Financial Performance Analysis of Selected Commercial Banks in Ethiopia

Financial Performance Analysis of Selected Commercial Banks
in Ethiopia
Ashenafi Haile1*, Tadesse Getacher1 and Hailemichael Tesfay1
Abstract
Accounting data are useful in assessing the economic prospects of a firm. The
paper shows how financial ratios can be used to explore the sources of a firm’s
profitability and evaluate the “quality” of its earnings in a systematic fashion.
Hence, the aim of the study is to analyze the financial performance of
commercial banks in Ethiopia for the period between 2009 and 2012.A sample
of the top seven commercial banks was selected based on the value of their
total assets at the end of the 2009 financial year. These are the banks that
dominate the sector with the top 7 banks controlling 90.4% of the total industry
assets which makes them systemically important banks The results of the study
indicated that CBE showed the highest level of RoE all the time but this was
driven by its high leverage levels. Moreover, all banks were found to be unduly
liquid affecting their revenue generating capacity. This is partly because of
government imposed loan restriction. Dashen Bank has continuously improved
its performance throughout the study period in most of the parameters used to
measure its performance. Wegagen Bank had the most stable earnings over
time as a result of its policy to use high level of equity financing. For a
sustained good banking performance in the country, it is recommended that the
banks invest more in interest bearing assets, mainly loans, to fully utilize their
revenue generating capacity. The Ethiopian government is also recommended
to balance its desire to control inflation with the need to maintain lasting
viability of the banking industry.
Keywords: Ratio analysis, financial performance, Bank performance, Ethiopia

DOI: http://dx.doi.org/10.4314/ejbe.v4i2.3
_________________________
1
College of Business and Economics, Mekelle University, Ethiopia
*Correspondance to: Ashenafi Haile, Department of Accounting and Fnance, Mekelle University,
P.O.Box 451, Mekelle Etiopia. E-mail: ashe.haile@gmail.com
Financial Performance of Banks: A Ratio Analysis
1. Introduction
The recent global financial crisis of 2007-2009 has shown the implication of
bank performance both in national and international economies and the
necessity to monitor it at all times (Tobias and Themba 2011). Certainly,
performance means different things to different stakeholders in a bank. For
example, depositors are interested in a bank’s long-term ability to look after
their savings; their interests are safeguarded by supervisory authorities. Equity
holders, for their part, focus on profit generation, i.e. on ensuring a future
return on their current holding (European Central Bank, 2010).
The European Central Bank report, 2010, defined bank performance as its
capacity to generate sustainable profitability. It stated, subsequent to the
spectacular losses in the financial crisis and the substantial government
intervention, there is little public support for banks returning return on equity
(RoE) ratios of well above 20%, as these have mostly proved to be
unsustainable (European Central Bank, 2010). The report also specified that
the most common measure for a bank’s performance, RoE, is only part of the
story, as a good level of RoE may either reflect a good level of profitability or
more limited equity capital. This may explain why some of the high-RoE firms
have performed particularly poorly over the crisis, dragged down by a rapid
leverage adjustment. It is understandable that a more comprehensive analysis
covering multiple aspects of performance is necessary to assess the overall
financial health of banks. Good financial performance of banks is important
not only to their shareholders but to the whole economy as it helps the banks to
continue their role of financial intermediation effectively and help economic
growth of a country, especially in countries where financial markets are not
well developed.
The goal of every manager is to build a successful business, but in order to do

this a manager needs to know how to measure a company's success. There are
multiple methods for measuring business success. In for-profit businesses, the
goal of financial management is to make money or add value for the owners.
More precisely, the goal of financial management is to maximize the current
value per share of the existing stock (Ross et al 2003).
EJBE Vol. 4 No. 2/2014 Page 252

Corporations are certainly not the only type of business; and the stock in many
corporations rarely changes hands, so it’s difficult to say what the value per
share is at any given time. Therefore the goal should be stated in a more
general way as to maximize the market value of the existing owners’ equity
(Ross et al 2003).
Though this is accepted as an objective, there is a problem of how we actually
go about determining the market value of the business. In the best of all worlds
the financial manager has full market value information about all of the firm’s
assets. This will rarely (if ever) happen.
There are also various equity valuation techniques. These techniques take the
firm’s dividends and earnings prospects as inputs. Although the valuation
analyst is interested in economic earnings streams, only financial accounting
data is readily available. So the reason we rely on accounting figures for much
of our financial information is that, we are almost always unable to obtain all
(or even part) of the market information that we want.
The question this study intends to address is, thus, “what can we learn from a
company’s financial accounting data that can help us gauge how well a
company has done in fulfilling its primary objective of shareholder value
maximization?”
Although economic earnings are more important for issues of performance
measurement of this kind, this study examines evidence suggesting that,
whatever their shortcomings, accounting data still are useful in assessing the
economic prospects of firms. We see how we can use financial ratios to
explore the sources of a firm’s profitability and evaluate the “quality” of its
earnings in a systematic fashion.
The objective of the study, therefore, is to analyze the financial performance of
commercial banks in terms of measures such as profitability, liquidity and
riskiness of the earnings to shareholders.
Motivation for taking banks as focus of the study
Bank performance is important because of its effect on the performance of the

whole economy. Good performance of banks facilitates economic development
by making the saving-investment process more smooth, efficient, and easier to
reach. The failure of a single bank, on the other hand, can not only affect its

shareholders and depositors but also the rest of other banks and all other
business. This in turn causes major distress on the economy as a whole.
Moreover, while several studies on bank performance have been conducted
widely for US and European markets and, to lesser extent, for large emerging
markets, relatively little is known about bank performance among other
developing countries like Ethiopia (Yeh, 1996; Webb, 2003; Lacewell, 2003;
Halkos and Salamouris, 2004; Dev and Rao, 2006).
2. Literature Review on Financial Ratio Analysis
2.1 Bank performance: Review of previous empirical studies
The measurement of bank performance particularly commercial banks is well

researched and has received increased attention over the past years (Seiford
and Zhu, 1999). There have been a large number of empirical studies on
commercial bank performance around the world (see Yeh, 1996; Webb, 2003;
Lacewell, 2003; Halkos and Salamouris, 2004; Tarawneh, 2006). However,
little has been done on bank performance in Ethiopia. However, with the
deteriorating health of the banking institutions and the recent surge of bank
failures as a result of the current global financial crisis, it is justified that bank
performance receives increased investigation from both scholars and industry
specialists.
There are two broad approaches used to measure bank performance, the
accounting approach, which makes use of financial ratios. Traditionally
accounting methods primarily based on the use of financial ratios have been
employed for assessing bank performance (Ncube, 2009).
Berger and Humphrey (1997) indicated that, “evaluating the performance of a

financial institution can inform government policy by assessing the effects of
deregulation, mergers and market structure on efficiency” (p175). Bank
regulators screen banks by evaluating banks’ liquidity, solvency and overall
performance to enable them to intervene when there is need and to gauge the
potential for problems (Casuet al, 2006). On a micro‐level, bank performance
measurement can also help improve managerial performance by identifying
best and worst practices associated with high and low measured efficiency.

