Determinants Of Deposit Money Banks’ Share Performance On The Nigerian Stock Market

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Determinants Of Deposit Money Banks’ Share Performance On The Nigerian Stock Market


Share price is a reflection of a company’s performance and investors’ expectations about the future prospects of the firm. This study therefore investigates the determinants of deposit money banks’ share performance on the Nigerian stock market between 2005 and 2014. This was with a view to providing empirical analysis of the variables affecting deposit money banks share performance in Nigeria. Secondary data obtained from the Central Bank of Nigeria statistical bulletin, Nigeria Stock Exchange factbooks and annual financial statements of banks for the period under consideration were used for this study. The data were analysed using descriptive statistic and generalized linear latent and mixed model. The findings suggest that there is a positive relationship between share performance and EPS, loan-to-assets ratio and all-share index on one hand and a negative relationship between share performance and return on assets, inflation and tier-2 capital on the other hand. The study concludes that both micro and macro variables are statistically significant variables in determining banks’ share performance in Nigeria.

Chapter One


1.1 General Background

Theories of finance and economic growth suggest that the financial functions provided by banks are important in promoting economic growth. Empirical research strongly supports the view that banks promote economic growth at the firm, industry and country levels (Cole, Moshirian & Wu, 2008). Thus, an effective banking system is a condition for a healthy economy and bank’s share is one of the factors that can reflect the effectiveness of the banking system (Ozsoz, Rengifo Akinkunmi, 2014). The performance of a bank can be represented by the performance of its share price as it is often a good indicator of how well the bank is doing (Shamsudin, Mahmood & Ismail, 2013). A share is the evidence of ownership after the investor has invested certain amount of money to a company (Almumani, 2014) and it reflects investors’ expectations about the future prospects of the firm. Findings from prior studies indicate that share price is a very much diverse and conflicting area of finance (Almumani, 2014). The determination of banks’ share price is often a matter of debate. It is a complex and conflicting task and has remained an open question (Francis, Hassan, Song & Yeung, 2012). Thus, identifying the factors that drive share performance has been a major concern for practice and academic research (Cauchie, Hoesli & Isakov, 2004).

In an efficient market, share performance has been observed to be determined primarily by economic fundamentals factors such as dividend yield, earnings per share, book-to-market value, price-earnings ratio, etc (Srinivasan, 2012; Yao, Yu, Zhang & Chen, 2011) and macroeconomic variables such as inflation, exchange rate, interest rate (Chiang & Chen, 2016; Fama & French, 1988). Fundamental analysis is the use of accounting information on firm fundamentals to derive a firm’s intrinsic value based on its earnings, dividends, investment opportunities, cost of capital and so forth (Hong & Wu, 2016). The principal aim of fundamental analysis is to improve the ability to forecast future movements in share performance, which can then be used to design investment strategies or optimal share portfolios (Avkiran & Morita, 2010). Whether share prices reflect fundamentals has been a contested issue already for several decades and this debate continues to persist (Velinov & Chen, 2015). During the 2007-2009 global financial crisis, shareholders of banks suffered extreme losses on their investment (Irresberger, Muhlnickel & Weib, 2015) and according to Ni, Wang & Xue (2015), unexpected slumps in the stock market could not be explained by mainstream classical financial theories, including the fundamental analysis and efficient-market hypothesis (EMH) (Fama, 1970), the asset pricing models such as Capital Asset Pricing Model (CAPM) (Sharpe, 1964), the macroeconomic factor model (Chen, Roll & Ross, 1986), and the three-factor model (Fama & French, 1993). There now exists ample empirical evidence that momentum variable is significantly correlated with firms’ share returns. Momentum analysis focuses on share’ own historical prices and returns (Teplova & Mikova, 2015). Price histories can indicate the psychology of the market better than fundamental factors and provide information regarding the sentiment of other participants in the market (Irresberger et al., 2015; Ni et al., 2015). Thus, information embedded in a share’ own past market prices should be useful alongside fundamental information for explaining share performance. Surprisingly, there has been little efforts understanding their complementary roles and there remain scant evidence on their joint ability to determine share performance across firms and over time (Hong & Wu, 2016). Although most of the above-mentioned variables have been empirically tested in explaining share performance in developed economies, not all of them have been applied to developing economies (Chiang & Chen, 2016). This is because the financial system of developing economies is somehow operating under a different set of rules and constraints (Rojas-Suarez, 2014).

