Asset Quality and Profitability of Commercial Banks: Evidence from Nigeria

Abstract

This study examined the relationship between asset quality and the profitability of the fifteen (15) quoted commercial banks in Nigeria from 1980 – 2013. The objective was to investigate the relationship between CAMELS criteria for asset quality and the profitability performance of Nigerian commercial banks. Secondary data were sourced from annual reports of the quoted commercial banks. Return on Investment (ROI) was modeled as the function of percentage of non-performing loans to Total Loans (NPL/TL), percentage of Non-performing Loans to Total Customers’ Deposit (NPL//TCD), percentage of Loan Loss Provision to Total Loans (LLP/TL) and percentage of Loan Loss Provision to Total Asset (LLP/TA). Multiple regressions with econometric view statistical package were used as data analysis method. The Ordinary Least Square properties of Augmented Dickey Fuller Test, Co-integration and Granger Causality test were employed to determine the short and long –run relationship between the dependent and the independent variables. Findings from the regression result proved that percentage of non-performing loans to Total Loans and percentage of non-performing Loans to Total Customers’ Deposit have positive relationship with Return on Investment while percentage of Loan Loss Provision to Total Loans and percentage of Loan Loss Provision to Total Asset have negative relationship with Return on Investment of the commercial banks. The Unit Root test shows stationarity of the variables in order of 1(1), the co-integration reveal long run relationship between the variables while the granger causality reveals no causal relationship among the variables. The model summary proved that the independent variables can explain 65.5% variation on the dependent variables while the F-statistics of 12.508477 and the probability of 0.000008 proved that the model is significant.  The study concludes that there is significant relationship between asset quality and the profitability of the commercial banks. It recommends that bank lending environment should be well examined before and after credit and the regulatory authorities should ensure sound bank lending environment to avoid the incidence of non-performing loans to enhance the profitability of commercial banks in Nigeria.

Keywords: Asset Quality, Commercial banks, Profitability