Introduction

Income statement, statement of financial position, statement of cash flow and other

accompanying reports of Ecobank Ghana(foreign bank) and Ghana Commercial bank(local

bank) from 2013-2017 are analysed to give an overview of the financial performance on the

two banking institutions. Performance ratios used in this course include liquidity ratios

capital adequacy, management efficiency, asset quality, and earnings ability.

Capital adequacy

Capital adequacy is said to be a measure that certifies banks meet their liabilities and risks

(Yunisa, 2013). As such , financial managers are to keep an adequate level of capital in order

to cover risky assets. The capital adequacy or a bank or a financial institution is meant to

absorb unanticipated shocks. As such, a high rate of capital adequacy indicates that the banks

would be able to meet her obligations (Yunisa, 2013). According to AIA’s CAMEL

Approach for Bank Analysis (AIA, 1996), capital adequacy can be measured using two

methods. These are the Capital Adequacy Ratio (CAR) which is the most widely used

method and according per the Basel norm a minimum 8% is required. On other hand, there is

also the Equity Capital to Total Assets which is expressed as the Total Capital over Total

Assets. As per AIA’s CAMEL Approach for Bank Analysis (AIA, 1996), a bank is to have at

least a minimum of 4%. Per available data, the researcher employs the equity capital to total

assets to ascertain the capital adequacy of Ecobank Ghana (foreign bank) and Ghana

Commercial bank (local bank). Generally, a bank with a high capital adequacy ratio is

considered likely to meet its financial obligations and safe.

Figure 1.1: Capital adequacy of the banks

Source: Task 2019

Figure 1.1 illustrated above gives info on the capital adequacy Ecobank Ghana (foreign bank)

and Ghana Commercial bank (local bank). Equity capital to total assets ratio computed for

Ecobank was 12.047% for the year 2013. The year 2014 also had an equity capital to total

assets ratio of 13.826% and year 2015 had an equity capital to total assets ratio of 13.374% as

2016 had a rate of 11.865%. In the year 2017, Ecobank recorded an equity capital to total

assets of 11.285%. On an overview, these values shows a falling trend in the equity capital to

total assets rate for Ecobank implying that the bank was having difficulties in meeting her

financial obligations over the period under consideration.

For Ghana Commercial bank, it was noticed that 13.186% was recorded as equity capital to

total assets rate for the year 2013. Year 2014 had an equity capital to total assets rate of

15.59% and year 2015 gave an equity capital to total assets rate of 17.639%. in 2016 and

2017, Ghana Commercial bank recorded equity capital to total assets rates of 16.78% and

11.646% respectively. In an over view, the equity capital to total assets rates of Ghana

Commercial bank was noted to have a declining trend. Thus implying that the company was

having difficulties in meeting her financial obligations over the period under consideration.
However, in comparing the two trends, it was noticed that Ghana Commercial Bank had

higher equity capital to total assets rates than Ecobank. This implies that though both banks

have falling equity capital to total assets rates, Ghana Commercial bank is much preferable

since her rates are higher than Ecobank. This suggest that Ghana commercial bank is much

capital adequate than Ecobank . Much more, Ghana commercial bank is able to meet her

obligations more than Ecobank.

Asset quality

The American International Assurance (AIA) (1996) describes asset quality as a means to

evaluating and also reviewing credit risk associated with asset in a bank. These assets are

noted to be those which require interest payments i.e. investment portfolios and loans. The

asset quality therefore give an idea of the efficiency of the bank in effectively controlling

managing and also monitoring credit risk. As per the American International Assurance

(AIA) (1996), effective means of assessing or ascertaining the asset quality status of a bank is

to employ nonperforming loans (NPLs) to Total Loans rate or nonperforming loans (NPLs) to

Total Equity. This rate should give a result which is lower than 1. Thus, a lower rate in the

nonperforming loans (NPLs) to Total Loans rate indicates higher asset quality. This is to say

that the banks is efficient in in reducing impaired loans i.e. the bank is not using her equity to

pay for impaired loans.

Source: Task 2019

Nonperforming loans (NPLs) to Total Equity rate of Ecobank was recorded at 0.0994 for the

year 2013. In 2014, the nonperforming loans (NPLs) to Total Equity rate was 0.0407 and in

2015 the nonperforming loans (NPLs) to Total Equity rate of the bank rate rose to 0.1314.

