Effect of Covid-19 on the Banking Sector
Chapter One
PURPOSE OF THE STUDY
- To determine the impact of Covid 19 on the profitability of First Bank
- To examine the performance of Other banks is compared to First Bank during the pandemic.
CHAPTER TWO
LITERATURE REVIEW
Corona Virus Infectious Disease-2019(COVID-19)
WHO (2020) defines, Coronavirus disease (COVID-19) is an infectious disease caused by a novel Coronavirus, a cluster of pneumonia. It is a mild to moderate respiratory illness that can be recovered without requiring special treatment. Older people and those with underlying medical problems like cardiovascular disease, diabetes, chronic respiratory disease, and cancer are more likely to develop serious illness (WHO, 2020). Still, there are no specific vaccines or treatments for COVID-19. Some countries, universities, and research centers invented COVID-19 vaccines; however, all of them are in the different phases of their trials. The virus spreads primarily through droplets of saliva or discharge from the nose when an infected person coughs or sneezes. So, WHO recommends maintaining physical distancing among people for preventive measures.
The very first case of COVID-19 was detected in Wuhan City, Hubei Province of China on 31 December 2019. As of 3rd January 2020, a total of 44 patients of COVID-19 cases reported 11were severely ill in Wuhan City and spread all over the world (WHO, 2020). WHO declared COVID-19 as Public health emergency of international concern (PHEIC) on 30th Jan of 2020 and it declared COVID-19 Global Pandemic on 11th March of 2020 (MOHP, 2020).
The first case of 2019-COVID-19 was confirmed in Nigeria on 23 January 2020 (MOHP, 2020). The second case was found after two months on March 22, 2020, in a student who was returned from France via Doha, Qatar (MOHP, 2020).
Banks risk premium during the crisis
We begin our analysis by comparing the stock price returns of banks with their overall domestic markets during the first months of the year (Panel A of Figure 1). By mid-February, the performance of banks and non-bank firms began deteriorating as a result of the pandemic with downward trajectories that followed each other closely. By late March, the stock prices of firms and banks had dipped to less than 70 and 60 percent of their initial levels of the year, respectively.
Thereafter, non-bank firms began improving their performance in a steady rise, reaching almost 90 percent of their initial year levels by the beginning of May. However, such recovery was not experienced by banks, whose stock returns remained 70 percent below their initial year levels. This bank risk premium suggests that markets expect banks to absorb part of the losses of the corporate sector.
With the surge of the crisis, banks have underperformed not only relative to the market, but also relative to other financial companies. Panel B of Figure 1 zooms in on the sample of financial companies to compare the stock price returns of banks and non-bank financial firms. While banks and non-bank financial firms had a similar drop in their returns by end of March, in the following month banks underperformed other non-bank financial firms. This evidence further confirms that the drop in stock prices is not inherent to all financial firms but exclusive to banks, as investors appear to price the excess pressure that the banking sector is experiencing.
The bank risk priced-in by the market appears to vary across bank characteristics. Even though banks on average underperformed the market and other non-bank financial companies, private banks fared better than public ones (Panel A of Figure 2). Similarly, banks with greater cash holdings one year prior to the pandemic (i.e., banks above the 2019 median cash-to-total assets ratios) showed a superior performance than less liquid banks (Panel B of Figure 2). Ex-ante exposure to the oil industry also appeared to have imposed an extra burden for banks (Panel C of Figure 2). Banks with greater exposure to the oil sector (i.e., banks above the 75th percentile distribution of oil exposure) experienced lower returns after the COVID-19 crisis than less exposed banks. Somewhat surprisingly, the returns of smaller banks (i.e., banks below the 2019 median mean assets) outperformed those of larger banks after the large drop in stock prices of late March (Panel D of Figure 2). In terms of capital, investors did not appear to price the excess risks more heavily in lower capitalized banks (i.e., banks below the 2019 median Tier 1 capital ratio), as Panel E of Figure 2 shows.
To test more rigorously the existence of a banking sector premium, we use regression analysis to examine the accumulated abnormal stock returns of banks during the crisis. Abnormal returns are the difference between realized returns and the expected returns implied by a market model.
