Determinants of Profit in the Nigerian Banking Sector

Abstract

The broad objective of this study is to investigate the determinants of profit in the Nigerian banking sector.The study employed a panel research design, with bank specific and macroeconomic data sourced from annual reports and Central Bank of Nigeria Statistical Bulletin covering the period 2006 to 2012. The data panel were analyzed using Ordinary Least Square (OLS) statistical technique. Conventional diagnostic tests of normality, multicollinearity, heteroskedasticity, autocorrelation and misspecification were conducted. In conducting the estimation of bank specific and macro-economic characteristics and bank profit, the significant variables from fixed effect estimation of preliminary baseline regressions were extracted and regressed on PCAINDEX and TOBINS’ Q and the findings are: capital adequacy, economic stability, money supply, inflation rate, lending interest rate and exchange rate were statistically significant at 5% level of significance on PCAINDEX and TOBIN’S Q respectively, although the strength of their impact was not the same. Total loans and advances were not statistically significant on PCAINDEX. The study also shows that the differences between the forecasting measures for bank specific conditions and macroeconomic conditions are not convincing enough to conclude on which model has higher forecasting ability for banks profitability. We therefore recommend that there is the need for sensible macroeconomic and bank specific characteristics management as the findings have revealed the sensitivity of banks profitability indices to both macroeconomic and bank specific factors.

Keywords: Profit, determinants, capital adequacy base and economy stability.