Accounting ratios is primarily designed to meet the informational needs of equity investors, bankers, analyst lawyers, government and creditors.
The objective of the ratio analysis includes the comparative measurement of the risk and return facilitating intelligent investments on credit decisions.
Accounting ratios generally can be seen as a process that involves standardization in the use of standardized report methods. Financial statement and other relevant variable allowing for comparison, overtime and cross-sectional between firms to access their performances. Therefore, accounting can be define as firms critical relationship by relating input (cost) with output (benefits) and facilitating comparisons of those relationship overtime (White, 1994: 1993).
The implication of these accounting ratios is the proportionality assumption that the relationship between numerator and denominator should be similar, irrespective of the size. Ratio cannot be used simply to produce a scaling factor standardization but rather to develop insight into the economic characteristics of different industries and of different firm in the same industry.
Distressed banks, one bank with problem relating to liquidity, poor earnings on performing assets and liability to pay debts or meets maturing obligations as they become due. Bank classification as distressed is based on banking examination rating system with acronym CAMEL.
C = Capital Adequacy
A = Assets Quality
M = Management Competences
E = Earnings Strength
L = Liquidity Sufficiency
The cognizance of ratio is to give the analysis a very useful assessment of a firm’s financial condition.
After gaining political independence in 1960, there was a need for gaining economic independence to enable Nigeria to judge ahead in developing her economic – through production, manufacturing and commerce, for these activities to be fully participated in Nigeria there was a need for financial institution to control and facilitates these services.
Although, there were banks operating in Nigeria, they were of foreign based. But there was need for indigenous banks to go round Nigeria and develop her economy by identifying her domestic problem and solving them. The government encouraged and established banks. The government joined in this development with the introduction of Structural Adjustment Programme (SAP) in 1986.
Access Bank Nigeria Plc has been at the forefront of economic diplomacy, cultivating deep strategic relationship with key International Financial Institutions who seek to do business with Nigeria, such as the International Finance Corporation, Netherlands FMO, European International Bank and US EXIM.
1.2 Statement of the Problem
Most management do not use financial ratio to compare the present and previous year to forecast the future performance and that is why we are having distress in the financial institutions.
Recent financial history clear provide many examples of company where at least in retrospect the financial market ignored warning signal consequently suffered significant financial losses.
Management needs a proper analysis to judge ahead, inability to understand the impact of alternative account method, places the investors at competitive advantage in a world of increasing sophisticated analysis techniques.
1.3 Objective of the Study
The main objective of this study is to evaluate the effectiveness of financial ratio in measuring corporate performance in Nigeria. Other specific objectives include:
i) Find out the types of accounting ratio used by Access Bank Nigeria Plc in analyzing its financial report.
ii) Determine the effectiveness of the techniques of accounting ratio used by Access Bank Nigeria Plc in measuring its financial performance.
iii) Examine whether the use of accounting ratios help Access Bank to determine its strength and weaknesses in relation to its financial operations.
iv) Find out whether the use of financial ratio is among the factors that lead to Access Bank success in the banking sector.
1.4 Hypothesis of the Study
H01: Financial Ratio does not serve as an effective tool for evaluating corporate performance.
H02: Financial ratio does not aid management of businesses in planning and decision making.
1.5 Significance of the Study
This study will be of benefit to management of banks in assessing, evaluating and determining the performance of banks as well as help the management in decision making.
The study will also be beneficial to the government in policy implementation, and the smooth operation of banks in the financial markets. The study will be of help to potential researchers and students as a reference for further research on similar topic. It will also go a long way in helping the public to know when a bank is performing to standard or not.
Management can use financial ratio to ascertain the level of bank performance. With adequate care and more determination and coverage to think through ways and means of overcoming the constraints and difficulties, ratio will continue to be one of the invaluable aids to management.
1.6 Scope of the Study
This study will focus on financial ratio and its benefit or importance to Access Bank Nigeria Plc, Kaduna. The study will cover six (6) years of operation of the bank, that is from 2008 – 2013 using the Access Bank Annual Report as the main sources.
1.7 Historical Background of Access Bank Nigeria Plc
The bank received its license from the Central Bank in 1989 and listed on the Nigeria Stock Exchange in 1998.
In 2002, Access Bank was taken over by a core of new management lead by Aig and Herbart. In 2005, Access Bank acquired Marine Bank and Capital Bank (the former Commercial Bank Credit Iyonnais Nigeria) by merger. Furthermore, in 2007, Access bank established a subsidiary in Banjul, the Gambia. This was has a head office and four branches as the bank had pledged to open another four branches.
In 2011, Access Bank in talks with the Central Bank of Nigeria to acquire Intercontinental Bank Plc. Further to the approval of the shareholders of both banks court sanction of the Federal High Court of Nigeria and approval of the Central Bank of Nigeria and the Securities and Exchange Commission, Access Bank Plc and Intercontinental Bank Plc announced the completion of the recapitalization of 75% majority interest in Intercontinental Bank by Access Bank Plc.
Effective today, Intercontinental Bank (including subsidiary of Access Bank Plc), the combined effect of the restoration of net asset value (NAV) to zero by AMCON and N50 billion capital injection by Access Bank Plc is that Intercontinental Bank now operates as a well capitalized Bank with shareholders funds of N50 billion capital adequacy ratio (CAR) of 24% well above the 10% regulatory threshold.
In January 2012, Access Bank announced the conclusion of former of Intercontinental Bank creating an expanded Access Bank of the largest four commercial banks in Nigeria with over 5.7 million customers, 309 branches and over 1600 Automated Teller Machines (ATMs).
1.8 Definition of Key Terms
Acronym: Means a word made up from first letters of the name of something for example CAMEL is Capital adequacy, Asset quality, Management competence, Earnings Strength, Liquidity sufficient; and BASIC programming is from Beginners All-Purpose Symbolic Instruction Code etc.
Comparison: The result of comparing a statement of the point of likeness and difference between two things.
Criterion: Established rule of standard or principle on which judgment is based.
Corporate: This means banks with problems relating to liquidity, poor earnings and non-performing assets, inability to any debts or meet maturity obligations when they become due.
Financial Statements: This is the statement of financial position, income statement, statement of cash flows, statement of retained earnings, and stockholders, equity footnotes and supplementing schedules, comparing a complete financial reports.
Ratio: This is measure of 2 or more variable in their relationship either in degree or numbers. Financial Accounting ratios represent an attempt to standardize financial information and it is the measure of 2 or more financial variable in their relationship.
Solvency: The quality of state of being solvent, having enough money, nor indebted.
Trend Analysis: This is sense of direction either upward or downward. The Access Bank Plc integration model is the model for integration in the banking industry.
The merger has propelled Access Bank Plc to rank amongst the top 8 banks in Nigeria with assets in excess of N200 billion and a net worth of approximately N30 billion.