PORTFOLIO MANAGEMENT AND ITS IMPACT ON PROFITABILITY LEVEL OF BANKS IN NIGERIA
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CHAPTER TWO
LITERATURE REVIEW
2.2. CONCEPTUAL REVIEW
2.2.1 CONCEPT OF ASSET PORTFOLIO MANAGEMENT
The dictionary of accounting defined portfolio as the collection of different securities or other assets held by an individual or an institution which can be evaluated interns of their combined risk and return. This risk of a portfolio does not depend nor any on the risking or security bills also on the relationship among the securities.
For a proper understanding of the frame work upon which this study is based, it is inevitable to highlight it. The contribution made by earlier writer on portfolio management foremost among these is the work of Professor Harry mackowitz (the portfolio management in journal of Finance (1952) and portfolio selection “efficient diversification of investment 1959).
His assertion were that the possess of portfolio selection could be of two fold.
Starting with their observation and experience that end with belief about the future performance that end of available securities and Starting with relevant belief about the performance that end with the choice of portfolio.
In general maxrkowitz and Adesota (1995) identify here factors that determine the efficiency of portfolios selection theory. These are:
The expected future return of each candidate security.
The expected risk of each candidate’s security.
The extent to which each security’s risk correlated with every other security.
From the evaluation of the entire potolio was the return one expects from the portfolio and associated risk of portfolio.
He believed those portfolios are created to diversify holdings of wealth to achieved low risk and high returns from these it is obvious that the ultimate aim of an investor is to minimize risk without necessary reducing the returns from investment.
The following those portfolios are created to diversify holding of wealth to achieved low risk and high returns from these it is obvious that the ultimate aim of an investor is to minimize risk without necessary reducing the returns from investment.
The following assumptions were made for our study:
If two portfolio of investment have same risk but different expected returns the portfolio with higher expected returns the will be selected.
If two portfolio of investment have the same expected returns. But different risk will be selected.
A portfolio with a larger expected returns and higher degree of risk.
Be commensurate with risk of such investment.
In the Nigeria socio economic setting first banks as a commercial bank whose assets have been greatly regulated by various government pronouncements, usually from the interest of judiciary. Role this banks plays to protect the interest of depositor in there of liquidity and the share holders in terms of profitability hence he opined that in a world of balance budged where each speeding units current in come and aggregate expenditure in the economy would be internally financed and surplus exit among spending units current in come and aggregate expenditure in the economy would be internally financed and would approximated gross national product. That is where deficit and surplus exit among spending such unit. Some expending would be financed externally and the extent of such fiancé would be measured by the sum of the deficit (or surpluses) undertaken (generated) by the spending units.
Eyre methue (1970) identified the following reasons for assets diversification.
To save money for future requirement.
To obtain the return from long term saving
To provide a return that is more than sufficient to compensate for the fall in the purchasing power of money.
Due to the effect of inflation from the bank plc stand point
The obligating they own their share-holder in term of profitability would require them to invest in order to earn maximum returns on the facilities on their disposal.
2.2.2 TYPES OF ASSET
Asset can be classified into two broad categories namely. Earning assets and non earning assets earning assets are loan and investment while non earning deposits asset are fixed asset the total reserves of banks would cash and earning deposit with the central bank earning asset liquidity more so some earning assets like short term investment provides liquidity while non earning assets like cash balance also provide liquidity. Bank asset will be discussed as follow:
Cash and short term funds: Cash is the amount of note and coins held in the strong rooms, of branches of the bank and in the head office to meet customer’s demands for withdrawals. These are idle find since they can not earn interest hence the effort of keeping the balance low short term finds refers to items in course of collection within Nigeria as well as balance with banks abroad e.g cheques.
Government securities: These include treasury bill and certificate and development stock and bonds. Treasury bill and certificate provides a safe short term involvement avenues for the surplus funds, they are issued by the CBN weekly. For 90-91 days. They are very risk but liquid and they can be discounted with the CBN before their maturity.
Statutory and other deposit with the CBN: These include balance on current account with the central bank which do attract interest, cash reserves deposit special deposits and letters of credit deposits e.t.c, the balance on current accounting is a working balance to meet they day to day cash requirement of backs such as cash withdrawal by branches foreign exchange allocation, adverse clearing balance and payment for other investments.
