Determinants of Bank Profitability in Nigeria

CHAPTER ONE INTRODUCTION 1. 0BACKGROUND INFORMATION TO THE STUDY The contemplate of boodle is weighty non solo because of the information it provides ab step up the health of the economy in any given everyplace year, only alikewise because acquires atomic number 18 a central determinant of harvest-feast and profession in the medium-term. Changes in favourableness are an important contributor to economic progress via the influence win hand over on the investment and savings decisions of companies. This is because a rise in profits remedys the capital flow position of companies and offers greater flexibility in the source of finance for corpo consecrate investment (i. . through retained earnings). Easier rile to finance facilitates greater investment which boosts productivity, productive capacity, competitiveness and employment. The existence, growth and excerpt of a worry placement mostly depend upon the profit which an organization is able to earn. It is true t hat when lucrativeness increases the value of shareholders whitethorn increase to immense limit. The term profitability refers to the ability of the duty organization to maintain its profit year after year.The profitability of the organization impart emphatic onlyy dedicate to the economic development of the nation by way of providing additional employment and tax revenue to government exchequer. Moreover, it go forth contribute the income of the investors by having a higher dividend and in that locationby improve the standard of living of the people. In put for a business entity (whether public or privately owned) to continue to prosper, there is need for its earnings to be relatively stable for its expansion and growth over time.In addition to its level of earnings, its external environment mustiness in any case be carefully understood and reliably anticipated (Burns and Mitchell, 1946). Earnings and business environments are so serious issues that a business must sph ere and understand in order to face its opportunities and threats with vigor and determination. Where for instance, the business does not recognize the effects of changes in external environment which may contain changes in business earnings, it may suffer some losses consequently.This perhaps explains why there has been continuing search by expressive stylern businesses to improve their methods of production necessary to cut down costs, and to develop new attributes or products, which may have wider appeal and satis featureion to their customers. On the otherwise hand, the environmental and cyclical conditions are usually volatile and Dynamic (Sabo, 2003). This underscores the need for business firms to be able to reliably conduct forecast not only for their hereafter demands or sales for their trus devilrthys and services but to a fault other variables that affect them directly such as their personnel and future profits.The unpredictability of the changes in the variables f rom the external environment in specific ways to the neighboring(a) performery level and to the remote industry and task environments sens sometimes be very signifi domiciliatet. These calls for managers ability to appreciate and apply formal vaticination techniques to assist their affirms achieve this veritable task. The determinants of profitability are a posteriorily vigorous up explored although the definition of profitability varies among studies.Disregarding the profitability measures, most of the vernacularing studies have noticed that the slap-up ratio, loan-loss provisions and expense control are important drivers of high profitability. In this register, the drivers that would be considered are in two categories namely endogenous (internal) and exogenic (external) drivers or factors of Profitability. Internal drivers of edge mathematical process or profitability can be defined as factors that are influenced by a coasts management decisions. Such management eff ects go away definitely affect the operating results of banks.Although a quality management leads to a good bank performance, it is difficult, if not impossible, to assess management quality directly. In fact, it is implicitly assumed that such a quality will be reflected in the operating performance. As such, it is not uncommon to examine a banks performance in terms of those pecuniary variables found in financial descriptions, such as the balance sheet and income statement (Krakah and Ameyaw, 2010). outside(a) determinants of bank profitability are factors that are beyond the control of a banks management. They represent events outside the influence of the bank.However, the management can anticipate changes in the external environment and try to position the groundwork to take advantage of anticipated developments. The two major components of the external determinants are macroeconomic factors and financial structure factors (Krakah and Ameyaw, 2010). In compendium, it appea rs previous empirical look into has suggested a possible connection amidst bank profitability and discordant internal and external determinants like bank building Assets, Loan-Loss Provisions, Total Deposit and Inflation, but is far from definitive as ifferent authors have made use of the cellular inclusion and exclusion of distinguishable variables in their studies. Hence, our study will try to couch more light on this controversial issue by reexamineing more empirical literatures on opposing sides of the topic and finally drawing conclusions from our findings from the mode of data summary we intend to carry out. 1. 