When looking to improve their performance, banks compare the performance
of their peers and evaluate the trend of their financial performance over time.
Tarawneh (2006) in his study measured the performance of Oman commercial
banks using financial ratios and ranked the banks based on their performance.
The study utilised Financial Ratio Analysis (FRA) to investigate the impact of
asset management, operational efficiency and bank size on the performance of
Oman commercial banks. The findings indicated that bank performance was
strongly and positively influenced by operational efficiency, asset management
and bank size.
In the Gulf, Samad (2004) investigated the performance of seven locally

incorporated commercial banks during the period 1994-2001. Financial ratios
were used to evaluate the credit quality, profitability, and liquidity
performances.
The performance of the seven commercial banks was compared with the
banking industry in Bahrain which was considered a benchmark. The article
applied a Student’s t-test to measure the statistical significance for the
measures of performance. The results revealed that commercial banks in
Bahrain were relatively less profitable, less liquid and were exposed to higher
credit risk than the banking industry, in which wholesale banks are the main
component.
2.2 Financial Ratio Analysis
Banking institutions have become increasingly complex, the key drivers of

their performance remain earnings, efficiency, risk-taking and leverage. In
detail: while it is clear that a bank must be able to generate “earnings”, it is also
important to take account of the composition and volatility of those earnings.
“Efficiency” refers to the bank’s ability to generate revenue from a given
amount of assets and to make profit from a given source of income. “Risk-
taking” is reflected in the necessary adjustments to earnings for the undertaken
risks to generate them (e.g. credit-risk cost over the cycle). “Leverage” might
improve results in the upswing – in the way it functions as a multiplier – but,
conversely, it can also make it more likely for a bank to fail, due to rare,
unexpected losses.

There are a multitude of measures used to assess bank performance, with each
group of stakeholders having its own focus of interest. Among the large set of
performance measures for banks used by academics and practitioners, the
following are commonly used ratios.
2.3 Profitability Performance
Performance measures are similar to those applied in other industries, with

return on assets (RoA), return on equity (RoE) or cost-to-income ratio being
the most widely used.
In addition, given the importance of the intermediation function for banks, net
interest margin is typically monitored.
Return on Assets (RoA) (net profit/total assets) shows the ability of

management to acquire deposits at a reasonable cost and invest them in
profitable investments (Ahmed, 2009). The return on assets (RoA) is the net
income for the year divided by total assets, usually the average value over the
year. This ratio indicates how much net income is generated per dollar of
assets. The higher the ROA, the more profitable the bank is.
Return on Equity (RoE) (net profit/ total equity) RoE is an internal

performance measure of shareholder value, and it is by far the most popular
measure of performance, since: (i) it proposes a direct assessment of the
financial return of a shareholder’s investment; (ii) it is easily available for
analysts, only relying upon public information; and (iii) it allows for
comparison between different companies or different sectors of the economy.
RoE is sometimes decomposed into separate drivers: this is called the “Dupont
analysis”, whereRoE = (result/turnover)*(turnover/total assets)*(total
assets/equity). The first element is the net profit margin and the last
corresponds to the financial leverage multiplier.
Cost to Income Ratio (C/I) (total cost /total income) measures the income
generated per $ cost. The cost-to-income ratios shows the ability of the
institution to generate profits from a given revenue stream. That is how

expensive it is for the bank to produce a unit of output. The lower the C/I ratio,
the better the performance of the bank.
Finally, net interest margin = net interest income / assets (or interest-bearing
assets) is a proxy for the income generation capacity of the intermediation
function of banks.
2.4 Liquidity Performance
Liquidity indicates the ability of the bank to meet its financial obligations in a
timely and effective manner. Samad (2004) states that ‘‘liquidity is the life and
blood of a commercial bank’’. Financial liabilities are attracted through retail
and wholesale distribution channels. Retail generated funding is considered
less interest elastic and more reliable than deposits attracted from wholesale
distribution channels (Thygerson, 1995). The following ratios are used to
measure liquidity.
Liquid assets to deposit-borrowing ratio (LADST) = liquid asset/customer

deposit and short term borrowed funds. This ratio indicates the percentage of
short term obligations that could be met with the bank’s liquid assets in the
case of sudden withdrawals.
Net Loans to total asset ratio (NLTA) = Net loans/total assets NLTA measures
the percentage of assets that is tied up in loans. The higher the ratio, the less
liquid the bank is.
Net loans to deposit and borrowing (NLDST) = Net loans/total deposits and
short term borrowings. This ratio indicates the percentage of the total deposits
locked into non-liquid assets. A high figure denotes lower liquidity.
2.5 Gearing
The gearing ratio is the proportion of a company's debt to its equity. A high
gearing ratio is indicative of a great deal of leverage, where a company is using
debt to pay for its continuing operations. In a business downturn, such
companies may have trouble meeting their debt repayment schedules, and
could risk bankruptcy. The situation is especially dangerous when a company

has engaged in debt arrangements with variable interest rates, where a sudden
increase in rates could cause serious interest payment problems.
2.6 Limitations of Ratio Analysis
Even though financial ratios are good for analyzing the performance of a
company, they have drawbacks that will be outlined in this section. First of all
financial ratios of a company cannot be analysed by themselves. They have to
be compared to an industry, the economy or the company’s past performance.
According to BPP (2012) there are limitations of financial ratios analysis such
as:
 Companies may adopt differing accounting policies from each other.