Using Nigeria as an example, the country has been classified as a developing economy characterised by a lack of coherent legal and financial systems that provide sufficient information to accommodate investors, thin bond market, etc (Chiang & Chen, 2016). All of these facts create the need for further studies with an appropriate model that combine fundamental, momentum and macroeconomic variables together. This study therefore intends to fill this gap in literature by examining the determinants of share performance in Nigerian deposit money banks using three categories of economic sources which are domestic economic fundamentals, momentum analysis and macroeconomic variables.

1.2 Statement of the Problem

Basically, share price is determined by demand and supply. Butthere are many other qualitative and quantitative factors that determine the stock price. It is unpredictable to specify exactly what factors determine the stock price. The shares of the deposit bank play a vital role in the overall index of NSE and the overall index is highly influenced by the share price of the deposit banks. The sector wise contribution in total traded volume in NSE is dominated by the financial sector. The shares of the publicly quoted deposit banks seem to the basis of investment to all potential investors.

Only few investors of Nigerian share market are aware of the causing agent of share price. It means most of the investors are unknown about the financial performance of the company but tends to invest on the company without proper financial analysis. It causes the unusual relation of the financial indicators EPS, BVPS, DPS etc. with the market price of the share. In this context, this study will try to identify the determinants of stock price and find out the degree of affection of those determinants.

1.3 Objective of the Study

The main objective of this study is to examine the determinants of deposit money banks’ share performance on the Nigerian stock market

  1. To evaluate the qualitative as well as quantitative factors affecting the stock price in NSE with focus to deposit banks.
  2. To determine the effect of earning per share, book value and P/E ratio on the shareprice.
  3. To examine the individual effect of earning per share and dividend per share on the stock price.
  4. To analyze the market trends of market price per share with financial indicators.
  5. To examine the impact of share price fluctuation.

1.4 Research questions

More specifically, this present study is carried out to answer the following research questions:

  1. What are the major factors that change the stock price in NSE?
  2. How earning per share, book value and P/E ratio of the company affect on the stock price?
  3. What is the effect of the earning per share and dividend per share on the stock price?
  4. Are the investors aware of financial indicators, which influence the MPS of the company?

1.5 Significance of the Study

A few studies have been made on the securities listed in NSE. Most of the studies made up to present on capital market are related to financial performance evaluation, capital structure analysis, deposit mobilization, dividend policy, risk and return etc. However, none of the researches has yet been made on the core perspective of the determinants of the share price. Therefore, the present study will be of substantial importance for investors, planners, researchers, students and policy makers to meet their personal and organizational objectives. This study attempts to construct the relation of MPS of the Nigeriandeposit banks to the major financial indicators like EPS, PE Ratio, BVPS, and DPS etc. The relation is hoped to show the status of Nigeriandeposit banks with respect to the determiners of share price. These findings may be helpful to the potential investors to make the better investment decision. Likewise, this thesis provides the information about the position of share price in share industry. Moreover, the industrial average regarding different financial indicators are helpful to compare with the individual banks. This information is expected to be helpful to the managers of the respective banks.

1.6 Scope of the Study

The study tries to explore the factors determining the stock price in Nigeria stock exchange. This study was delimited to seven deposit banks in Nigeria. Namely: First bank Nigeria (FBN), Union Bank Plc (UBN), Guaranteed Trust Bank (GTB), Access Bank of Nigeria (ABN), Zenith bank (ZBN), Ecobank Plc (EBN), First Chartered Monumental Bank (FCMB).

1.7 Limitations of the Study

The study tries to explore the factors determining the stock price in Nigeria stock exchange. Since, the study is conducted in limited time and budget, so it may not provide the 100% result. The lack of experience, limited time and budget is the main limitation. The other limitations of the study are presented below:

  1. Limited financial and statistical tools are used.
  2. The study includes only deposit banks sector for the study. So, the findings and conclusion obtained may not be applicable for other sectors of companies listed in NSE.
  3. Most of the primary data are based on research questionnaire. Therefore, the reliability and validity of the data depends upon their source.

Chapter Five

Summary, Conclusion and Recommendation

This is the fifth and last chapter of the study. This chapter is divided into three parts: summary, conclusion and recommendation. They are discussed below.

5.1 Summary

The number of investor in stock market is increasing day by day. Many young people are attracted towards stock investment. Investment in common stock is not an easy task. It requires proper knowledge, risk taking capacity and patience. Since, the stock investment provides a handsome profit sometimes with the increase in market price and dividend distributed by the company, many people are attracted in this sector. But, sometimes the stock price declines so heavily that the dividend provided by the company cannot cover the loss amount occurred due to decrease in MPS.

