Finance-Theoretic Analysis of a Banking-Firm: Case Study of First Bank of Nigeria PLC

Abstract

Banks have been historically the most important kind of financial intermediaries. In Nigeria, they account for more than 60 percent of the market capitalization of quoted firms on the Nigerian Stock Exchange. Even though, there have been many well-known studies on the relationship between financial (services) development and economic growth, a micro-economic approach to the analysis of banks’ performance has almost been ignored to the detriment of the industry practitioners, potential investors and financial system supervisors. This study attempts a finance-theoretic performance analysis of First Bank of Nigeria along four dimensions namely: common ratios, CAMELS framework, Z-score and Black-Scholes option pricing frameworks. These four frameworks were shown to be mutually reinforcing in insights from the performance of First Bank in terms of capital adequacy, assets quality, management efficiency, earnings quality, liquidity, sensitivity to market risk and overall risk strategy of the bank. The option-theoretic framework that generates the time values of First Bank and a peer (Zenith Bank) rationalizes the distinction between the two banks’ overall risk appetite wherein the higher risk tolerant bank corresponds to a higher time value with consistent CAMELS metrics. The study recommends improved disclosures in published financial statements to aid investor and market discipline; strict enforcement of prudential regulations to check-mate excessive risk taking; prudential guidelines to provide appropriate incentives for banks’ portfolio choices across economic sectors; product and geographic diversification strategy by banks to minimize risk; provision of public infrastructure such as electricity and security to contain escalating bank overheads which threaten their operating efficiency.