Different methods of depreciation will lead to different accounting
profit figures and hence it may not be appropriate to draw conclusions
of the two ratios without making suitable adjustments.
 Although ratio analysis aid in providing clues to the company’s
performance or its financial position but on their own they cannot show
whether performance is good or bad and therefore, they need to be
carefully interpreted to draw meaningful conclusions onResearch
Report which informed decisions could be made. Furthermore,
comparisons need to be made with the ‘best in the business’ or with
industry standards.
 The figures in a company’s latest annual accounts is likely to be several
months out of date and may not provide most current and best
indication of its performance.
 Different businesses may have different sizes and hence may enjoy
different levels of economies of scale. Comparisons of such businesses
using ratio analysis may not be appropriate as smaller business may not
enjoy facilities which are available to large ones (e.g. bulk discounts,
extended credit periods, etc).
 Inflation could render the comparison of financial results misleading if
compared over longer time period as financial figures will not be within
the same level of purchasing power. Improving trend of various ratios

could indicate that the company is performing well but if accounted for
inflationary changes it may paint a different picture.
3. Methodology
3.1 Data source and Data collection technique
This paper uses a descriptive financial ratio analysis to measure, describe and
analyse the performance of commercial banks in Ethiopia during the period
20009-2012.The study employed quantitative research approach using
secondary data gathered from financial statements of commercial banks. The
data was obtained from National Bank of Ethiopia, website of the private
banks, annual reports and financial statements.
3.2 Sampling design
The population for this research comprise all the banks operating in Ethiopia
between 2009 and 2012. A sample of the top seven commercial banks was
selected based on the value of their total assets at the end of the 2009 financial
year end. These are the banks that dominate the sector with the top 7 banks
controlling 90.4% of the total industry assets which makes them systemically
important banks. The fact that all banks could not be included in the study
constrains the validity of the study. However, only the seven largest Ethiopian
banks (Dashen,Awash, Zemen ,Wegagen , Hibret , Nib and Commericail Bank
of Ethiopia (CBE)) offer a comprehensive variety of financial services right
throughout Ethiopia, all the other banks are either aimed at niche markets or
confined to geographical operations or are in their early years of establishment,
making them less comparable with the veterans in the industry. Zemen bank
was included to see its unique nature.
3.3 Data analysis
Financial ratio analysis (FRA) was used to analyze the general trend of the data
from 2009 to 2012 for the variables which included in the study.

Ratio analysis is one of the main accounting techniques of financial analysis to
evaluate the financial position and performance of companies. It involves
comparison and calculation of a number of profitability, liquidity, efficiency,
gearing and investor ratios which in turn paint a thorough picture of the
company’s performance over a period of time (BPP, 2012).
The main advantage of FRA is its ability and effectiveness in distinguishing

high performance firms from others and the fact that FRA compensates for
disparities and controls for any size effect on the financial variables being
studied (Samad, 2004). Additionally, financial ratios can be used to identify a
bank’s specific strengths and weaknesses as well as providing detailed
information about bank profitability, liquidity and credit quality policies
(Hempelet al, 1994: Dietrich, 1996). FRA permits a historical sketch of bank
returns and risks which Hempelet al, (1994) suggests presents an opportunity
to evaluate the past performance of the bank which is an important step for
planning for future performance.
Although accounting data in financial statements is subject to manipulation and

financial statements are backward looking, they are the only detailed
information available on the bank’s overall activities (Sinkey, 2002).
Furthermore, they are the only source of information for evaluating the
management’s potential to generate satisfactory returns in future.
4. Results and Discussion
This section presents the financial ratio analysis using data collected from
seven selected banks. Descriptive analysis was employed to analyze data
collected and is presented below.
4.1 Profitability
Profitability in commercial banks is determined by the ability of the banks to

retain capital, absorb loan losses, support future growth of assets and provide
return to investors. The largest source of income to the bank is interest income
from lending activity less interest paid on deposits and debt. In this study,

profitability was measured by four ratios which are return on equity,return on
assets, cost to income ratio, and net interest margin.
4.1.1 Return on Equity
Return on equity measures a corporation's profitability by revealing how much

profit a company generates with the money shareholders have invested.
Table 1: Return on Equity
2009 2010 2011 2012

Dashen 27.5% 28.8% 32.3% 35.7%
Awash 28.1% 25.8% 37.8% 32.1%
Zemen -10.1% 32.2% 35.2% 30.8%
Wegagen 21.6% 21.2% 24.2% 20.9%
United 18.0% 27.4% 25.7% 27.0%
Nib 21.1% 21.9% 29.4% 25.5%
CBE 38.1% 45.1% 45.9% 71.6%
Sector 28.7% 28.6% 33.1% 42.1%
Source: Authors own construct
Figure 1: Return on Equity

80.0%
70.0% Dashen
60.0% Awash
50.0% Zemen
40.0%
Wegagen
30.0%
United
20.0%
10.0% Nib
0.0% CBE
-10.0% 2009 2010 2011 2012 Sector
-20.0%

Figure 1 shows the profitability, as measured by RoE, trend of the banks under
study as well as the industry average for the years 2009 to 2012. First of all
what is clear from the line graph is the sector’s return on equity is raising
slightly in the last two years 2011/12 and 2010/11 after being relatively
stagnant in 2009/10. Further, it is the Commercial Bank of Ethiopia that is
consistently performing above the industry average RoE as well as the RoE of
all the banks under study.The CBE is also the bank showing the highest
percentage increase in RoE of about 56% in the year 2011/12 after maintaining
relatively similar levels of RoE in the years 2010 and 2011. One reason for
such a dramatic jump in RoEis that the CBE operates at a very large scale
compared to the other banks and its equity relative to its total capital is very
small. For example, while CBE’s total assets increased by more than 166% in
the period 2009 to 2012, its equity increased by only about 50% and its profit
figure increased more than 180% in the same period. What the commercial
bank of Ethiopia is doing is that it is increasing its profit by using a
significantly larger capital base but without a proportionate increase in its
equity capital. This highly leveraged position may be good for the bank as it
has a multiplier effect on its RoE during times of profitability, but it is also
risky because it makes the bank’s ability to absorb shocks very low (De Wet,
etal., 2007).
Zemen Bank’s climb from a loss in its initial year to a RoE above the industry
average in 2010 was remarkable because it was also better than the other banks
except CBE in that year.
Another important observation is that Dashen bank has continuously improved

its RoE throughout the study period from 27.5% in 2009 to 28.8%, 32.3% and
35.7% in the three years that followed. This represented a 4.9%, 11.9%, and
10.5% improvement in each of the years 2010, 2011, and 2012.
Looking at the average RoE of all banks for the period covered by the study,
the highest was obviously that of CBE’s at 50.2%, Zemen and Wegagen
showed the lowest at 22%. Zemen Bank’s position was due to its negative
RoE in its year of commencement, 2009, but Wegagen Bank’s low RoE record
may be a point of concern compared to that of the other banks and the industry
average which stands at an average RoE for the four year period of 33.1%.
Another important aspect of interest about the roe is its stability overtime. As
mentioned above Dashen and CBE have been in an upward trend in their RoE
for all the four years. But others have seen both upward and downward trends.
Hence it makes sense to compare the variability of the banks other than these
two to measure their stability. Using standard deviation, the sector has seen a
6.3% fluctuation in RoE. All the banks under study had lower standard
deviation than the sector as a whole, Wegagen being with the lowest standard
deviation of 1.49%. This indicates Wegagen Bank, although it had the lowest
average RoE of all banks, it is also the bank with the most stable earnings over
time which means the bank with the lowest risk to shareholders.
4.1.2 Return on Assets

