John N. N. Ugoani
College of Management and Social Sciences,
Rhema University, Nigeria
E-mail: drjohnugoani@yahoo.com
Submission: 08/04/2015
Revision: 22/04/2015
Accept: 01/05/2015
ABSTRACT
Bank earnings in the form of retained
profit help in the capital formation of banks. This is critical because capital
inadequacy is often a cause of bank failures. During the banking crisis in
Nigeria the gross earnings of many banks diminished considerably due to frauds
and bad management. For example, in 2009 the Central Bank of Nigeria revoked
the operating licenses of fourteen banks which had huge nonperforming loans and
were making losses. The fragility in the Nigerian banking system in the 1990s
and beyond was compounded due to wide spread poor corporate governance
practices and imprudent lending that led to the erosion of gross earnings and
profitability. The study employed the survey research design. Data analysis was
done through the descriptive and Chi-square statistical methods. It was found
that gross earnings have strong relationship with bank profitability.
Keywords: Bad
management, Huge nonperforming loans, Imprudent lending, Central Bank of
Nigeria
1. INTRODUCTION
Earnings by a bank indicate the
extent to which management is putting its assets into productive use, although
some nonproductive use is normal because while plant and equipment may not
directly generate income, they are necessary to support the operations of the
bank. What is critical here is that a bank must ensure cost efficiency of
running plant and equipment.
The reality is that a bank with a
core earnings performance significantly below the average for its peer group is
very unlikely to have the capacity to compete effectively in the market place.
Without such efficiency on the part of management, a bank may not be
profitable, and may witness a serious drain on its earnings, and may even fail.
The major role of a bank is to take
in funds, primarily through deposits and equity and reinvest differential
earnings. In addition, a bank provides fee-based financial services that
generate earnings in form of commission among others. It requires sound
management to ensure that the optimum degree of expenditure is made that
reflects the efficiency and quality of earnings.
Barltrop and McNaughton (1997)
assert that bank earnings provide internal capital formation, and they are
needed to attract new investor capital which is essential if the bank is to
grow and remain profitable. Bank earnings serve both as a demonstration of
management’s effectiveness and as a barometer of the effects of macrofinancial
policies on the bank. Earnings are needed because profit is needed to absorb
loan losses and to build adequate provision.
A consistent earnings performance
builds public confidence in the bank. Banks believe that public confidence is
among their most valuable assets because it allows them to minimize finding
costs and provide access to the best borrowers. Thus, regular and consistent
healthy earnings are essential to the sustainability and profitability of
banks. In effect sound bank earnings are the oil that allows the bank to remain
viable. The Nigerian bank crisis of the 1980s, 1990s and beyond was exacerbated
by the lack of earnings to provide capital cover for banks.
Many banks were liquidated because
of inadequate capital cover to wipe out or at least reduce losses sustained
from failed investment as the result of unsound bank management. The losses of
most banks were so high that shareholders’ funds’ were completely wiped away.
Lack of retained earnings and the inability of the promoters of the affected
banks to restructure them, through the injection of fresh capital and new sound
management to revive the banks led to their liquidation by the regulatory
authorities.
According to Onoh (2002) bank
capital does not only serve as a cushion against deposit run-off, but forms the
basis for future asset growth. The rate at which retained earnings grow also
determines to a large extent the growth of bank capital and invariably the
growth of bank assets.
He opines that if the rate of growth
of retained earnings is low, it could be an indication of poor profitability or
poor dividend policy or high dividend payment, to the extent that some banks
rely mainly on retained earnings for the beefing up of bank capital since the
banking system operates on a fractural reserve system in which each bank
maintains only a fraction of its deposits in reserves, retained earnings serve
as a cushion for banks in times of bank panics.
A bank panic occurs when the failure
of one bank to honour its depositor’s demands for payment leads the general
public to fear that other banks will be unable to honour some demands. When
this occurs depositors attempt to withdraw their deposits before their bank
fails and in so doing may place it and other banks in jeopardy (BAYE; JANSEN,
2006). Bank profitability and earnings are closely related because retained
earnings are undistributed profits accumulated over the years which may be subsequently
used for the purpose of enhancing the capital resources of the bank (NZOTTA,
2004).
