Evaluating Bank Profitability in Ghana: A five step Du-Pont Model Approach

Abstract

<p><em>We investigate bank profitability in Ghana using periods before, during and after the globe financial crises with the five step du-pont model for the first time. We adapt the variable of the five step du-pont model to explain bank profitability with a panel data of twenty-five banks in Ghana from 2006 to 2012. To ensure meaningful generalization robust errors fixed and random effects models are used.Our empirical results suggests that bank operating activities (operating profit margin), bank efficiency (asset turnover), bank leverage (asset to equity) and financing cost (interest burden) were positive and significant determinants of bank profitability (ROE) during the period of study implying that bank in Ghana can boost return to equity holders through the above mentioned variables.. We further report that the five step du-pont model better explains the total variation (94%) in bank profitability in Ghana as compared to earlier findings suggesting that bank specific variables are keen in explaining ROE in banks in Ghana. We cited no empirical study that has employed five step du-pont model making our study unique and different from earlier studies as we assert that bank specific variables are core to explaining bank profitability.</em></p>