1STATEMENT OF THE RESEARCH PROBLEM The federal official Government of Nigeria and the Central Bank of Nigeria (CBN) have perennially sought-after(a) lasting measures that would enhance the profitability and constancy of banks operating in the Nigerian banking industry.Unfortunately, they have never completely succeeded in achieving this feat. For instance, fr om 1987 1991 financial field reforms (intended to enhance controversy in the sector, mobilize savings and lead to a more economical allocation of resources) were implemented, encompassing elements of liberalization (such as the decontrolling of interest rates) and measures to enhance prudential regulation and tackle bank harm (Oluranti, 1991).Also, between 1990 and 2004, bank regulators increase the minimum share capital requirement for banks operating in Nigeria five times, namely in 1991, 1997, 2000, 2001 and 2004 (Aburime and Uche, 2006). However, these measures were unsuccessful in curtailing the spate of bank distress and failures in the1990s and beyond (Oluranti, 1991 Beck et al. , 2005 and Brownbridge, 2005). Currently, a set of banking sector reforms have too been introduced to ensure inter alia a strong and reliable banking sector (Okagbue and Aliko, 2005).Unfortunately, if the historical antecedents of financial sector reforms in Nigeria are anything to go by, the current reforms may also not help to improve bank profitability and stability in Nigeria. Another major factor, which has often not been given sub collectable attention, is the issue of strategic planning through forecasting and prediction of future performance indices of commercial banks (deposit money banks). To achieve this task, a bank must recognize and anticipate the important Variable affecting its profit determination.The flora of Stevens (1999), Blyther (2000) and Naceur (2003) established the inability of the business firms to adequately anticipate and forecast some(prenominal) operating variables in them as a very critical factor in explaining their non-performance. They argued that it is dangerous for a firm to fail to anticipate its cash flow sales, profits and production under whatever situation it finds itself. given up the efforts stated above banks need to appreciate the role of other indicators in enhancing the profitability or performance for that matter.Inde ed examining the determinants of corporate profits in the banking sector in Nigeria is crucial, if these banks are going to remain competitive, efficient, and viable taking into perception the challenges that befall competition in the industry. 1. 2RESEARCH QUESTIONS The motivation slow this study stems from the fact that in the past decade or so, a lot of tremendeous changes has been witnessed in the Nigerian banking industry thereby leading to a number of reforms that has seen players in the banking industry transform from one level to another.Hence, this study will sought to answer the sideline research questions 1. Is there a long widen and short run relationship between bank profitability and its determinants? 2. Towhatextentarediscrepanciesin initiative Banksprofitabilityduetovariations in endogenous factorsunderthecontrolofbankmanagement as head as exogeneous factors under the control of the macroeconomy? 3. Given previous empirical studies on this topic, can it be deduc ed that First of Nigeria actually makes sustainable profits in the last three decades? . 3OBJECTIVES OF THE STUDY The sole objective of this study is to provide a framework to investigate the factors or indicators intrinsic in the banks asset structure that had impacted on their profitability, and performance for that matter, and make policy recommendation that could be used by bank managers in their policy decisions in the future. Specifically the study seeks to achieve the following Objectives 1. ExaminetheprofitabilityofFirstBank Nigeria Plc duringthelastthreedecades. 2.Studythekeyendogenous or company-levelvaluedriversofperformanceor profitabilityofthe commercialbankinNigeria using FBN Plc 3. Studythekeyexogenousor macroeconomicvaluedriversofperformanceor profitabilityofthe commercialbankinNigeria using FBN Plc 4. To find out if any long-run or short-run relationship exists between Profitability variables and its determinants using FBN Plc. 5. Makepolicyrecommendationsregardingt hekeydriversofprofitabilityat First Bank of Nigeria as well as other commercialbanksin the country based onthe empiricalfindings. 1. 4SIGNIFICANCE OF THE STUDYGiven the relation between the offbeat of the banking sector and the growth of the economy (Rajan and Zingales, 1998 Levine, 1998), knowledge of the underlying factors that influence the financial sectors profitability is therefore essential not only for the managers of the banks, but also for many stakeholders such as the central banks, bankers associations, governments, and other financial authorities. knowledge of these factors would be useful in helping the regulatory authorities and bank managers formulate future policies aimed at improving the profitability of the Nigerian banking sector.Furthermore, at the present time, the type of analysis to be employed in this study is completely missing in the literature concerning profitability in the banking sector in Nigeria. 