Financial Ratios as Predictor of Financial Distress: A Study on Some Select Deposit Money Banks in Nigeria (1991-2014)

Abstract

The purpose of this study is to evaluate the use of financial ratios as a predictor of financial distress in Deposit Money Banks (DMB) in Nigeria. Banks’ deficiency in the period between 1991 and 2011 and a subsequent loss of depositor’s funds first prompted our attention. The instability of the industry felt even today calls for further research to understand the underlying causes of such issues better. Three Nigerian Deposit Money Banks were financially analyzed using data set for the period between 1991 and 2014. The banks were classified as very strong, strong, and weak. For instance, GT Bank was classified as very strong, UBA as strong, and Polaris bank as weak. Data were collected from the banks’ annual financial reports. Other sources were included, such as CBN Annual Reports and NSE Fact Books. Logistic regression analysis was performed on the data set. The model correctly predicted 87.5% of periods in which the banks were expected to experience financial distress and 93.8% of periods in which the banks were supposed to be in good financial state. Out of the five ratios that were used in the study, three turned out to be significant in predicting banks’ financial distress. This research constructed a model of financial ratios to predict difficulty with great success. Thus, stakeholders are advised to go beyond assessing the present status of banks, i.e., their strengths and weaknesses, but to utilize financial ratios in the near future. The study recommends that bank management should focus more on generating more earnings with the assets at their disposal.