One of the variables that explain the above variation of RoE of banks is their
ability to generate enough net profit on the assets they employ. RoA is a
measure of how efficiently a bank uses its assets. That is, the amount of profit a
bank is generating per one birr in assets that it employs. The higher the RoA
the more efficient the bank is in utilizing its assets.
Table 2: Return on Assets
2009 2010 2011 2012

Dashen 2.6% 2.6% 3.1% 3.7%
Awash 3.0% 2.7% 4.6% 4.0%
Zemen -2.0% 4.8% 5.2% 3.6%
Wegagen 3.5% 3.9% 4.0% 4.0%
United 2.0% 3.0% 3.0% 3.4%
Nib 3.2% 3.4% 4.8% 4.7%
CBE 3.2% 3.8% 2.5% 3.4%
Sector 2.9% 2.7% 2.7% 3.3%

Figure 2: Return on Assets
6.0%
Dashen
4.0% Awash
Zemen
2.0%
Wegagen
0.0%
United
2009 2010 2011 2012
-2.0% Nib
CBE
-4.0%
As opposed to the above comparison of the banks using RoE, in which CBE
appeared to dominate all the banks, Figure 2 shows different banks excelling in
different times in terms of efficiency in asset utilization. In 2009 Wegagen
Bank showed the highest RoA of 3.5% followed by Nib and CBE, both at
3.2%. In 2010 and 2011, Zemen Bank recovered from its loss making position
in 2009 to being the bank with the highest RoA of 4.8% and 5.2% respectively.
Finally, in 2012, Nib was the leader in efficiency at RoA of 4.7%. This shows
that the leading position of the CBE in RoE terms is not explained by its
efficiency of its asset utilization but by the fact that its equity is relatively very
small.
The highest boost in RoA was that shown by Awash Bank in the year 2011
which is a 66% increase from 2.7% in 2010 to 4.6% in 2011. During that year,
the profit of Awash bank morethan doubled while its assets increased only by
about one fifth of the percentage increase in its profit. In other words, Awash
bank was able to generate a remarkably higher level of profit in 2011 for every
Birr in its assets. A deeper investigation of this ability to generate higher profit
may indicate awash bank was either able to generate more revenue and
maintained the profit margin and/or increased the profit margin for the revenue
it generated which means it better controlled its costs.
It is interesting to observe that Dashen Bank has consistently improved its RoA
and RoE throughout the study period explaining the upward trend of its RoE, at

least partly, by its efficiency in asset utilization.It improved its RoA by 21.7%
from 2.57% in 2009 to 2.62 in 2010. It also continued to improve that figure to
3.08% and 3.72% in 2011 and 2012 respectively. This represented a 17.6% and
20.7% improvement in each of these years.
Zemen bank, reported the highest RoA in the first year it reported a profit in
2010, the fiscal year following its year of establishment. This can be explained
by its unique business model in the country. The fact that it has a single branch
gives it a unique advantage to keep its asset base low. This continued through
the following year 2011, Zemen reporting an exceptionally high RoA of 5.25%
representing an 8.5% above its RoA in 2010.Finally,Zemen Bank’s RoA came
down sharply in 2012 to 3.61% which meant a 31% decline from the preceding
year’s RoA. The reason is that while its total asset figure continued to increase
by 48.35% compared to the increase in the previous year at 52.89%, profit
increased far too slowly at about 2% compared to the 66% increase in 2011. In
fact, the revenue figure for this bank has shown a decline in 2012. The increase
in assets is mainly driven by a 54% increase in deposits and equity increased
by about 16.6% showing increase in the gearing level that we will see in a later
section.
4.1.3 Cost to Income Ratio

The Cost to Income ratio is an efficiency measure similar to operating margin.
Cost to income ratio measures a bank’s ability to earn a profit from the revenue
it generates. This is purely a measure of a bank’s cost control. No matter how
much revenue it generates, a bank cannot be profitable unless it is able to
control its costs. A lower cost to income ratio is better as it indicates a lower
cost relative to revenue.

Table 3: Cost to Income Ratio
Cost to Income Ratio

2009 2010 2011 2012
Dashen 53.3% 52.5% 50.9% 48.2%
Awash 57.6% 48.9% 45.5% 52.2%
Zemen 150.8% 48.4% 44.4% 40.5%
Wegagen 45.8% 42.3% 41.2% 46.1%
United 56.4% 45.8% 67.4% 51.1%
Nib 48.4% 48.7% 47.6% 48.7%
CBE 29.4% 37.0% 29.6% 22.6%
Sector 41.7% 30.8% 44.7% 40.0%
Figure 3: Cost to Income Ratio
160.0%
140.0% Dashen
120.0% Awash
100.0%
Zemen
80.0%
60.0% Wegagen
40.0% United
20.0%
Nib
0.0%
2009 2010 2011 2012 CBE
Looking at Figure 3, Zemen Bank shows an extremely high level of cost to

income ratio in 2009, costs being more than 150% of income. This is not
surprising, though, as the bank started operations that year. It didn’t take long
for Zemen to bring down its cost to income ratio to only 48.4% just a year later
in 2010 being even better than three banks in this measure; Dashen, Awash,
and Nib. This is a 67% improvement from the original loss making position of
this ratio. This improvement was due to Zemen’s ability to increase its revenue

in 2010 to seven and half times what it was in 2009 while its costs increased by
only 139%. It also continued to improve its cost to income ratio to 44.4 and
40.5 percent in 2011 and 2012, this being about 8.4% and 8.7% improvement
from its respective prior year ratio. This improvement also meant that this bank
was the second most efficient bank in this measure in 2012 next to CBE.
It is impressive to observe the bank’s flexibility in controlling its cost relative

to its revenue. Not only was it able to increase revenues more than the increase
in its costs in the first three years of its operations, it was also able to drag
down its costs by about 13% when its revenue declined by about 4.8% in 2012,
thus continuing to increase its profit by nearly 2% in 2012 despite the decrease
in revenue. Whether this is a coincidence or a real management ability is a
question that needs further investigation, but it highlights that an important
alternative to improve profit may be cost control.
CBE was the most efficient bank in terms of cost to income ratio in three of the
four years considered in the study with costs being only 29.4%, 29.6%, and
22.6% of its revenue in the years 2009, 2011, and 2012 respectively. CBE’s
unusual rise in its cost to income ratio to 37% in 2010 was the result of costs
increasing in this year dramatically by 46% compared to the increase of only
16% in revenues. A closer look at the income statement figures showed that
CBE’s interest and non-interest revenues increased by a similar around 16%,
the expenses in the same year increased at 47%. The breakdown of the
expenses in to interest and non interest showed that interest expenses raised by
about 21% but noninterest expenses increased by 78%.
Dashen Bank continuously improved its cost to income ratio during the four
years in a steady fashion of about two to three percentage points every year.
Though its cost to income ratio is relatively high, in fact the highest in 2010,
compared to other banks, it is improving every year in a stable way.
Other banks showed cost to income ratio about close to each other and
fluctuating from time to time. This may indicate lack of conscious cost control.

