Financial Performance Analysis of Distressed Banks in Ghana: Exploration of Financial Ratios and Z-score

  • Juabin MATEY Development Institute for Vocational & Secretarial Studies, Ghana

Abstract

Abstract:


A healthy bank sector is critical to an economy's stability. This is illustrated by most countries' concentration on macroeconomic policies affecting the banking industry. In 2017, the Ghanaian bank industry underwent a clean-up exercise to rehabilitate the industry's impaired operating environment, which was exacerbated by an unmanageable rate of non-performing loans and a deficient tier one capital base. To assess the soundness of the affected institutions, this study used financial ratios and the Z-score to examine UT Bank’s financial performance prior to the 2017 bank industry health check. Annual financials for a ten-year period (2007–2016) were analyzed. UT Bank's debt management policies were found to be deficient. This was evident in the underwhelming leverage and risk management variable ratios. It was clear that UT Bank had difficulty meeting its debt obligations to creditors. 7.6 debt-to-equity and 0.90 debt-to-asset ratios indicated a precarious condition. Credit management strategies at UT Bank and other banks that experienced these challenges in the industry must swiftly be improved to safeguard customer deposits. As a policy recommendation, the regulator of the banking industry (the Bank of Ghana) should bolster its supervisory and monitoring functions to aid in the early detection of non-performing banks. Additionally, this paper advises that banks' statutory lending limits of 10% for unsecured loans and 25% for secured loans of banks' net owned funds be maintained.

References

[1] Abor J.Y., Gyeke-Dako, A., Fiador, V.O., Agbloyor, E.K., Amidu, M., and Mensah, L. 2019. Money and banking in Africa loan portfolio and credit management. Advances in African Economic, Social and Political Development, Springer Nature. DOI.10.1007/978-3-319-77458-9
[2] Aguenaous, S., Lahrec, A., and Bounakaya, S. 2017. Analysing banks’ efficiency as a measurement of performance in the Moroccan context: Application of CAMEL Framework, International Review of Research in Emerging Markets and the Global Economy, 3: 1105-1121.
[3] Altman, E. I. 1968. Financial ratios, discriminant analysis and the prediction of corporate bankruptcy, Journal of Finance, 23: 589 – 609. DOI: 10.2307/2978933
[4] Altman, E.I., and Hotchkiss, E. 2006. Corporate Financial Distress & Bankruptcy, 3rd Edition, J. Wiley & Sons. Hoboken, New Jersey. ISBN: 978-1-118-26780-6
[5] Attefah, E.K, and Darko, E.A. 2016. Financial ratios approach to evaluating financial performance of Cal Bank Ghana from 2010 to 2014 International Journal of Academic Research in Business and Social Sciences, 6: 150 - 176. DOI: 106007/IJARBSS/v6-i6/2191
[6] Berger, A. 1995. The profit-structure relationship in banking – tests of market-power and efficient-structure hypotheses. Journal of Money, Credit and Banking, 404 - 420. DOI: 10.2307/2077876
[7] Kaufman, G. G. 1966. Bank market structure and performance: The evidence from Iowa, Southern Economic Journal, 429 - 439.
[8] Lepetit, L., Nys, E., Rous, P. and Tarazi, A. 2008. Bank income structure and risk: An empirical analysis of European banks. Journal of Banking and Finance, 32: 1452 - 1467. DOI: 10.1016/j.jbankfin.2007.12.002
[9] Li, X., Tripe, D., and Malone, C.B. 2017. Measuring bank risk: An exploration of Z-Score, SSRN Electronic Journal. DOI: 10.2139/2823946
[10] Nyalatorgbi E. 2019. Bank of Ghana closes seven banks in banking crisis: African Agenda, Third World, Network Africa, 21(3): 33 - 36.
[11] Rhoades, S. A. 1985. Market share as a source of market power: Implications and some evidence. Journal of Economics and Business, 3: 343 - 355.
[12] Seelanatha, L. 2010. Market structure, efficiency and performance of banking industry in Sri Lanka. Banks and Bank Systems, 5: 20-31.
[13] Sheikh-Waqas, A. 2005. Financial statement analysis of bank, Falah. Virtual University Pakistan, Pakistan.
[14] Shepherd, W. G. 1986. Tobins’q and the Structure-Performance Relationship: Comment. The American Economic Review, 76: 1205 - 1210.
[15] Smirklock, M. 1985. Evidence of the (non) relationship between concentration and profitability in banking. Journal of Money, Credit and Banking, 17: 69 - 74. DOI. 12691/jfe-2-3-6
[16] Srairi, S. 2013. Ownership structure and risk-taking behaviour in conventional and Islamic banks: Evidence for MENA countries. Borsa Istanbul Review, 13: 115 - 127. DOI: 10.1016/j.bir.2013.10.010
[17] Taboi, L. 2017. How the Kenyan banks went under African Business. Available at: https://african.business/ 2017/02/economy/kenyan-banks-went/
[18] Tassev, L. 2019. Three bank failures open new chapter in never-ending financial crisis, African Business. Available at: https://mpra.ub.uni-muenchen.de/97095/
[19] Torna, G., and DeYoung, R. 2013. Non-traditional banking activities and bank failures during the financial crisis. Journal of Financial Intermediation, 22: 397 - 421. DOI: 10.1016/j.jfi.2013.01.001
*** Central Bank of Nigeria [CBC] 2010. Annual report bullion; January-March 2010.
*** GBS 2019. Banking reforms so far: topmost issues on the minds of bank CEOs, Price Water House Coopers (Ghana) Limited.
*** GBS 2019. Banking reforms so far: topmost issues on the minds of bank CEOs, Price Water House Coopers (Ghana) Limited.
Published
2021-06-30
How to Cite
MATEY, Juabin. Financial Performance Analysis of Distressed Banks in Ghana: Exploration of Financial Ratios and Z-score. Journal of Advanced Studies in Finance, [S.l.], v. 12, n. 1, p. 20-27, june 2021. ISSN 2068-8393. Available at: <https://journals.aserspublishing.eu/jasf/article/view/6379>. Date accessed: 29 mar. 2024. doi: https://doi.org/10.14505//jasf.v12.1(23).02.
Section
Journal of Advanced Studies in Finance