Determinants of Deposit Money Banks Profitability in Nigeria

Abstract

This study analysed the significant determinants of deposit money banks‟ profitability in Nigeria and developed profitability prediction models thereof. The study adopted a combination of expost facto and survey designs in data collection, while quantitative and qualitative tools were employed in data analysis. The BASEL III accord provided the basic framework that guided the investigation. CAMELS index in addition to two industry drivers (bank size and market share) and one macroeconomic driver (cyclic output growth rate of the economy) were employed during preliminary investigation. Eight (8) deposit money banks formed the sample size, out of which six (6) (United Bank for Africa Plc, Access Bank Plc, GTBank Plc, First Bank Plc, Union Bank Plc and Wema Bank Plc) formed the analysis group, while, two (FCMB Plc and Diamond Bank Plc) formed the hold out group. The qualitative analysis included descriptive statistics of expert opinions, while quantitative analysis were econometric analysis (Augmented Dickey Fuller test, Vector autoregression, Granger causality test, Johensen cointegration test and ordinary least square) of financial statement ratios. The result of the econometric investigation identified assets quality (p-value: 0.003), liquidity (p-value: 0.035) and earnings quality (p-value: 0.0001) as the critical determinants of bank profitability in Nigeria. Application of the developed model to the holdout sample banks achieved 72.14% and 76.31% accuracy in predicting actual profit after tax of FCMC and Diamond bank respectively. The reliability of the developed profitability model was further validated through a Chow structural break stability test of effect of the 2004 bank consolidation policy of the Central bank of Nigeria. The result showed that the model did not experience structural breaks at year 2005, being the point when the policy was fully implemented. Equally, the result of qualitative analysis based on mean weighted scores, identified asset quality (4.68), earnings quality (4.50) and liquidity (4.01) on a 5-point maximum value as three critical determinants of deposit money bank‟s‟ profitability. The study concluded that irrespective of industry and macroeconomic conditions, deposit money bank‟s‟ can remain profitable, if adequate internal capacity is built for effective management of scare resources available to the bank.