SOURCE:

Faculty: Management Sciences
Department: Accountancy

CONTRIBUTORS:

ADEAGA, J. C. D
Okafor, T.G.
Nzewi, U.C

ABSTRACT:

This study empirically investigates the contribution of financial soundness indicators, that is, capital adequacy, liquid asset and leverage ratios on Nigeria deposit money banks’ financial performance. The aim of the study is to determine difference in the prediction of financial soundness surrogates on Nigerian deposit money banks’ return on asset, asset quality, expense-revenue and return on equity. The study adopted the ex-post facto research design with a population of 22 Nigeria deposit money banks (DMB) licensed by Central Bank of Nigeria (CBN) out of which 16 DMBs were selected. The study involved time series and cross-sectional data, that is, secondary data that spanned from 2010 to 2017, 128 pooled balanced panel observations/data were obtained from the audited annual accounts and reports of the selected DMBs and analysed using standardized multiple linear regression model (OLS), Karl Pearson Product Moment Correlation Co-efficient (PPMC) and Chow-test. The results showed that capital adequacy, leverage and liquid asset ratios are significant predictors of Nigeria DMBs’ return on asset, asset quality, expense-revenue and return on equity. There is no significant difference in the financial soundness proxy’s prediction of international and national deposit money banks’ financial performance surrogates; except in asset quality where there is significant difference. Also capital adequacy ratio had negative impact on all the financial performance surrogates but had an insignificant positive impact on return on asset while leverage and liquid asset ratio had positive impact on all the financial performance proxies. In addition capital adequacy ratio had insignificant positive and negative relationship with return on asset and asset quality respectively. The study concluded that financial soundness surrogates had contributed to Nigeria deposit money banks’ financial performance. We therefore recommend amongst others that Central Bank of Nigeria should relentlessly monitor capital adequacy ratio and established liquidity and leverage ratio ceiling that will restrain the quest for management’s profit maximization and incentives for banks to game the regulatory framework.