An empirical assessment of the determinants of bank profitability in Nigeria: Bank characteristics panel evidence

Abstract

Given the recent developments in the Nigerian banking industry, only a profitable banking sector is better able to withstand negative shocks and contribute to the stability of the financial system. This assertion compels an in depth investigation of the determinants of the profitability of deposit money banks in Nigeria. Our data set is made up of 147 bank level observations over a 10-year period from 2001 to 2010 in respect of 15 banks that satisfied the study requirements. Data were obtained from the annual reports and accounts of the sampled banks. Pooled OLS (Pooled ordinary least square) stated in a multiple regression form was used to estimate the coefficients. Major outcomes of the analysis include that increase in size (higher total assets) may not necessarily lead to higher profits due to diseconomies of scale; higher capital-assets ratio and loans and advances contribute strongly to bank profitability. Overall, the paper suggests bank size, capital and asset composition as the major endogenous determinants of bank profitability in Nigeria. Key words: Profitability, bank size, asset composition, liquidity, capital adequacy