4.1.4 Net Interest Margin
Net interest margin (NIM) is a measure of the difference between
the interest income generated by banks or other financial institutions and the
amount of interest paid out to their lenders (for example, deposits), relative to
the amount of their (interest-earning) assets. It is similar to the gross margin of
non-financial companies. Banks are keenly interested in their net interest
margins because they lend at one rate and pay depositors at another.
Table 4: Net interest margin
2009 2010 2011 2012

Dashen 2.50% 1.97% 1.98% 2.93%
Awash 3.63% 1.83% 1.77% 3.14%
Zemen 0.41% 0.84% 1.25% 1.59%
Wegagen 3.06% 3.17% 2.72% 3.79%
United 2.67% 2.53% 2.57% 3.77%
Nib 4.00% 3.20% 3.11% 3.59%
CBE 3.13% 4.32% 2.73% 3.35%
Sector 2.90% 2.56% 2.51% 3.14%
Figure 4: Net interest margin

5.0%
Dashen
4.0% Awash
3.0% Zemen
2.0% Wegagen
1.0% United
0.0% Nib
2009 2010 2011 2012 CBE

Figure 4 shows the net interest margin of the banks in our consideration for the
years 2009 to 2012.The immediate observation we can take from the graph in
2009 is that Zemen Bank had the lowest net interest margin of all in that year
at 0.41%. This isagain explained by the fact that this was the year of
establishment for the bank. After that, Zemen Bank continuously improved its
net interest margin for the next three years to 0.84%, 1.25%, and 1.59%. This
was a 106%, 49%, and 26% improvement in net interest margin implying
Zemen has been able to earn more and more interest spread on the assets that it
invests. This improvement was driven by the fact that, during this period,
Zemen Bank’s net interest income was growing 1.8 to 2.8 times the growth in
its interest bearing assets. For example in 2010 Zemen Bank’s net interest
income increased 400% from the same figure in 2009 while the growth in its
interest bearing assets was140%. Similarly in 2011, net interest income
increased by 132% and its interest bearing assets by about 56%. Finally, in
2012, the growth was at 88% and 48% for Zemen’snet interest income and
interest bearing assets respectively compared to the previous year’s position.
Nib earned the highest net interest margin in 2009 of 4% but this figure quickly
dropped to 3.2% and 3.1% in 2010 and 2011 before it finally rose to about
3.6% in 2012.It has been above the sector average all four years. It was the
highest among the banks under this study in 2011 too.
Unlike in other measures of profitability, Dashen Bank’s net interest margin

did not consistently rise over the four years. It started at 2.50% in 2009 and
dropped to 1.97% and 1.98% in 2010 and 2011 and finally rose to 2.93% in
2012.
Similarly Wegagen Bank’s net interest margin showed a slight increase of

3.46% in 2010 as compared to 2009, but decreased by 14.18% in 2011 and
finally increased by a huge 39.47% in 2012.
CBE’s net interest margin was at its peak in 2010 at 4.32% which is the highest
of all banks for the whole four years under study. This accounts for an
improvement of 38.13% from the figure in 2009 but it dropped by about
36.89% in 2011 to only 2.73%. This figure was better in 2012 by 22.86% at
3.35%.

The net interest margin goes on for all other banks and the industry average in
this way during the study period. Most of them showed a decline in 2010 as
compared to 2009, all of them were at their minimum in 2011 and all of them
were better in 2012 compared to 2011. It is possible to take an understanding
that the government’s policy to restrict loan during those years has caused the
fluctuation (Access capital, 2011).
4.2 Liquidity
Liquidity performance measures the ability to meet financial obligations as

they become due and is crucial to the sustained viability of banking
institutions. It can be described as the ability of a bank to have sufficient funds
to meet cash demands for loans, deposit withdrawals, and operating expenses.
For this reason, a balance should be found between the amount of deposits
garnered and the quantum of loans extended.
Table 5: Net Loan to deposit ratio (NLDST)
2009 2010 2011 2012 Average

Dashen 54.9% 48.7% 51.5% 56.5% 52.9%
Awash 51.7% 49.1% 49.6% 58.2% 52.1%
Zemen 67.2% 54.9% 54.5% 55.5% 58.0%
Wegagen 53.2% 60.6% 46.6% 60.4% 55.2%
United 57.7% 53.3% 52.5% 59.0% 55.6%
Nib 64.3% 59.3% 51.4% 61.8% 59.2%
CBE 43.1% 40.4% 37.5% 47.6% 42.2%
Sector 51.2% 49.4% 46.4% 55.2% 50.5%

Figure 5: Net Loan to deposit ratio (NLDST)
80.0%
70.0% Dashen
60.0% Awash
50.0% Zemen
40.0% Wegagen
30.0% United
20.0%
Nib
10.0%
CBE
0.0%
Sector
2009 2010 2011 2012
The NLDST is a commonly used measure for assessing a bank's liquidity by

dividing the bank’s total loans by its total deposits. This number, also known as
the LTD ratio, is expressed as a percentage.
A high loans to deposits ratio means that the bank is issuing out more of its
deposits in the form of interest-bearing loans, which, in turn, means it will
generate more income. On the other hand, the bank has to repay deposits on
request, so having a ratio that is too high puts the bank at high risk. A very low
ratio means that the bank is at low risk, but it also means it isn’t using its assets
to generate income and may even end up losing money.
The general trend of NLDST among all the banks being considered and the
sector average is that this ratio has shown on average a reduction in 2010 and
2011 before it increased in 2012. The sectors NLDST was at its lowest in the
four years in 2011 at 46.4% and it was the highest in 2012 at 55.2% which
represented about 19% increase from the figure in 2011.
This generally means that the banking sectors over all liquidly improved during
2010 and 2011 as less of the deposits were tied up in illiquid loans compared to
the situation in 2009 and 2012.

