Modeling the Effect of Bank Specific Factors on Financial Performance of Commercial Banks in Nigeria: Panel Data Regression Approach

Abstract

Periodic checking and evaluation of financial performance of the banking sector is a way of sustaining the development of a nation’s economy. The key indicators of the banks’ financial performance are their return on assets (ROA) and return on equity (ROE). A bank’s financial performance is affected by some specific factors like capital adequacy ratio (CAR), credit risk (CRISK), management quality, liquidity ratio (LIQ.RAT.) and bank size. This work first compares average financial performance of some sampled commercial banks in Nigeria (UBA, GTB, ZENITH, FIRST, and ACCESS banks) based on the key indicators and the bank specific factors. It then models the effect of these factors on the overall financial performance of the sampled banks using panel data regression approach. The results showed that the GTB had the highest average ROA, ROE and CAR throughout the period under review while Zenith bank was the best in terms of credit risk, management quality and liquidity ratio. The fitted ROA model accounted for 83% of the total variability in the data and revealed that CAR, CRISK, and LIQ.RAT were significant at both 1% and 5% levels while the ROE model accounted for 69% and revealed that CRISK and LIQ.RAT were significant.