk assets (money lent out by the bank).

The CBN requires that banks with international subsidiaries maintain CAR of 15 per cent, while banks without international subsidiaries maintain CAR of 10 per cent.

But the minimum requirement for the systemically important banks (SIBs) is 16 per cent. If it has less, then the bank will need to raise capital. Stanbic IBTC has not been counted among them.

Stanbic’s cost-to-income ratio settled higher at 52.9 per cent relative to 49.8 per cent in FY:2017. This means that it cost the bank higher to generate money in 2018 than 2017. It probably spent N52.90k to generate N100.

The NPL ratio trended downward from 8.7 per cent in FY 2017 to 4.0 per cent in FY 2018, below the regulatory benchmark of 5 per cent. CBN says NPL above 5 per cent is dangerous. Stanbic IBTC did well to bring its NPL ratio below 5 per cent.

When a borrower has not made regular payments for at least 90 days, the loan is considered a non-performing loan, or NPL. The non-performing loan ratio, better known as the NPL ratio, is the ratio of the amount of non-performing loans in a bank’s loan portfolio to the total amount of outstanding loans the bank holds.

Zenith Bank

Zenith Bank is a tier 1,  systemically Important Bank (SIB). With 46.4 per cent cost-to-income ratio in 2018 as against 42.3 per cent in 2017, Zenith Bank did not reduce what it cost to make N1 income. Although keeping it below 50 per cent is good, analysts believe that Zenith Bank can do better than spending about N46.4kobo to generate N100.

According to analysis by financial advisers from Capital Bancorp Plc, a member of the Nigerian Stock Exchange, Zenith Bank’s loan-to-deposit ratio came down to 67.7 per cent 2018, as against, 75.5 per cent 2017.

The ratio tells that Zenith Bank lent roughly 68 per cent of the money deposited by customers at the end of 2018. Loan-to-deposit ratio (LDR) is used to assess a bank’s liquidity by comparing a bank’s total loans to its total deposits for the same period.

Available records show that the ideal LDR should be around 80 to 90 per cent.  100 per cent means every N1 is given out as loan and no money to settle customers who want to withdraw their deposits.

Ironically, if the ratio is too high, it means that the bank may not have enough liquidity to cover any unforeseen fund requirements.

Conversely, if the ratio is too low, the bank may not be earning as much as it could be.

The lender’s Return on Average Equity (ROAE) according to analysis from the banks 2018 result is 23.7 per cent. ROAE can give a more accurate depiction of a company’s profitability.

A high ROAE means a company is creating more income for each Naira of shareholders’ equity. Investors can consider a return on equity near the long-term average of the S&P 500 (14 per cent) as an acceptable ratio and anything less than 10 per cent as poor.

UBA

Like Zenith Bank, UBA is a tier 1 SIB. The recently published FY:2018 result for United Bank for Africa (UBA) according to analysts from Afrinvest (West) Africa Limited, provides little excitement considering expectations from the lender.

UBA says its profit-before-tax increased marginally by 2.4 per cent to N106.8 billion while profit-after-tax rose by a paltry 1.4 per cent to N78.6 billion.

However, its ROAE and ROAA moderated to 15.3 per cent and 1.8 per cent respectively.

UBA’s 15 per cent ROAE is moderate, but did not compare well with most tier 1 lenders, even as the Group like other tier-1 banks, recorded a contraction in interest income due to a moderation in yields in H1:2018 and poor risk asset growth due to the fragile macroeconomic environment.

“Cost to income ratio (ex impairment charges) landed at 64.0 per cent from 57.7 per cent in the prior year and signals a marked deterioration in efficiency, considering the bank’s medium-term target of 50.0 per cent,” says Afrinvest. It probably cost the bank about N64 to generate N100 in 2018.

In terms of assets quality, capital adequacy improved to 24.0 per cent from 22.0 per cent in the previous year.

CAR, as earlier stated, is a measurement of a bank’s available capital expressed as a percentage of its risk-weighted credit exposures. UBA stands strong above the regulatory 15 plus 1 per cent for its category of banks.

Also, with liquidity ratio at 50.0 per cent, UBA remained well above regulatory threshold of 30.0 per cent and 2017 levels of 40.0 per cent, reflecting the reduced scope for risk asset creation during the year.

The loan-to-deposit ratio of the bank moderated to 51.0 per cent in FY:2018 from 61.0 per cent in the prior period, mainly due to slow loan growth and a rapid expansion in deposits by 22.9 per cent.

This means that UBA lent roughly 51 per cent of customers’ deposits by the end of 2018.

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Fidelity Bank

Fidelity Bank’s Profit After Tax (PAT) of N20.7 billion implies a 2018 ROAE of 10.5 per cent.

The bank’s 10.5 per cent ROAE means the lender is at the threshold of not creating added income for each Naira of shareholders’ equity, because anything below 10 per cent is poor according to experts. However, the lender says it is better positioned to generate higher returns this year through SME lending.

Guaranty Trust Bank

GTBank’s cost-to-income ratio stood at 36.5 per cent relative to 37.5 per cent in the preceding year. This clearly shows that the lender has continued to apply cost reduction measures. GTBank is probably doing well by spending about N36.50kobo to generate N100 income.

The bank’s PAT also translates to a healthy ROAE of 31.7 per cent.

Liquidity ratio (LR) settled at 41.4 per cent in the year relative to 47.6 per cent in the prior year. GTBank’s LR are cash balances plus assets that can easily convert to cash, as a ratio of the total liabilities owed by the bank, which is typically deposits. Nigeria’s banks are supposed to have a liquidity ratio of 30 per cent.

The Bank’s management noted that liquidity ratio came under pressure last year from issues bordering on effective Cash Reserve Ratio (CRR) and customers’ preference for better yielding fixed income instruments show the cash levels of a company and the ability to turn other assets into cash to pay off liabilities and other current demands for cash on the bank.

A high liquidity ratio indicates that a business is holding too much cash that could be utilised in other areas. A low liquidity ratio means a firm may struggle to pay short-term obligations

Access Bank

Access Bank’s cost-to-income ratio of 62.2 per cent in 2018 was higher than  61.9  per cent 2017 according to Capital Bancorp Plc analysis. However, this means that the bank perhaps spent N61.90 kobo to generate a N100 in 2018. Also, its loan-to-deposit ratio stood at 67.7 per cent in 2018 as against 75.5  in 2017, meaning that though, the lender slowed down on loan growth and lent roughly 67.7 per cent of customers’ deposits by the end of 2018.

Return on Average Equity stood at 19.36 per cent in 2018 compared with 11.75 per cent in 2017.

As earlier stated, a high ROAE means a company is creating more income for each Naira of shareholders’ equity, while a too low ROAE is the reverse. At 19. 36 per cent, Access Bank is actually increasing return to shareholders but has room for improvement considering that some of its peers are delivering 23 per cent and above.

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