Looking at the individual banks under study, Zemen Bank had the highest
NLDST in 2009 of 67.2% indicating the lowest liquidity of that bank in that
year followed by Nib’s 64.3% of deposits garnered as loans in that year. This
was clearly reflected in Nib Bank’s net interest margin ratio being the highest
in 2009 as shown in figure 4 reflecting lower liquidity results in higher income.
Zemen Bank’s net interest margin was, of course, the lowest in that year, but
this doesn’t contradict with what is already mentioned above because it is the
result of its being a newly established bank and loans may not have earned
interest for the whole year.
The lowest NLDST is experienced by CBE in all the four years making CBE
the most liquid bank. CBE’s ratio shows loans at 43.1% of deposits in 2009
and this even decline to 40.4% in 2010 and 37.5% in 2011 before it finally
increased to 47.6% in 2012.
This highest level of liquidity for CBE makes it safer but at the expense of the
potential incremental profit that could have been attained by extending
additional interest earning loans and still remaining as safe as the other banks.
This can explain the bank’s inefficiency measured by its RoA. Despite the
asset size, this banks RoA was far below its competitors reflecting the high size
of assets not earning money. CBE should consider utilizing its asset to a
greater extent in making more profits.
The reason behind the decline in liquidly ratio in all banks in 2012 was that the
amount of loans extended sharply increased by an average of 55% in that year
compared to the 35% in 2011. This increased the ratio of loans to deposits
because deposits increased at a lower rate of 31% relative to the increase in
loans in 2012. This is as compared to the increase in deposits in 2011 which
was at a higher rate of 44% compared to the increase in loans of 35% in that
year. This was a common trend for all the banks except Zemen. Zemen’s loans
and deposits were increasing at what can seem extraordinary at first glance.
Loans increased at 102%, 68%, and 57% and deposits by 148%, 69%, and 54%
in 2010, 2011 and 2012 respectively. This is because, as a start up bank,
Zemen’s figures of loans and deposits were relatively very small especially in

2009, and the increase in the absolute figures of loans and deposits resulted in
what can possibly look like an extraordinary change in percentage terms.
Table 6 : Net Loans to Total Assets Ratio (NLTA)
2009 2010 2011 2012 Average

Dashen 44.7% 40.0% 41.7% 45.4% 42.9%
Awash 35.9% 33.2% 34.6% 40.8% 36.2%
Zemen 40.4% 35.8% 39.3% 41.5% 39.2%
Wegagen 38.8% 41.4% 34.5% 41.7% 39.1%
United 44.8% 42.7% 41.2% 45.4% 43.6%
Nib 44.1% 41.0% 37.3% 43.6% 41.5%
CBE 31.5% 30.2% 29.2% 36.0% 31.7%
Sector 38.2% 36.9% 34.9% 40.7% 37.7%
Figure 6: Net Loans to Total Assets Ratio (NLTA)
50.0%
45.0% Dashen
40.0%
Awash
35.0%
30.0% Zemen
25.0% Wegagen
20.0%
United
15.0%
10.0% Nib
5.0% CBE
0.0%
Sector
2009 2010 2011 2012
Though the ratio of net loans to total assets does not directly measure liquidity,
it gives an indication of how much of the bank assets are tied into illiquid
loans.

Similar to the NLDST, the banking sector’s overall NLTA showed what can be
described as a u-shaped trend over the four years, 2009-2012. It was 36.9% in
2010, showing a slight reduction of about 1.3 percentage points compared to
the 38.2% in 2009. This reduction even continued in 2011 by about 2
percentage points and was at 34.9% before finally soaring to 40.7% in 2012.
This was also the case for each of the individual banks under consideration.
Their NLTA reduced from its level in 2009 in both 2010 and 2011 and sharply
increased in 2012.
This was consistent with the trend of net interest margin shown in figure 4
above for most of the banks. Since loan figure compared to total assets is down
during the two years 2010 and 2011, net interest income (interest income
minus interest expense) is due to decline relative to the assets of the banks.
This is because the banks’ interest earning depends on their being able to
granting loans to their customers. If their loan is reduced, so does their interest
income without necessarily reducing their interest expense as they still can
have deposits from customers on which they pay interest.
4.3 Gearing
A European central bank’s report on EU banking structures states “recent
events have shown that the most common measure for a bank’s performance,
i.e. RoE, is only part of the story, as a good level of RoE may either reflect a
good level of profitability or more limited equity capital.” The report is of the
position that a good level of RoE driven by high level of leverage rather than a
good level of profitability is largely unsustainable. Gearing is a two edged
sword it magnifies your shareholders returns, both positive and negative. So,
while it is good at good times,it may be devastating when your earnings turn
south.
We use the equity to total asset ratio to measure the level of gearing each bank
is employing.

Table 7: Long Term Equity ratio (Equity/ total Asset)
2009 2010 2011 2012

Dashen 9.3% 9.09% 9.6% 10.4%
Awash 10.7% 10.6% 12.1% 12.6%
Zemen 19.6% 15.0% 14.9% 11.7%
Wegagen 16.3% 18.3% 16.6% 19.2%
United 11.2% 10.8% 11.7% 12.5%
Nib 15.2% 15.4% 16.5% 18.5%
CBE 8.5% 8.4% 5.5% 4.8%
Sector 10.0% 9.6% 8.3% 7.9%
Figure 7: Long Term Equity ratio (Equity/ total Asset)

25.0%
Dashen
20.0%
Awash
15.0% Zemen
Wegagen
10.0%
United
5.0% Nib
CBE
0.0%
Sector
2009 2010 2011 2012
Figure 7 shows the gearing levels of the banks under study. The highest equity
relative to total assets is employed by Zemen Bank in 2009, 19.6%. This
actually does not reflect a deliberate managerial decision to do that, it simply
meant that Zemen Bank did not yet mobilize much borrowed funds (mainly
deposits) in that early time of starting its business. This is true because that
didn’t continue any time further and Zemen Bank’s equity relative to its total

assets fell from nearly 20% in 2009, to about 11.7% in 2012. It was never the
highest equity financed bank in the group in the remaining three years.
Wegagen Bank, the second highest equity financed bank in 2009, rather
seemed to follow that policy of maintaining its debt equity mix. Its equity
relative to its total assets was the highest in 2010, 2011, and 2012 at 18.3%,
16.6%, and 19.2%. There is a similar upward trend in the equity to total assets
ratio of Nib Bank. Nib’s equity to total assets ratio consistently increased in the
four years from 15.2% in 2009 to 18.5% in 2012. Awash and United banks’
equity level did not vary much during this period; it was around 10 and 12
percent. Compared to Wegagen and Nib’s position, this is a relatively low
equity level but it is also consistent during the whole four years.
The graph shows the lowest equity levels for Dashen Bank and CBE. What’s
more, CBE’s equity level is significantly decreasing. While Dashen Bank’s
equity relative to assets was mostly around 9 to 11 percent, CBE’s ratio
dramatically declined from about eight and half percent in 2009 and 2010 to
5.5 and 4.8 percent in 2011 and 2012. This is driven by CBE’s campaign of
mobilizing deposit in recent years without increasing its equity base. This trend
also supports the exceptionally high RoE shown by the bank recently while its
RoA is among the lowest. Thus CBE’s high level of profitability as measured
by its return on equity is not the result of the bank’s ability to earn high profits
but a result of its very low equity level. This makes it a bank with low shock
absorbing capacity because its RoE can swing greatly even with a slight
movement in its earnings.
5. Summary, Conclusions and Recommendations

5.1 Summary and Conclusions
This paper has examined the performance of seven Ethiopian commercial

banks over a period of four years, 2009 – 2012. The banks showed differing
levels of profitability, liquidity, and gearing levels which indicates their
differing levels of return and risk.

