Liquidity Management and Bank Profitability: A Study of Selected Commercial Banks with National and International Authorizations in Nigeria

Abstract

With profitability objectives conflicting with liquidity objectives of banks, there is need to reconcile these conflicting positions through effective liquidity management so as to ensure the survival and growth of  banks and to prepare them against probable financial challenges. This paper examines the link or nexus between liquidity management and bank profitability in Nigeria. An ex-post facto research design was employed as relevant data were collected from the annual report of affected banks and the CBN statistical bulletin for the period 2006 to 2019.  A total of 6 variables, split into 3 dependent and 3 independent variables were used in the study. The profitability ratios constitute the dependent variables. They are Return on Equity (ROE), Return on Assets (ROA) and Profit after Tax (PAT) while the Liquidity management ratios that make up the independent variables include Cash Ratio (CAR), Loan to deposit ratio (LTDR) and Loan to Assets ratio (LTAR). A panel data analysis involving the use of Generalized Least Square (GLS) method on a time series data with 14 observations and 10 cross sections were used to ascertain relationships. Outcome of the study indicates that, the coefficient of liquidity management ratios had a mixed bag relationship with profitability ratios of selected commercial banks - While some had a positive impact, others were negative. However, in return to equity (ROE) equation, it maintained a strictly negative relationship with loan to asset ratios (LTAR) of all the selected commercial banks except for Sterling bank. It was also a mixed bag scenario with other profitability ratios and the panel cross section fixed effects. Conclusively, it could be said that the actual sway of each policy is a function of other endogenous variables inherent in each bank. For example, how come it was only Stirling Bank that sustained a positive interface between return to equity and loan to asset ratio as a liquidity management tool? The answer to this question is not farfetched as every level of liquidity has a different effect on the level of profitability. It is thus recommended that Banks should evaluate and redesign their liquidity management strategies so that it will not only optimize returns to shareholders equity but also optimize the use of the assets. In this regard, the current liquidity management policies as put forward by the central bank of Nigeria should be sustained as they are helping to mop up excess liquidity.  In a situation where a bank is experiencing excess liquidity crises, the following lines of action should be considered - such excesses should be invested in profitable financial outlets and in the real sectors at home or abroad. Again, such excesses could be used for expansion, where there is a positive synergy for such an expansion but where these are not feasible then, the bank should lodge in such excesses with the Central Bank of Nigeria.

Keywords: Profitability ratio, Liquidity ratio, Return on Equity, Return on Assets, Profit after Tax, Cash Ratio, Loan to deposit ratio, Loan to Assets ratio.

DOI: 10.7176/RJFA/12-20-01

Publication date:October 31^st 2021