Bank Capital, Operating Efficiency, and Corporate Performance in Nigeria

Abstract

This study examines the impact of bank capital and operating efficiency on the Nigerian deposit money bank financial performance with a view to resolving risk-based and non-risk-based capitals’ dichotomy existing in the bank literature. Using bank-specific data obtained from the annual reports and accounts of 15 banks listed on the Nigerian Stock Exchange between 2012 and 2015, the panel data regression analyses revealed the superiority of standard capital ratio of equity-to-total-assets, a non-risk-based capital, over other measures. While all measures, both risk-based and non-risk-based capitals, showed significantly positive effects on bank performance as measured by return-on-asset, mixed results were obtained from other indicators: return-on-equity and net-interest-margin. Overall, only equity-to-total-assets influenced all adopted performance indicators positively. It was also found that operating efficiency measured by cost-to-income ratio had negative impact on bank performance, but on the average it appeared too high. Thus, incorporating the standard capital ratio of equity-to-total assets into regulatory regime by the banks’ regulator is recommended to ensure its relevance is not overshadowed.

Determinants of Bank Performance in Nigeria: Do they Behave Differently with Risk-Adjusted Returns?

“…Also, as a measure of performance, EPS is an important mandatory disclosure in corporate reporting in Nigeria. ROA represents the relationship between net income and total assets of a bank while ROE is the result of the relationship between the after-tax earnings and shareholders' funds (Salami & Uthman, 2018;Tan, 2016). NIM, an important measure of profit margin in the banking industry, symbolizes interest income to earning assets ratio (Grochulski et al, 2018).…”

“…The positive relationship between capital and bank financial performance is attributable to the fact that having higher capital reduces funding cost, acts as safety net, ensures prudent lending and reduces bank dependence on borrowing (Athanasoglou et al, 2008; Tan, 2016). Although capital adequacy is measured in several ways (Salami, 2018), the positive impact of total regulatory capital and traditional capital ratio was evident in the past (Salami & Uthman, 2018). Thus, these two measures of capital adequacy which are expected to have positive impact on bank performance are adopted for this study.…”

“…Diversification is also an important driver of bank performance (Hamdi et al, 2017;Nisar et al, 2018) as the non-interest income has become an integral part of bank gross income subsequent to financial system liberalization (Olarewaju, 2018). The impact of diversification on bank performance depends on the measure of profitability adopted, net income or net interest margin (Salami & Uthman, 2018). Thus, diversification is expected to be negatively related to NIM but positively related to ROA, ROE and EPS because the latter are measured with net income.…”

“…Despite the dichotomy or duality of the profitability measures of bank performance, evidence shows that the variability of their determining factors has not been hitherto incorporated in a single study. The past studies have either adopted purely risk-neutral measures (Athanasoglou et al, 2008;Salami & Uthman, 2018;Tan, 2016) or wholly risk-adjusted measures (Ahmad et al, 2016;Mercieca, Schaeck & Wolfe, 2007;Salami, 2018;Stiroh, 2004). Modern banking system, which dated back to 1892 in Nigeria when a South African-based bank-African Banking Corporation was established, has reached an advanced stage in the country given the Nigerian banks (especially those with international licence) domination of financial sector in the West Africa by having subsidiaries across the sub-region.…”