Financial statement analysis

FINANCIAL RATIOS AND THE STATE OF HEALTH OF NIGERIAN BANKS

Onyeiwu Charles University of Lagos, Lagos State, Nigeria Email: [e-mail] Tel: [phone].

And Aliemeke Goodluck Guarranty Trust Bank Plc, Nigeria Email:[e-mail]

Abstract
This study investigates the use of financial ratios to ascertain state of health of Deposit Money Banks in the Nigerian financial services sector using the multivariate analysis propounded by (Altman 1968). Twenty-three banks constitute the sample of which eight, have been indicted as weak, by Central Bank of Nigeria within the year of investigation (CBN 2009).The study applied a Multivariate technique to Nigerian banks to ascertain its ability to discriminate between weak and healthy banks. The audit report for year ended 2009 formed the basis of the calculation. The Z score of each of the banks is found to be below 1.80 indicating ill health. However, it is observed that the banks can be disaggregated into two distinct classes i.e. Those with positive Z score which rightly fall into category of banks that have not been indicted by the Central Bank of Nigeria and those with negative Z score which fall into category of banks which have been indicted by CBN within the past one year resulting in 100 percent correct classification. The study provides the regulatory authorities insight on how the Z score can be used to improve their supervisory oversight function.

Keywards: Financial ratios, Z score, Nigerian banks and financial health

1.1 INTRODUCTION
Financial statement analysis is important to the management, owners, personnel, customers, suppliers, competitors, regulatory agencies, tax payers,

References: Altman, E. I. (1968). ‘ Financial ratios, discriminant analysis and the prediction of corporate bankruptcy.’ Journal of Finance, 23(4):589-609. Altman, E. I. (2000). ‘Predicting financial distress of companies: revisiting the Z score model.’ retrieved from www.z score.pdf. 5-10 Beaver, W Casey, C. J. (1980). ‘Variation in Accounting Information Load: The effect on loan officers’ Predictions of bankruptcy’. The Accounting Review, LV (1). Endri, 2009, ‘The Financial Performance Analysis using Altman Z score’; Perbanas Quarterly Review. Foster, G. (1978), ‘financial statement analysis’. Prentice-Hall, first Ed. Ganesalingam, S and Kumar, K. ( 2001), ‘Forecasting credit rating using ANN and statistical techniques’ epublication.bond.edu. Hadad, (2004), ‘The financial performance analysis using Altman Z scores’- Indonesia Central Bank. Horrigan J.O. (2001), ‘Methodological Implications of non-normally distributed financial ratios: a comment’, Journal of Business Finance and Accounting, 573-593. Karel, G and Prakash, A.( 1987), ‘Multivariate Normality and Forecasting of Business Bankruptcy,’ Journal of Business Finance C3 Accounting 14(4). Maleay, S. (1986), ‘ Distributional Characteristics of Ratios- Evidence from Turkish firms.’ www.eurojournal.com Martikainen, T McDonald B and Morris, M (1984), ‘The Statistical Validity of Ratio Method in Financial Analysis: An Empirical Examination’, Journal of Finance and Accounting,(1st quarter) 547-555. Theodossiou, P. T. (1993). Predicting shifts in the mean of a multivariate time series process: An application in predicting business failure. Journal of the American Statistical Association, 88(422):441-449 Wall, Watson, C. (1990),’Multivariate distributional properties and transformation of financial ratios, Accounting Review 65/3, 682-695 . Wilcox, J. (1976). A gambler’s ruin prediction of business failure using accounting data. Sloan Management Review, pages 1-10. Spring copy of the journal.