Financial Metrics and Return on Assets of Deposit Money Banks in Nigeria

Abstract

Research Purpose: This study investigates how financial metrics affect the return on assets (ROA) of Nigerian deposit money institutions. Specifically, it aims to:

1. Ascertain the impact of the liquidity ratio on the ROA of Nigerian deposit money banks.
2. Analyse the effect of the cash reserve ratio on the ROA of these banks.
3. Examine how the loan-to-deposit ratio affects the ROA of Nigerian deposit money banks.

Methodology: The study employs an ex-post-facto research design, utilising secondary data from the financial statements of Nigerian deposit money banks. A model incorporating descriptive coefficients, multiple linear regression analysis, panel data time series, and cross-sectional data was used to assess the extent to which the tested variables influenced ROA. The analysis was conducted using regression techniques.

Findings: The results indicated that the liquidity ratio, cash reserve ratio, and loan-to-deposit ratio each had a positive but non-significant effect on the ROA of Nigerian deposit money banks:

1. Liquidity ratio: Positive (0.021065; p-value = 0.5501 > 0.05)
2. Cash reserve ratio: Positive (0.001794; p-value = 0.9021 > 0.05)
3. Loan-to-deposit ratio: Positive (0.021065; p-value = 0.5501 > 0.05)

Additionally, the liquidity ratio had a negative and non-significant effect on ROA (-0.007557; p-value = 0.5072 > 0.05).

Conclusion: The findings suggest that while the financial metrics examined have positive associations with the ROA of deposit money banks in Nigeria, these effects are not statistically significant.

Recommendations: It is recommended that banks develop prudent strategies for managing their cash reserves, considering the risk-return trade-off when managing loan portfolios. Furthermore, banks should ensure that their liquidity is appropriately managed to enhance overall financial performance.