Panel Data Regression Method for Evaluating Financial Performance of Commercial Banks in Nigerian

Abstract

Evaluation of financial performance of the banking sector is an effective measure and indicator to check the soundness of economic activities of a nation because thesector’s performance is perceived as the nation’s replica of economic activities.The key indicators of banks’ financial performance are their return on assets (ROA), which indicates the proportion of profit a company makes in relation to its assets and return on equity (ROE), whichmeasures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. Panel data are data on two or more entities for multiple time periods.Therefore, this study sought to model the overall performance of some sampled commercial banks (in terms of ROA and ROE) in Nigeria using panel data regression methods. This performance is modeled in relation to the factors that affect it, which include capital adequacy ratio(CAR), credit risk(CRISK), management, liquidity ratio(LIQ.RAT.) and bank size. The results revealed that capital adequacy ratio (CAR), credit risk (CRISK), and liquidity ratio (LIQ.RAT) have highly significant effects on the estimated ROA model at both 1% and 5% significance levels with the given p-values. This model accounted for over 82% of the total variability in the data. However, for the fitted ROE model, only credit risk (CRISK) and liquidity ratio (LIQ.RAT) were observed to have highly significant effects at both 1% and 5% significance levels and the fitted model accounted for about 69% of the total variation in the ROE data.