Nonperforming loans (NPLs) to Total Equity rate of Ecobank furthered to 0.1875 in 2016 but

dropped to 0.1694 in 2017. In a gist, it can be noticed that the nonperforming loans (NPLs) to

Total Equity rate for Ecobank has a rising trend. This indicates that a high proportion of

equity of Ecobank is used to finance nonperforming loan of the bank. This does not indicate

good financial health for Ecobank.

With respect to Ghana Commercial Bank, it was noticed from the figure above that her

nonperforming loans (NPLs) to Total Equity rate was 0.0236 in 2013. In 2014, Ghana

Commercial Bank had a nonperforming loans (NPLs) to Total Equity rate of 0.0361. In 2015,

nonperforming loans (NPLs) to Total Equity rate was 0.1145, this rate fell to 0.0261 in 2016

but gave a small increase to 0.448 in 2017. In all, over the period under consideration Ghana
Commercial Bank is noted to have a marginal rise in the trend of her nonperforming loans

(NPLs) to Total Equity rate. This suggests that the bank is used her equity to finance non-

performing loans in the bank. Comparing the two banks simultaneously, it can be said that

Ecobank has predominantly higher level of nonperforming loans (NPLs) to Total Equity rate

than Ghana Commercial Bank. This suggests that over the period under consideration,

Ecobank used higher level of equity to finance her nonperforming loan much more than

Ghana Commercial bank. In effect, Ghana Commercial bank for the year 2013-2017 is much

more efficient in in reducing impaired loans. Thus Ghana Commercial banks has higher asset

quality than Ecobank.

Management efficiency

Efficiency of management of a bank is a measure which helps to determine the ability to

manage and use its assets and liabilities effectively. According to Rozzani and Rahman

(2013), it encompasses the assessment of tops managements plan to changing circumstances

such as leadership skills, Technical competence, and administrative ability. With respect to

the banking sector, it is difficult to determine the qualitative measure for management

efficiency. As a result AIA’s CAMEL Approach for Bank Analysis (AIA, 1996) employs

loan growth rate, total asset growth rate and earnings growth rate to assess the efficiency of

management. The researcher therefore adopts total asset growth rate as a measure to

determine management efficiency. Asset growth rate is determined by deducting the values

of the current values of total assets over the previous year’s total assets from one. The higher

the assets growth rate the higher the indication that management is efficient in developing her

asset to be employed in to produce income for the bank.

Source: Task 2019

The total asset growth rate for Ghana Commercial bank reads 0.141 for the year 2013, total

asset growth rate of 0.226 for 2014 and a total asset growth rate of 0.094 in 2015. In the year

2016, total asset growth rate was 0.307 and in 2017 total asset growth rate was 0.58. For the

period 2013-2017, the total asset growth rate of Ghana Commercial Bank gave a rising trend.

This indicates that in the period being reviewed, Ghana Commercial Bank’s management was

efficient in developing and also management assets of the banks to generate income for the

bank.

With respect to Ecobank, it was realised that the banks had a total asset growth rate of 0.369

in 2013. The banks also had a total asset growth rate of 0.226 in 2014, and 0.162 in 2015. For

the year 2016, Ecobank recorded a total asset growth rate of 0.218 and in year 2017 a total

asset growth rate of 0.134. The period 2013-2017 for Ecobank gave a declining trend in total

asset growth rate. This suggests that for the period under review, the Ecobank’s management

was not effective in developing assets to effectively use them to generate income for the
bank. Comparing the two financial institutions in the period 2013-2017. It can be said that

Ghana Commercial bank has a rising trend in total asset growth rate and Ecobank has a

declining trend in total asset growth rate. As such, Ghana Commercial bank has better

management efficiency than Ecobank.

Earnings ability

AIA’s CAMEL Approach for Bank Analysis (1996) to concern the ability for management to

reduce losses and build capital to support future and present operations. According to the

AIA (1996), measures such as cost to Income ratio, returns on assets and returns on equity

are used to determine the earnings ability of banks. The higher the rate of returns on assets

and returns on equity the higher the earnings ability of the firms and the lower the cost to

Income ratio the higher the earning ability of the bank.

Return on Assets (ROA): according to Brealey, Myers and Allen (2008), return on Assets

(ROA) is a criterion to measure organisational performance and it is the ratio the annual net

income of to the total assets of a firm. It gives details of the efficiency of management

in producing income from invested assets of the firm. The higher the return on Assets (ROA),

the higher the ability management in efficiently producing income from invested assets of the

firm.
Figure 1.4: Return on Assets (ROA) of the banks

Source: Task 2019

From figure 1.4, return on Assets (ROA) of Ghana Commercial bank was 6.5891 in 2013.