Investment with other bank: These include investment in call money fixed and negotiable certificate of deposit with other banks. The investment yields a high return and are reasonable saft.
Loans and advances: This is by far by the largest assets on the balance sheet of many banks it stood at N500 million on the balance sheet under consideration. All loans demand except for term loans practically most rate charged on these assets are quite high and are usually fixed by the central bank.
Fixed assists: This represent the banks investment in building (premises) are quite high and are usually fixed by the central bank.
Other asset: These include pre payments accrued interest received sub suspense resources and uncapitalised expenditure.
2.2.3 NATURE OF THE NIGERIA INVESTMENT MARKET
The Nigeria investment markets like other investment market can be divided into two namely:
The capital and the money market
The money market: this is the market for the raising of short terms funds. It is divided into two primary and secondary markets. The commercial are the major participants in the money markets and most of their investment assets are traded in the market.
The money funds as defined by Harming (1990) as the place of the mechanism whereby funds are obtained for short period of time (from one day to one year) and financial assets representing short-term claims are exchanges.
The primary markets as mentioned above is where term funds are obtained for the first time at different rates term while the secondary market is where these short term financial asset a re traded at rates usually dictated by the demand for supply of such short term financial assets.
The capital market: this is market in which long term finds such as equinity and bonds are raised by commercial enterprises and the government also where second hand securities such as quality and bonds are treaded for long terms finds
The capital market is further divided into the primary markets is the one in which securities that are to be issued for the first time traded. The securities and exchange commission plays key role in the primary market the secondary capital markets is the stock exchange in which securities have already been traded between companies
The primary capital market is primary used by business enterprises to raise capital while, investors uses the secondary capital market (Henrning 1981) as acquire of dispose off investment at their convenient.
The following are the listing requirement for companies to be quited in the first security market
the company must have a trading record of five years.
Date of the last audited account figures must not be more than the mine months
Annual quotation free is based on the share capital companies.
The companies are required to submitted quarterly half yearly and annually statement of accounts…
The amount that can be raised is limited expending upon the borrowing power of the company expending upon the borrowing power of the company
Not less than 35% or N150, 000 (one hundred and fifty thousand naira) of their issued share capital must be available to the public.
Despite the final requirement size companies could not be meet the requirement which led to further revision of the listing requirement without compromising standard and by 30th April 1985 the second tier securities market was launched with following listening requirements
The companies must have years trading record
Latest audited report not be more than nine months
A flat change of N2,000 (two thousand naira) per annual
The amount that can be raised may not exceed N5million.
Companies to submit half yearly and annual statement of accounts.
Number of shareholders not less than one hundred
At least 10% or N50,000 (fifty thousand naira) of the equity capital to be made available to the public no single shareholders to have more than 75% of the issued share capital
2.2.4 DETERMINANT OF ASSET PORTFIOLIO CHOICE
As earlier noted, first bank as a commercial banks, portfolio choice is not by accident but rather a matter of capital design,.
Therefore, for this purpose, we will classify these determining factors under the following heading.
Management factors
Government factors
Economic factors
Environmental factors
2.2.5 MANAGEMENT FACTORS
Management factors are regarded as factors that are under the control of management (bank) hence management would evaluate the following factors before selecting portfolio mix.
Liquidity consideration: the ability of management to convert an asset into cash within a relatively short period of time with minimum capital relatively the transaction would determine is asset portfolio choice. Hence financial assists are generally preferred to real estates.
Ease of management in view hirt and block (1993) the easier it is of manage a potolio the more readily the management select it’.
Eyere Methuen (1975) stated that even where you do not have the time or inclination to manage your own portfolio, provided you can get experts such as unit trust, investment trust, stockbroker, tutee department and other independent firms to manage such investment:.
Capital appreciation: management decision would depend also on its aim in acquiring the assets is if the intention to trade on the investment or to permanently own the share in such venture in which they invest. Safety pandy (1978) believed that management would invest in the highest yielding marketable securities subject to the constraints that the securities have an acceptable level of risk which implied that to reduce the risk invention should invest in a relative safe securities. He also noted that the time period over which interest and Principal are to be repaid as an important factor in determining assets portfolio choice. This means that for any particular investment management could have to take into consideration its maturity data