CHAPTER THREE
RESEARCH METHODOLOGY
Research method
Research is used to investigate facts, reconfirm the results of previous experiments, provide solutions to new issues, and support theories (Apuke, 2017). It involves collecting, analyzing, and interpreting data to thoroughly understand events, incidents, facts, or situations (Leedy & Ormrod, 2001). Research stems from answering questions about phenomena (Apuke, 2017). Research investigates these issues by critically collecting data, analyzing, and discussing the results to draw inferences or conclusions (Williams, 2005). Research methods as the holistic steps that researchers take when starting their research work (Leedy & Ormrod, 2001). Therefore, a quantitative research method is usually adopted by the researchers to deal with quantifying and analysis variables to get results. It involves the use of numerical data using specific statistical methods and the skills of analyzing and answering questions (Apuke, 2017).
Also, quantitative research methods explain problems or phenomena by collecting data in numerical form and analyzing them with the help of mathematical methods, especially statistics (Aliaga & Gunderson, 2002). In this study, the quantitative research method is adopted to address the research questions and test the hypotheses. Furthermore, the quantitative research involves collecting data to quantify and statistically process information to support or refute alternative knowledge claims (Williams, 2011). Therefore, the numeral data of my research are collected and analyzed using statistical methods in this paper.
CHAPTER FOUR
DATA ANALYSIS
OLS regression model
Table 1 presents the ordinary least square (OLS) estimations examining the effects of the COVID-19 pandemic on the financial performance of First Bank. The result shows that the coefficient of CASES is significantly (p-value is 0.0001 < 0.05) and negatively (-0.397) associated with ROA measuring bank financial performance. This result supports the first hypothesis (H1) of my study and provides primary evidence that the eruption of COVID-19 has significantly reduced the profitability of First Bank. Therefore, the first hypothesis (H1) cannot be rejected.
In addition, the coefficient of CAR is positively (0.098) and significantly (p-value is 0.0354 < 0.05) associated with ROA. This implies that ROA increases as CAR increases. This result supports research conducted by Athanasoglou, Brissimis and Delis (2008) and Bitar, Pukthuanthong and Walker (2018), which state that the CAR has a positive effect on ROA. However, I find that the NPL, LDR and ER have had insignificant effects on ROA, which is inconsistent with the studies of Elekdag, Malik and Mitra (2020) and Athanasoglou, Brissimis and Delis (2008).
CHAPTER FIVE
DISCUSSION AND CONCLUSION
Discussion
The financial performance of First Bank during the COVID-19 pandemic
This study applied the descriptive and analytical techniques to investigate the impact of the COVID-19 pandemic on the banking industry in Nigeria. The aim of this study is to investigate whether the COVID-19 pandemic affects the financial performance of First Bank, as well as the differences in the financial performance of First Bank during this pandemic. To answer my first research question, whether the pandemic has a significant impact on the profitability of First Bank. The findings revealed that the coefficient of CASES is significantly and negatively associated with the ROA of First Bank. This implies that the COVID-19 outbreak has significantly reduced the profitability of First Bank. This result is in line with Kunt, Pedraza, and Ortega (2021) and Colak and Öztekin (2021) who also found that the COVID-19 pandemic has an adverse impact on banks. In particular, this finding confirms the results of Elnahass, Trinh and Li (2021) finding that both banks in these Nigeria have been negatively affected by the pandemic.
The second research question of this study is to investigate whether the financial performance of Other banks is better or worse than that of First Bank during the pandemic. The results of the OLS regression analysis show that the dummy variable US is insignificant, however, the variable is significant after interacting with the CASES variable in the moderation analysis. The results show that the moderator CASES has a significant and negative effect on the relationship of First Bank to ROA. This implies that the financial performance of First Bank was affected by COVID-19, and Other banks performed better than First Bank during the pandemic. These findings provide strong empirical evidence and complement for the analysis of Elnahass, Trinh and Li (2021), suggesting that the financial performance of Other banks is better than that of First Bank during the COVID-19 period.
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