Return on assets (ROA) for 2014 was 6.3801 and that for the year 2015 was 5.2863. In the

year 2016, return on assets (ROA) was 4.9426 and in 2017 return on assets (ROA) of Ghana

Commercial Bank was 2.2255. The period 2013-2017 gives an indication of a declining trend

in return on assets (ROA). This indicates that for the period 2013-2017 the ability of

management of Ghana Commercial Bank to effectively use assets of the bank to generate

income has being reducing.

Considering Ecobank, it was realised that the bank had a return on assets (ROA) of 4.0192 in

2013 and a return on assets (ROA) of 5.4609 in 2014. In the year 2015, Ecobank had a return

on assets (ROA) of 4.9719 and a return on assets (ROA) of 4.057 in 2016. 2017 gave a return

on assets (ROA) of 2.8068. The period 2013-2017 for Ecobank gave declining trend. This

indicates that indicates that for the period 2013-2017 the ability of management of Ecobank

to effectively use assets of the bank to generate income has being reducing. In comparing the
two bank, it is realised that although the two banks have a declining return to assets, Ghana

Commercial Bank has higher rate within the period than Ecobank. This implies that Ghana

Commercial Bank was better in effectively using assets of the bank to generate income than

Ecobank. This gives indication that Ghana Commercial Bank comparatively has a higher

earning ability than Ecobank, though both banks have a declining ROA

Liquidity

Financial institutions such as banks are mostly rated with their capability of meeting

collateral and cash requirements without heavy costs in the process. The ability of a bank to

meet its obligations without heavy cost is what Diamond (2007) classify as liquidity. The

AIA (1996) used measures such as total loans to total assets rate to determine the liquidity

level of a bank. In that, the lower the total loans to total assets rate, the higher the level of

liquidity. Thus the lower the total loans to total assets rate the higher the ability of the bank to

meets its collateral and cash requirements. Figure 1.5 below gives an indication of liquidity

level of the bank using the total loans to total assets rate of the banks.

Figure 1.4: Total loans to total assets rate of the banks

The total loans to total assets rate of Ghana Commercial Bank for year 2013 is given by

0.3335 and for year 2014 by 0.3185. Total loans to total assets rate for year 2015 was 0.3688

and for year 2016 was 0.3053. Ghana Commercial Bank had a total loans to total assets rate

Of 0.2432 for year 2017. The trend for the period 2013-2017 for Ghana Commercial Bank

was declining for total loans to total assets rate. This indicates that management had

conscious effort to reducing the level of loan to asset or assets used to fund loans.

For Ecobank, she gave a total loans to total assets rate of 0.664 in 2013 and 0.7347 in 2014.

In 2015, the bank also gave a total loans to total assets rate of 0.6931 and in 2016 a total loans

to total assets rate of 0.4337. In the year 2017, Ecobank recorded a total loans to total assets

rate of 0.2952. The period 2013-2017 for Ecobank gave declining trend. This indicates that

management of Ecobank had conscious effort to reducing the level of loan to asset or assets

used to fund loans. Relative comparison of the total loans to total assets rates of the two bank

gives Ghana Commercial bank comparative advantage to Ecobank. This is because, Ghana

Commercial Bank has a lower rate as compared to Ecobank. This means that Ghana

Commercial Bank uses lesser assets to support loans. This makes Ghana commercial bank

have better liquidity than Ecobank.

Conclusion

From the above presentation on the financial performance of Ecobank Ghana (foreign bank)

and Ghana Commercial bank (local bank) from 2013-2017 with respect to liquidity ratios

capital adequacy, management efficiency, asset quality, and earnings ability, it can be said

that Ghana Commercial Bank has higher fiancnail performance compared to Ecobank. This is
because Ghana Commercial Bank is much capital adequate, has higher asset quality , better

management efficiency, as higher earning ability and better liquidity than Ecobank.
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Brealey R., Myers S., and Allen F. (2008). “Principles of Corporate Finance”. Mc Graw
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Diamond D. (2007). “Banks and liquidity creation: a simple exposition of the Diamond–
Dybvig model”. Economic Quarterly, 93(2):189–200, 2007.

Rozzani, N., and Rahman, R. (2013). CAMELS and performance evaluation of banks in
Malaysia: Conventional versus Islamic. Journal of Islamic Finance and Business
Research, 2(1), 36-45.

Yunisa, A. (20013). Deposit- money- banks: unethical divergence in capital adequacy ratios:
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