Sahel Analyst (AJOM): ISSN 1118- 6224 Page 65 DETERMINANTS OF BANKS FINANCIAL PERFORMANCE: EVIDENCE FROM SEVEN COMMERCIAL BANKS IN NIGERIA Hudu Gambo 1 [email protected]Ahmad A. Maiyaki 1 [email protected]Muktar S. Aliyu 1 [email protected]Abstract This research work was undertaken to empirically investigate the determinants of firm’s financial performance of listed deposit money banks (DMBs) in Nigeria. Annual data covering the study period of 2013 – 2017 from seven (7) sampled commercial banks were obtained from the Nigerian Stock Exchange publications, Central Bank of Nigeria statistical bulletins, the Securities and Exchange Commission bulletins and the published annual accounts of DMBs. Panel data methodology was employed while the random effects model was chosen as estimation technique against fixed effect. The results revealed that capital adequacy, liquidity management and firms' size were positive but insignificantly influencing returns on equity, assets quality and dividend payout ratio were found to be negative and statistically insignificant with returns on equity while management efficiency and leverage was found to be negative but statistically significant with return on equity. Therefore, it is recommended that the management of deposit money banks in Nigerian banking industry especially the Central bank of Nigeria as supervisory body regulating banking activities, should urgently have a review on capital adequacy requirements as specified in the prudential guidelines as the regression results has shown that poor capital adequacy, inadequate liquidity management has also resulted in poor financial performance and also banks should focus on improving and maintaining high level and profitable liquidity management and efficiency to enhance their performance. Keywords: Firms, Financial performance, Deposit money banks, Nigeria 1 Department of Business Administration and Enterpreneurship, Bayero University, Kano. Nigeria
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The above correlation matrix table shows the association between all
the pairs of variables in the regression model. The result reveals a mixture of
positive and negative correlations between the explanatory variables and
dependent variables as used in the study. The results shows LM and firms
size has a positive relationship with returns on equity in the Deposit Money
Banks in Nigeria during the period of the study while the rest of the
explanatory variables negatively correlated with ROE. As seen in table 2. The
CA, AQ, ME, DPR, and LEV are having a negative correlation coefficient
with ROE at -0.1662, -0.0837, -0.0773, and -0.1041 respectively. While ML
and firms' size has a positive relationship with ROE at 0.0504 and 0.2369
respectively.
Table 3: Regression Results
Variables Coefficient t- value p-value Tolerance value VIF
Constant 0.9371492 0.94 0.356
CA 0.0015017 0.51 0.612 0.178499 5.60
AQ -1.61988 -2.67 0.508 0.581084 1.72
ME -0.3029571 -2.49 0.019 0 .788115 1.27
LM 0.1080559 0.13 0.897 0 .668018 1.50
DPR -0.0530163 -0.23 0.819 0.885710 1.13
LEV -1.2631432 -4.27 0.000 0.735280 1.36
FIRMSIZE 0.0801151 0.84 0.407 0.159613 6.27
R2 0.4712
Adjusted R2 0.3340
F- Stat 3.44
F- Sig 0.0093
R2 :Within 0.3136
Between 0.9741
Overall 0.4712
Rho 0
Lagrangian test 1.0000
Hausman test 0.9980
Source: STATA Output 2018
African Journal of Management (Vol.3, No.5 2018), Business Admin. University of Maiduguri
Sahel Analyst (AJOM): ISSN 1118- 6224 Page 74
Prior to design panel data models, it is necessary to verify the
problem of multicollinearity between independent variables (Burca and
Batrinca, 2014, p. 304). The Variance Inflation Factor (VIF) is a commonly
used for testing the multicollinearity problems. It shows the degree to which
each independent variable is explained by other independent variable. As a
rule of thumb, a VIF greater than 10 indicates the presence of harmful
collinearity (Gujarati, 2003). Table 4 shows the Variance Inflation Factor
(VIF) of all the variables of this study. The results show that VIF for all the
variables are less than 10 and the problem of multicollinearity is not present
in the model.
The commutative association between the regressed and the
regressors is 0.4712 indicating that the relationship between banks' specific
determinants and returns on equity used in the study accounts for about .47%.
This implies that for any change in banks' specific determinants in deposit
money banks in Nigeria, their returns on equity will be directly affected. The
cumulative adjusted R2 (0.3340), which is the multiple coefficient of
determination, gives the percentage of the total variation in the dependent
variable explained by the explanatory variables jointly. Hence, it signifies that
the explanatory variables of banks' specific determinants as used in the study
caused 33% of total variation in returns on equity in deposit money banks in
Nigeria during the period of the study. This indicates that the model is fit and
the explanatory variables are properly selected, combined and used in the
study as proved by the 1% level of significance while 67% was caused by
other factors not included in the model.
Ho1: In testing the hypothesis one about the relationship between CA
and Returns on Equity (ROE) in Deposit Money Banks in Nigeria, a t-value
was obtained from the OLS regression model for financial performance
(ROE) at 0.51 and a beta coefficient of 0.1554003 were given by the
regressions which is positive but statistically not significant. This signifies
that as CA increase, financial performance increases as measured by ROE
with no significant effect. However, the null hypothesis is rejected. The
findings are consisted with that of Tefera (2011), Fan and Yijun (2014),
Singh, (2015).
Ho2: To test the hypothesis which states that There is no significant
effect between assets quality and Return on Equity (ROE) of DMBs in
Nigeria also a t-value was obtained from the OLS regression model for
financial performance (ROE) at -2.67 and a beta coefficient of -1.61988 were
given by the regressions which is negative and statistically not significant.