Basically, the price of the stock is determined by demand and supply, but there are many other factors that lead to the fluctuation in price. Company financial indicator like EPS, DPS, BVPS, P/E ratio, cost of equity, cost of fund and other environmental factor like government’s policy, fiscal policy, political situation, CBN’s policy, news, rumours, interest rate affects the share price. Nobody can predict the main factors that affect the change in share price. It has been a major concern to many researcher and investors regarding the major determinants and variables of share price.

The study is focused on the identification of variable that affect the share price and analysis of the relationship of these variables with the market price per share of the deposit banks. Hence, seven listed deposit banks are taken in consideration for the purpose. Market price of the sample banks has been analytically tested here to compare with other financial indicator like EPS, DPS, BVPS and P/E ratio. For this purpose, secondary data was gathered from different sources and different financial tools as well as statistical tools have been used for analysis. Along with this, a set of 13 questions were prepared and presented to 50 respondents to collect primary data related the share price change on Nigeriandeposit banks. This study mainly aims to examine the factors affecting the share price of deposit bankin the capital market. Theshare price of deposit banks has been passing through up and down in recent years. Stock market seems to be highly sensitive and fluctuating, hence the basic focus of the study is to examine factors affecting stock price with the help of five years data on seven sample banks.

The study is based on both primary and secondary data analysis. The secondary data are collected from the annual reports of the banks available in their websites. For the support of this study, survey of questionnaire from various respondents have been taken.

The major findings from the financial analysis is presented below:

  1. The banks with higher EPS, DPS and BVPS also have higher MPPS.
  2. The MPPS of the company is mostly affected by EPS, BVPS and DPS.
  3. The average EPS of the banks for the study period was found to be N.44.13
  4. The average DPS of the banks is N.33.58.
  5. The average MPS of the sample bank is N.1190.42.
  6. The average BVPS of the sample bank is N.197.94.
  7. The EPS of six deposit bank is found to be decreasing in the fiscal year 2016/2017.
  8. The MPS of all the deposit banks is in decreasing order. Due to this the overall market capitalization is also decreasing.

From the analysis of primary data, it is found that investors are not satisfied with the performance of NSE and SEBON, they believe that both the entity has not been able to protect the investors interest. Majority of the investors think themselves as smart and aware, but they do not perform analysis before investment. Investors run to grab the company share even at higher price that have the highest EPS and DPS. Most of the investor invest in common stock of deposit banks share because they are well managed and provide continuous dividend. The investor believes that after fulfillment of paid-up-capital to 8000 million, as directed by Central Bank of Nigeria, deposit bank will not distribute bonus share and focus on cash dividend.The regulatory body of the stock market SEBON is not able to adopt systematic and efficient trading system, for the capital market development. As a result, there is not adequate transparency in the performances of the listed companies and the capital market due to which the capital market is struggling to become matured. The study is divided into five main chapters, they are discussed below:

The first chapter covers the general introduction of the deposit banks which were taken as the sample of the study. It also includes the objective of the study, statement of the problem, significance of the study, objective of the study and the limitation of the study.

The second chapter consists of the review of the literature. It includes the study made by the other researcher in the field of common stocks analysis. Various books, journals, unpublished materials articles related to the stock market were taken as the basis of the literature review.

The third chapter includes the methodology taken for the research. Research design, sources of data, the sample size and the tools taken for analysis are included in this chapter.

The fourth chapter covers the presentation and analysis of the data collected from various sources. The collected data are summarized in the table for better understanding and interpretation is made in this chapter.

The fifth and last chapter is summary, conclusion and recommendation. The first part of this chapter summarizes the study in brief. In the second part conclusion from the study is drawn from the basis of data presentation and analysis section. Finally based upon the major findings of the study recommendation is made in the last part.

5.2 Conclusion

The study of the factors affecting share price has been a subject of great interest these days. Specially, the share price of deposit banks in Nigeria is very fluctuating. It is a subject of curiosity to identify the factors affecting share price of deposit banks. The shares of deposit banks dominate the portfolio of majority of investors. The banking sector plays a crucial role in the NSE index. So, this study examines the factors affecting share price of deposit banks over the period 2012-2017. The findings of the study over the past five-year period revealed that dividend per share and earning per share, book value per share has the significant positive association with share price.