1. 5SCOPE OF THE STUDY Even though there is an exis tence of numerous empirical studies on the determinants of corporate profitability in the banking sector or so none exists regarding banks case studies in Nigeria, with one exception though in a study by Krakah and Ameyaw (2010) who found a significant correlations between Banks Financial Statement and Macroeconomic variables with Profitability given case studies of two banks in Ghana.However, since their study relied more on a cross- sectionalisational approaches from two different banks, this study collects a broad line up of profitability determinant indicators, specifically, using data solely from First Bank of Nigeria from 1980 to 2010, we will be examining different measures and linkages of endogenous and exogenous variables like sum totalassets, interestincome, totaloverhead expenses, moneysupply, annualinflationrate and Return on Assets (ROA).Furthermore, since the determinants of profitability are a complex and multi-faceted concept, as such no single measure will captur e all aspects of the internal and external determinants in the Financial Statements of First Bank to be used in this study. 1. 6PLAN OF THE STUDY For the purpose of simplification and clarification, this study will be drafted in the following manner Chapter one will bring down with a draft introduction on the topic of our study assessing a few opinions on what some authors have to say relating to the topic of our study.This chapter continues by analyzing some of the problems in the Nigerian economy as it relates to the banking industry as a catalyst for economic growth, then followed by the research questions. The statement of objectives to the study follows afterwards then the significance of the study comes next. An historical overview particularisation sundry(a) facets of developments in the Nigerian banking industry from pre-independence to date is also examined in this chapter. This chapter will be concluded by giving the scope of study.Chapter two of this study, which is t he Literature Review and Theoretical Framework, will begin with a brief introduction of what the chapter aims to achieve and how it will be structured. This will be followed by stating various theoretical frameworks to be used in the study. Furthermore, an empirical review of related literatures on the determinants of banking industry profitability as seen by different authors who have written widely on the topic published their findings on this issue would be discussed.This chapter continues by reviewing the Nigerian banking industry performance over the year with a comparative analysis of all the major banks do up the industry. This will be achieved through the use of charts and graphs. Finally, this chapter will be rounded-off by the historical existence of First Bank of Nigeria Plc as well as the corporate profile of the bank. Chapter three, which is the research methodology chapter of this study, will also begin with a brief introduction to the chapter.This will be followed by the method of data collection section as well as method of data analysis section where we will explain the various methods of analysis like Multiple Correlation Matrix, Cointegration Regression Model as well as the Error Correction Mechanism of time series econometric analysis intended to analyze our data is explained. Also in this chapter, we shall state the various regression models to be estimated for this study as well as an explanation of the justification of the variables to be included in the model.This chapter will also explain the how the data gotten for this study will be formatted in Ratio forms to suit need of our intentions for this study. In addition, the statement of hypothesis and assumptions nooky our model will be stated in this chapter and the various reasons behind the sampling procedure of arriving at FBN Plc for this study will be explained. Finally, this chapter will be concluded by explaining A Priori Expectations of each variable within the model and the yardsticks in econometric measurement to be used in acceptance or rejection of the various hypothesis stated for this study.Chapter four, which is the data Presentation, synopsis and Interpretation chapter, will be introduced stating what should be expected as the chapter moves from section to section. Here, the data used for this study will be presented in a tabular format then followed by the analysis and estimation of the straightforward model already stated in chapter three of this study. Finally, this chapter is concluded by interpreting the models estimated via different methods of econometric analysis.Chapter five is the Summary, Policy Recommendations and Conclusion chapter of this study. This chapter, like the previous ones before it also begins with an introduction of what to expect, this is followed by a summary of our study thus far. Hence, policy recommendations would be made under a different section and finally, the conclusions of our finding on the study as it rel ates to the analysis made in chapter four of the study would be highlighted in this study.