Determinants of Banks Profitability: Evidence from Nigeria Banking Industry

Abstract

The study, investigated determinants of banks profitability in Nigeria. Other studies in this area concentrated on other profitability notions, this study incorporated Economic Value Added (EVA). Due to the presence of endogeneity problems inherent in most panel data sets of this nature we employed a two-step system GMM estimator to produce a robust estimation and account for the endogeneity problem in the data. The study revealed that bank size has a positive and significant impact on all measures of bank profitability with the exception of Net Interest Margin (NIM). This result remained consistent after macroeconomic factors were introduced in the model. The outcome also indicated that capital adequacy significantly explains bank profitability in Nigeria, with a sign change in the case of Economic Value Added (EVA) only. It was also evident that financial structure (FS) has a positive and significant impact on Return on Assets (ROA), NIM, and EVA but no evidence of significant relationship was found with ROE. The result indicated that liquidity risk (LR) has a negative and significant impact on ROA and EVA but failed to provide a significant impact on ROE and NIM. The result of the macroeconomic factors included in the model indicated that Gross Domestic Product (GDP) has a positive and significant impact on NIM and EVA while no significant relationship was found when related to ROA and ROE. Inflation as a macroeconomic variable showed a significant relationship with ROA and ROE with no evidence of significant relationship with NIM and EVA. It was concluded that the impact of firm specific factors and macroeconomic variables on the profitability of the Nigerian banking sector differ according to the profitability measure employed.