From the secondary data analysis, it is found that the deposit banks performance is highly inconsistent in the relationship of MPPS with EPS, DPS and BVPS. The MPPS is found to be highly correlated with the EPS and BVPS. From the primary data analysis, factors affecting the market price of share of deposit banks listed in Nigeria Stock Exchange are identified. Such internal factors affecting the share price are earnings per share, book value, dividend payment, price earning ratio, paid up capital of the banks. Similarly, there are other environmental factors affecting the market price of share. Such environmental factors affecting the share price are government instability, CBN’s policy, SEBON performance, political influences. NSE is in primitive stage and it has not significant effect of return on assets, retention ratio, non-performing loan of the bank, cash reserve ratio and cost of fund. After analyzing the secondary and primary data, the following conclusions have been achieved.

  1. There exists significant relationship of EPS, DPS, BVPS and P/E ratio with MPPS.
  2. The EPS of the FBN is high in four fiscal years i.e.2012/2013 to 2015/2016 and GTB leads in the fiscal year 2016/017.The mean EPS of FBN and GTB are higher than other sample banks. The mean MPS of the same banks FBN and GTB is found to be higher than other banks. So, it can be concluded that higher EPS results to higher MPS.
  3. Under DPS analysis FBN, GTB, and ABN have higher EPS. The MPS of the same banks are higher as per the same order of DPS. It suggests that higher the DPS leads to higher MPS.
  4. Under MPPS analysis FBN has the highest MPPS and FCMB the lowest. The EPS of FBN is highest and FCMB is lowest. So, it can be concluded that higher the EPS higher the MPPS.
  5. Under BVPS analysis FBN and GTB has higher book value and FCMB and ZBN has the same BVPS. ABN has the consistent BVPS.
  6. The major findings of the study show that the market price per share has high degree of positive relationship with EPS, BVPS and DPS.
  7. Nigerian capital market is mainly dominated by banks and financial institutions, hence loose monetary and CBN’s policy could take the deposit banks share price to a new high.
  8. Most of the investors are attracted towards the deposit banks share because they view deposit banks as the well managed and risk-free sector in NSE. So, they are always profitable and provide a handsome dividend to the investors.
  9. Positive political development with stable government can promote share market further which can play a vital role for financial intermediation and resource mobilization through capital market.
  10. EPS is the most influencing factor of share price. Besides this, CBN’s policy, political situation, capital structure of the company also influences the share price of the company.
  11. The price earning ratio of the sample bank suggests that still the price of the deposit banks is high and overvalued. The P/E ratio of EBN and FCMB is less among other so they are taken as the risk-free stock to invest.
  12. The proportion of educated investors is high in the market most of them perform self analysis about the stock and company they invest in.
  13. BVPS and DPS individually do not influence the share price, but they jointly influence the share price. EPS is the most influential variable among all.
  14. Earnings, book value, dividend payment, paid up capital, price earning ratio, political stability are the major factors affecting the share price in NSE, according to the respondents of the survey. Cost of capital, retention ratio cost of equity, market liquidity, and change in management does not significantly affect the share price in NSE.

5.3 Recommendation

Based on this study, the major recommendations are as follows.

  1. Most of the respondents/investors were found to rely very much only EPS, DPS, BVPS and P/E ratioof a company. Sometimes the EPS and DPS only may not cover the return as per risk associated with it. The investors are recommended not to perceive EPS, DPS, BVPS only as the performance measurement of the company. Other fundamental factors like cost of capital, corporate governance of the company, non-performing loan ratio should also be taken into considerations. Investors are recommended to invest in the stock of the company only after proper fundamental as well as technical analysis and also take only the calculated risk.
  2. The DPS of FBN in the last two fiscal years suggest that the bank is providing attractive dividend only when there is need of capital increment otherwise it is interested in retaining the earnings. Hence it is found to be in very fluctuating manner. So, FBN should focus on continuous and increasing dividend pattern to attract the investors to invest in their common stock. The ultimate goal of the company should be focused on the shareholder’s wealth maximization by providing attractive dividend.
  3. The EPS of FBN and EBN have been decreased more than half in the fiscal year 2016/017, which does not represent a good financial health. So, the banks are recommended to find out the reason of the fall in the EPS and take corrective action. Hence, FBN and EBN should focuses on the profitability increment.
  4. Most of the banks EPS has been declined in the fiscal year 2016/017, it might be the reason of paid-up-capital increment as per the directive of CBN. So, the banks are recommended to increase their earnings to maintain a balance between earnings and increased capital. It can be done by reducing the operating cost, decrease the non-performing loan and minimize the cost of fund.
  5. For the further development of the stock market SEBON should establish and introduce the fully online trading system as per international standards, provide the broker licence to the deposit banks, motivate the NRN to invest in capital market.

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