The government owned bank CBE showed the highest level of RoE all the time
but this was driven by its high leverage levels. It is the bank that provides high
return to shareholders but with substantial risk.
Zemen Bank has shown a RoE comparable to other banks just after reporting a
negative profitability just for one year. The seniority of the other banks was not
much of a factor to determine their level of RoE.
Dashen Bank’s RoE has shown a continuous improvement over time. This
shows the quality of the return it provides to its shareholders.
Wegagen Bank had the lowest level of average RoE, indicating a very low
level of return but it is also the bank with the most stable earnings as indicated
by the lowest level of standard deviation in its four year RoE meaning it has
also the lowest risk. Wegagen Bank’s low level of RoE is not the result of its
inability to generate profit. The bank’s return on its assets (RoA) is among the
highest in all the years.
As with its RoE, Dashen Bank continuously increased its RoA which indicates
Dashen Bank’s profitability is the result of generating enough return on its
assets.
Zemen Bank’s RoA declined in 2012 after showing exceptional improvement

for the years before it. This was not the result of decline in the amount of profit
but the result of increasing the amount of total assets employed to generate this
profit. The increase in total assets was mainly driven by the increase in
deposits. Zemen Bank was unable to generate enough profit to the assets it is
employing to maintain the level of return per birr in its assets it was generating
until 2011.
Zemen Banks increase in its profit figure despite the decrease in its revenue in
2012, highlights that profit can be improved not only by the increase in
revenue, but also by a better cost control.

CBE was the most efficient bank in its Cost to Income ratio in all the years
under study except in 2010. This was the result of an unusually high increase in
its costs especially its non interest costs.
Dashen Bank’s cost to income ratio is what we can describe as high relative to
other banks under study, but when observed over time it showed a continuous
improvement, consistent to the other profitability measures.
Regarding liquidity of the banks studied, no one has ever heard of a bank in
Ethiopia being in problem meeting its cash demands but there are important
areas in which the banks can do something to improve their performance.
Liquidity is not seen in this study only from the perspective of banks facing a
problem meeting their cash demands but also from the potential effect on
profitability.
2012 was the year in which the LTD ratio increased for all banks under study
after the decline in 2010 and 2011. This is due to the increase in the amount of
loan extended in this year. The government’s policy to restrict granting loans is
most likely the cause for the low level of loan to deposit ratio in the years
before 2012.
Generally the banks in Ethiopia are not extending enough interest bearing loans
to help their profits. This is especially true with CBE which stands to be the
most liquid bank throughout the period under study.
Banks in Ethiopia show varying levels of gearing. Wegagen Bank is the bank
that uses the highest proportion of equity in its total assets. In other words it is
the bank with the lowest level of gearing. This helps the bank to have a better
capacity to absorb potential fluctuations in its earnings. This is reflected in the
stability of its RoE.
On the other hand, CBE is the one with the lowest and declining level of equity
to total assets. This is potentially dangerous as the high level of return to its
equity remains unsustainable and is under undue exposure to risk.

5.2 Recommendations
Based on the analysis and conclusions made in the previous sections, the
following recommendations are forwarded to improve the banks’ performance.
 Ethiopian commercial banks do not appear to fully utilize their assets to
generate income. The low level of loan to deposit ratio shows a
potential to increase more loans to generate more revenue. The banks
are recommended to invest in interest bearing assets, mainly loans, to
fully utilize their revenue generating capacity.
 Commercial Bank of Ethiopia should accompany its capital growth by
growth in equity. This may be done by increasing their reinvestment
rate; i.e. decreasing the dividend payout ratio. Much emphasis should
be put on improving the return on assets (RoA) rather than increasing
leverage as a means of improving shareholder return.
 CBE should utilize its capacity to generate revenue, and profit, by
extending more loans with its current levels of deposit than
campaigning for more deposits. If put idle, deposits are nothing but cost
to the bank.
 The Ethiopian government is recommended to balance its desire to
control inflation with the need to maintain lasting viability of the
banking industry. Net interest margin of all banks dropped in the years
2010 and 2011. This was due to the fact that the banks did not issue as
much loan as they could during those years due to the government’s
policy to restrict loans.
 Zemen Bank seems to reach a saturation point in its earning capacity.
Its RoA declined in 2012 as a result of declining revenues. Appropriate
strategies should be put in place to continue its growth in its earnings.
 Commercial Bank of Ethiopia needs to continue its cost consciousness.
In 2012 CBE’s costs relative to its revenue has increased significantly.
This shows the bank is weakening in terms of controlling its costs,
especially non interest costs, as compared to its leading position in this
measure.

5.3 Limitations of the study and recommendation for further study
The study aims to show how useful accounting data can be in measuring the
success of a company. It also tries to demonstrate the effect of changes in
government policy on the performance of commercial banks in Ethiopia. The
banks studied include both public and private commercial banks and banks of
different sizes.
One limitation to the validity of the study is the fact that it could not include all
banks. Besides, this study measures the performance of the banks relative to
each other, overtime, and the industry average. This, however, does not
necessarily indicate how well the individual banks are doing as we do not
know where the country’s banking industry stands in terms of its profitability
and risk relative to other suitable benchmarks. Further studies are
recommended that address these limitations.

