Asset Quality Correlates and Financial Performance of Commercial Banks in Nigeria

Abstract

In this study, we examine asset quality correlates and financial performance of commercial banks in Nigeria within the panel data framework using yearly data for a period of eleven years from 2005 to 2016. A sample of 15 commercial banks are used including Access Bank, Diamond Bank, Eco bank, Fidelity Bank, First Bank, First City Monument Bank, Guarantee Trust Bank, Skye Bank, Stanbic IBTC, Sterling Bank, United Bank for Africa, Union Bank, Unity Bank, Wema Bank and Zenith Bank. Capital adequacy ratio is the dependent variable while loan loss provisions and non-performing loans both serve as explanatory variables. Bank deposit base and total assets are used as control variables. When the three conventional panel data methods (pooled regression, fixed effects and random effects methods) are estimated, the results show that both fixed effects and random effects models have specification problems while the pooled regression is well-behaved.  Based on the results of the pooled regression model, there is evidence that non-performing loans and loan loss provisions both have in significant relationship with bank profitability. However, while the effect of non-performing is negative, the effect of loan loss provisions is positive. There is also evidence that and total assets and deposit base have highly significant relationship with bank profitability. Again, while total asset exhibits positive relationship, deposit base exhibits negative relationship.