Analysis of Critical Determinants of Commercial Banks Profitability: Evidence from Nigeria

Abstract

This study investigated the critical determinants of commercial bank profitability in Nigeria. The objective was to develop empirical models for predicting commercial bank profitability. The study adopted a combination of ex-post facto and survey research design in data collection and analysis, while quantitative and qualitative tools were employed in data analysis. The CAMELS performance basket provided the framework that guided the investigation. Two industry drivers (bank size and market share) and one macroeconomic driver (cyclic output growth rate of the economy) were included into the CAMELS basket. The quantitative approach made use of descriptive statistics and set of econometric tools in the analysis. The result of econometric analysis identified assets quality, liquidity and earnings as the significant determinants of commercial bank profitability in Nigeria. The result of the qualitative analysis based on expert opinion equally identified asset quality, earnings and liquidity as three top determinants of commercial bank profitability. This also validates the result of quantitative analysis. The study concludes that irrespective of whatever is the industry and macroeconomic state of the economy, commercial banks’ ability to remain profitable, strictly dependent on the capacity of internal management to invest the banks resources into quality assets that affords the bank the opportunity to maintain optimal liquidity and generate earnings sufficient to offset all associated cost of doing business as well as create positive margin adequate to reward shareholders. Based on the above conclusion, the study recommends for increased capacity building (technical and managerial) of internal managers of commercial banks in Nigeria for enhanced strategic, tactical and operational planning and management of banks.