References
Access capital.2011.Ethiopia: Macroeconomic Handbook.Acess on [January

21, 2014] [online] [http://www.portaldecomert.ro/Files/01.12%20-
%20Info%20A%20A%20nr%2080_10%2001%202012%20ANEXA%20Ethio
pia%20.pdf]
Berger, A.N. and Humphrey, D.B. 1997. Efficiency of financial institutions:
international survey and directions for future research. European Journal
of Operational Research, Vol 98, pp.175-212.
BPP.2012. Study Text Paper F7: Financial Reporting. BPP Learning Media
ltd. London UK
Casu, B., Molyneux, P. And Girardone, C. (2006).Introduction to Banking,
Prentice Hall/ Financial Times, London.
Dev, A. and Rao, V. 2006. Performance Measurement in Financial Institutions
in an ERM Framework: A Practitioner Guide, Risk Books.
De Wet, J.H.v.H. and De Toit, E. 2007.Return on equity: A popular, but flawed
measure of corporate financial performance. Department of Financial
Management, University of Pretoria.
European Central Bank. 2010.Beyond RoE: How to Measure Bank
performance. Frankfurt am Main, Germany. Access on [December 20,
2013][Online]
[http://www.ecb.europa.eu/pub/pdf/other/beyondroehowtomeasurebankperfor
mance201009en.pdf]
Halkos, G. and Salamouris, D. 2004. Efficiency measurement of the Greek
commercial banks with the use of financial ratios: a data envelope analysis
approach. Management Accounting Research 15 (2), pp 201- 224.
Kirkpatrick, C., Murinde, V. and Tefula, M. 2007.The measurement and
determinants of x-inefficiency in commercial banks in Sub-Saharan
Africa. European Journal of Finance 14 (7) 2, pp 625-639.
Kiyota, H. 2009.Efficiency of Commercial Banks in Sub-Saharan Africa: A
Comparative Analysis of Domestic and Foreign Banks. A paper prepared
for the CSAE conference 2009 on “Economic Development in Africa”
held at the University of Oxford. UK.
Lacewell, S., K. 2003. Do Efficient Institutions Score Well Using Ratio
Analysis? An Examination of Commercial Banks in The 1990s. Journal
of Commercial Banking and Finance 2, pp 17-33
Ncube, M. 2009. Efficiency of the Banking Sector in South Africa, African
Economic Conference 2009.Fostering Development in an Era of Financial
and Economic Crises, Addis Ababa.

Oberholzer, M. and Van der Westhuizen, G. 2004.An Empirical Study on
Measuring Efficiency and Profitability of Bank Regions.Meditari
Accountancy Research 12 (1), pp 165–178.
Okeahalam, C. 2006. Production costs and efficiency in the South African
banking sector: a stochastic analysis. International Review of Applied
Economics 20, pp 103–23.
Otley, D T. 2002 In: Business Performance Measurement: Theory and
Practice. Cambridge : Cambridge University Press p. 3-21. 19 p.
Ross SA, Westerfield RW, and Jaffe FJ. 2003. Corporate Finance.Sixth
Edition.McGraw-Hill/Irwin.
Samad, A. 2004.Bahrain Commercial Bank’s Performance during 1994

-2001.Credit and Financial Management Review 10(1) pp 33-40.
Seiford, L., M and Zhu, J.1999. Profitability and Marketability of the Top 55
U.S. Commercial Banks Management Science 45 (9), pp 1270-1288.
Tarawneh, M. 2006. A Comparison of Financial Performance in the Banking
Sector: Some Evidence from Omani Commercial Banks”. International
Research Journal of Finance and Economics 3, pp 103-112.
Tobias Olweny and Themba Mamba Shipho.2011. Effects of Banking Sectoral
Factors on the Profitability of Commercial Banks in Kenya, Economics
and Finance Review Vol. 1(5) pp. 01 – 30, July, ISSN: 2047 – 0401.
Webb, R.M. 2003. Levels of efficiency in UK retail banks: a DEA window
analysis. International Journal of the Economics of Business Vol 10 (3),
pp 305-322.
Yeh, Q., J. 1996. The Application of Data Envelopment Analysis in
Conjunction with Financial Ratios for Bank Performance
Evaluation.Journal of the Operational Research Society 47, pp 980-988.

Financial Performance Analysis of Selected Commercial Banks in Ethiopia

Uploaded by

Copyright:

Available Formats

Financial Performance Analysis of Selected Commercial Banks in Ethiopia

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Financial Performance Analysis of Selected Commercial Banks in Ethiopia

Uploaded by

Copyright:

Available Formats

Financial Performance Analysis of Selected Commercial Banks

Ashenafi Haile1*, Tadesse Getacher1 and Hailemichael Tesfay1

Keywords: Ratio analysis, financial performance, Bank performance, Ethiopia

The goal of every manager is to build a successful business, but in order to do

EJBE Vol. 4 No. 2/2014 Page 252

Motivation for taking banks as focus of the study

Bank performance is important because of its effect on the performance of the

EJBE Vol. 4 No. 2/2014 Page 253

2. Literature Review on Financial Ratio Analysis

2.1 Bank performance: Review of previous empirical studies

The measurement of bank performance particularly commercial banks is well

Berger and Humphrey (1997) indicated that, “evaluating the performance of a

EJBE Vol. 4 No. 2/2014 Page 254

In the Gulf, Samad (2004) investigated the performance of seven locally

2.2 Financial Ratio Analysis

Banking institutions have become increasingly complex, the key drivers of

EJBE Vol. 4 No. 2/2014 Page 255

2.3 Profitability Performance

Performance measures are similar to those applied in other industries, with

Return on Assets (RoA) (net profit/total assets) shows the ability of

Return on Equity (RoE) (net profit/ total equity) RoE is an internal

EJBE Vol. 4 No. 2/2014 Page 256

2.4 Liquidity Performance

Liquid assets to deposit-borrowing ratio (LADST) = liquid asset/customer

EJBE Vol. 4 No. 2/2014 Page 257

2.6 Limitations of Ratio Analysis

 Companies may adopt differing accounting policies from each other.

EJBE Vol. 4 No. 2/2014 Page 258

3.1 Data source and Data collection technique

3.2 Sampling design

3.3 Data analysis

EJBE Vol. 4 No. 2/2014 Page 259

The main advantage of FRA is its ability and effectiveness in distinguishing

Although accounting data in financial statements is subject to manipulation and

4. Results and Discussion

Profitability in commercial banks is determined by the ability of the banks to

EJBE Vol. 4 No. 2/2014 Page 260

4.1.1 Return on Equity

Return on equity measures a corporation's profitability by revealing how much

Table 1: Return on Equity

2009 2010 2011 2012

Figure 1: Return on Equity

Source: Authors own construct

Another important observation is that Dashen bank has continuously improved

4.1.2 Return on Assets

2009 2010 2011 2012

EJBE Vol. 4 No. 2/2014 Page 263

Source: Authors own construct

EJBE Vol. 4 No. 2/2014 Page 264

4.1.3 Cost to Income Ratio

EJBE Vol. 4 No. 2/2014 Page 265

Cost to Income Ratio

Figure 3: Cost to Income Ratio

Source: Authors own construct

Looking at Figure 3, Zemen Bank shows an extremely high level of cost to

EJBE Vol. 4 No. 2/2014 Page 266

It is impressive to observe the bank’s flexibility in controlling its cost relative

EJBE Vol. 4 No. 2/2014 Page 267