Portfolio Management and Profitability of Commercial Banks

Andrews Doeh Agblobi,Oscar Tornam Yaw Kuhorfah,Prisca Asamoah

doi:10.11648/j.jbed.20200504.17

Andrews Doeh Agblobi, Oscar Tornam Yaw Kuhorfah + Show 1 more

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https://doi.org/10.11648/j.jbed.20200504.17

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Abstract

Banks optimally invest to earn profit as they consider the associated risks with such portfolio management. Portfolio management is a medium by which the banks hold investment due from other banks, purchase Government securities and invest in subsidiaries. This paper investigates the effect of banks’ portfolio management on profitability. Five commercial banks that are listed on the Ghana Stock Exchange were randomly selected for the study. Data on the total market value of Government securities, investment in subsidiaries and due from other banks were collected from the Bank of Ghana and the Ghana Stock Exchange between 2008 and 2017. As panel study, we regress portfolio management on profitability. The findings show that holding of government securities and investing in subsidiaries have a significant positive effect on the profitability of banks in Ghana. The findings also show that non-performing loans have a significant negative effect on the profitability of the banks. Therefore, it is recommended that banks should develop a balance between holding government securities and investing in subsidiaries to improve upon its profitability. The banks should also double their efforts to reduce their non-performing loans by enhancing the skills of its officers, strengthening its due diligence procedures and intensify monitoring activities.

Highlights

The paper investigates the relationship between portfolio management and profitability of commercial banks
Where yt is the profitability of banks, sigma ( ∑ πt ) denotes portfolio management which is measured as a collection of asset classes held by the bank to include government securities, investment in subsidiaries and due from other financial institutions
The findings suggest that holding of Government Securities, investment in subsidiaries, due from other financial institution affect the profitability of the banks

Summary

Introduction

The paper investigates the relationship between portfolio management and profitability of commercial banks. Portfolio management is increasingly an important aspect of banking such that individual banks as well as financial institutions structure their collection of assets in a manner that will add value to their investments. The construction of an efficient portfolio enables banks to diversify their risks and improve their earnings ability [14, 12]. Between 2017 and 2019, about 435 banks and other deposits taking institutions collapsed in Ghana. The Bank of Ghana and Securities and Exchange Commission (SEC) that regulate these financial institutions stated that the institutions’ inability to meet the minimum capital requirement, poor corporate governance, liquidity problem and high default risk, as well as poor assets management, caused the revocation of their licenses. As at the end of 2019, there was a total of 23 Commercial Banks in Ghana, a dropped from 34 banks in

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