Financial Performance Analysis of Selected Commercial Banks in Ethiopia

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