Macroeconomy and Banks’ Profitability in Nigeria

Abstract

Banks, like any other businesses are driven by the profit motive. The banking environment in Nigeria has been fraught with major macroeconomic shocks over the years. This study therefore analysed the impact of macroeconomic dynamics on banks’ profitability in Nigeria. Specifically, the study examined the impact of macroeconomic variables (Gross domestic product growth, Inflation, and Crude oil price) on banks’ profitability. It also seeks to examine the significance of microeconomic variables (cost to income ratio, loan to deposit ratio; loan to total assets ratio and total assets) on banks’ profitability. It analysed the impact of banking industry concentration on banks’ profitability. The estimation technique follows a panel regression which studied a cross section of the banking firms while observing the heterogeneity in the individual firms. The results indicated that the ratio of cost to income market concentration, and crude oil price are negatively significant in determining changes in return on average equity while total assets is positively significant in explaining return on average equity (as a measure of profitability). The study recommended that banks’ exposure to the oil and gas sector must be properly managed given the significant impact of crude oil price on banks’ profitability. It is evident that the Nigerian banking industry is fairly competitive, and banks size matters in determining profitability. Banks management must therefore focus on strategies that will give them cost advantage as well as differentiate them from other competitors.

Key Words: macroeconomy, bank, profitability