This indicates that as AQ increases, the financial performance reduces as
measured by ROE with no level of significance. However, the null hypothesis
is accepted. The findings is consistent with Awo and Akotey (2011), Ana et.
al (2011), Ramadan et. al (2011), Darydenko (2010), Vong and Chan (2007).
This is a strong indication that banks needs to work on their loan
Determinants of Banks Financial Performance: Evidence from Seven Commercial Banks
in Nigeria policy
Sahel Analyst (AJOM): ISSN 1118- 6224 Page 75
disbursement. This was contrary with the findings of Darydenko (2010),
Ramadan (2011) but consistent with Alper and Anbar (2011) who found that
assets quality do not have a significant and positive impact on bank’s Return
on equity.
Ho3: In testing this hypothesis which stated that there is no significant
effect between Management efficiency and Return on Equity (ROE) of
DMBs in Nigeria, a t-value was obtained from the OLS regression model for
financial performance (ROE) at -2.49 and a beta coefficient of -0.3029571
were given by the regressions which is negative but statistically significant at
10% level. This signifies that as ME increases, the financial performance
increases as measured by ROE with 10% level of significance which formed
the bases for accepting the hypothesis. This findings is in line with the
findings of Ongore and Kusa (2013), Haron, 2004) but contradict that of
Farooq, et-al, (2015) and Kinyuai (2017).
Ho4: There is no significant effect between Liquidity management
and Return on Equity (ROE) of DMBs in Nigeria. In testing this hypothesis,
a t-value was obtained from the OLS regression model for financial
performance (ROE) at 0.13 and a beta coefficient of 0.1080559 were given
by the regressions which is positive but statistically no significant effect with
financial performance measured by ROE. This indicates that as LM increases,
financial performance increases with no significant level. The null hypothesis
were rejected. This study is in line with that of Ongore and Kusa (2013).
However, contradict the study conducted by Ramadan, Kilani and Kadduni,
(2011).
Ho5: There is no significant effect of Dividend Payout Ratio (DPR)
on Return on Equity (ROE) of DMBs in Nigeria. In testing this hypothesis, a
t-value was obtained from the OLS regression model for financial
performance (ROE) at -0.23 and a beta coefficient of -0.0530163 were given
by the regressions which is negative and statistically insignificant effect with
financial performance measured by ROE. This result is not surprising as the
researcher expects that dividend payout ratio will influence returns on equity
positively and significantly. This signifies that as DPR decreases, the
financial performance also decreases at the same proportion. This serves as an
evidence to accept the null hypothesis. The results is also it is inconsistent
with dividend relevancy theory while it supports dividend irrelevancy theory.
The findings is in agreement with that of Smits (2012); Al-Hasan (2013);
Abdelwahed (2014) while Adediran (2013); Yegon, et al (2014) and Adediran
and Alade (2013) found no statistically effect on firms' performance.
Ho6: To test the hypothesis which states that leverage has no
significant relationship with returns on equity in deposit money banks in
Nigeria, a positive and statistically strong significant effect was established.
The regression results give a t-value of -4.27 and beta coefficient value of -
1.2631432 which is at highly significance at 10%. This result is not surprising
African Journal of Management (Vol.3, No.5 2018), Business Admin. University of Maiduguri
Sahel Analyst (AJOM): ISSN 1118- 6224 Page 76
as it is not in variance with the researchers expectations. Thus, the hypothesis
of the study is hereby rejected. The result also affirms pecking order theory.
This results supports the findings documented by Antwi, Mills and Zhao,
(2012), Ahmad, Abdullahi and Roslan (2012). Conversely, the results
disagreed with that of.Rayan (2008), Ogbulu and Emeni (2012) and Lawal
(2014).
Lastly, in examining the influence between firms size and returns on
equity in deposit money banks in Nigeria, a t-value of 0.84 and a coefficient
of 0.0801151 was given by regression result which shows a positive but
statistically insignificant. This signifies the larger the firm size, the better will
be the returns on equity but insignificant. The result formed the basis of
failing to reject the hypothesis which states that firms size has no significant
influence on returns on equity in deposit money banks in Nigeria. This
findings support that of Rizqia and Sumiati (2013); Rajhans and Kaur (2013).
In contrast, it disagrees with the one documented by Hemmelgarn and
Teichmann (2013) .
Conclusion and Recommendation
The study examines banks' specific determinants of seven (7) listed
deposit money banks in Nigeria using regression model with panel data for a
period of five year, 2013-2017. The study reveals that banks' specific
(Internal) factors are important to the bank financial performance in Nigeria .
Among the bank internal factors, Management efficiency and Leverage are
positively and strongly significant factors for determining DMBs financial
performance in Nigerian banking industry while Capital adequacy, Asset
quality, Liquidity management, Dividend payout ratio and Firms' size were
found to be insignificant factor in influencing the financial performance of
DMBs in Nigeria. Therefore, it is recommended that the management of
deposit money banks in Nigerian banking industry especially the Central
bank of Nigeria should urgently have a review on capital adequacy
requirements as specified in the prudential guidelines as the regression results
has shown that poor capital adequacy has also resulted in poor financial
performance and also banks should focus on improving and maintaining high
level and profitable liquidity management and efficiency to enhance their
performance.
Limitation and Suggestion for Future Research
This study limited to only specific factors in DMBs performance for
period of five year, similar research should include other external variables
such as inflation rate and market structure behaviour and the like for robust
conclusions and policy prescriptions. The current study adopts secondary data
primarily obtained from the seven selected DMBs' financial statements, other
studies on bank specific determinants and financial performance measures
Determinants of Banks Financial Performance: Evidence from Seven Commercial Banks
in Nigeria policy
Sahel Analyst (AJOM): ISSN 1118- 6224 Page 77
should incorporate the use of primary data and the period of the study can be
extended to empirically examine the same issue.
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