A bank generate a profit from the
differential between the level of interest it pays for deposits and other
sources of funds and the level of interest it charges in its lending
operations. This difference is the spread between the cost of funds, and the
loan interest rate. In recent history, banks have taken many new measures of
income generation to ensure that they remain profitable while responding to
increasingly changing market conditions.
For example, they have expanded the
use of risk based pricing from business lending to consumer lending, which
means charging higher interest rates to those customers that are considered to
be a higher credit risk and thus increased chance of default on loans. This
helps to offset the losses from bad loans, lowers the price of loans to those
who have better credit histories, and offers credit facilities to high risk
customers who would otherwise have been denied credit.
They have equally sought to enhance
the methods of payment processing available to the general public and the
business community. Banks make money from these products through interest
payments, fees and commission to increase their gross earnings. (MATYSZAK,
2007).
Profit is the bottom line or
ultimate performance result showing the net effects of banks policies and
activities in a financial year. Its stability and growth trends are the best
summary indicators of a banks performance in both the past and the future.
According to Greuning and Bratanovic
(2003) profitability is usually measured by a set of financial ratios,
including gross earnings. They insist that strong and stable net interest
margins have traditionally been the primary determinants of intermediation
efficiency and earnings performance.
Prior to 2004 banking sector reform,
many banks in Nigeria were distressed largely due to poor management and
operating losses. The reform agenda led to the emergence of twenty five banks
as at 31st December, 2005, from seventy five banks out of the
existing eighty nine banks as at 31st December, 2004. Fourteen banks
which had huge nonperforming loans and making losses had their licenses revoked
by the CBN (UNIAMIKOGBO, 2007; ONOH, 2014).
With the purchase of nonperforming
loans of banks by the Asset Management Corporation of Nigeria (AMCON) the
banking industry capital position became stronger in 2011. While the equity
capital decreased by about 11.81 percent from N249.71 billion in 2010 to
N220.21 billion in 2011, the reserves increased substantially to N2.266 billion
in 2011 from N179.89 billion in 2010.
The adjusted shareholders’ funds
increased to N1.93trillion in 2011 from N312.36billion in 2010. Consequently,
deposit money banks capital adequacy ratio improved from 4.06 percent in 2010
to 17.71 percent in 2011. Accordingly, total operating income of the banking
industry stood at N2.33trillion in 2011, representing an increase of about 7.90
percent over the N2.16 trillion reported in 2010. Similarly, total operating
expenses increased from N932.53 billion in 2011 to N1.79 trillion in 2011.
Some banks reported losses at the
end of 2011 which resulted in the negative Return on Assets (ROA) as well as
Return on Equity (ROE) and adversely affected the industry performance
(IBRAHIM, 2011). Bank earnings, both current and accumulated, are to absorb
losses and augment capital.
Earnings are the initial safeguard
against the risks of engaging in the banking business, and represent the first
line defense against capital depletion. Earnings performance allows the bank to
remain competitive and profitable. An analysis of bank earnings is often
critical for the success of a bank and the Return on Assets (ROA) is a common
starting point for analyzing earnings because it gives an indication of the
return on the bank’s overall activities.
The Federal Deposit Insurance
Corporation (2015) believes that earnings evaluation involves the level of
earnings, the ability to provide for adequate capital through retained earnings,
the quality and sources of earnings, the level of expenses in relation to
operations, as well as the earnings exposure to market risk such as interest
rate, foreign exchange, and price risks.
1.1. Statement
of the problem
Banking institutions have the
fundamental objective of generating earnings so as to achieve improved
profitability for shareholders and to provide cushion in times of bank panics
through sound management. This was elusive during the Nigerian banking crisis
of the 1980s, 1990s and beyond, when shareholders funds in the banking system
were wiped out.
According to Nnamdi and Nwakanma
(2011) shareholders’ funds represent total stake of stockholders inclusive of
reserves and retained earnings in banking business. And without adequate earnings
the confidence in the banking system by the public that they should have access
to their funds whenever they need them is eroded.
1.2. Objective
of the study
This study was designed to explore
the effect of gross earnings on bank profitability.
1.3. Hypotheses
There is a growing body of empirical
evidence to suggest that banks with high gross earnings tend to be more
profitable. As a modest contribution therefore, and based on the objective of
the study, two hypotheses were formulated and tested at 0.05 level of
significance to either support or deny the assumptions
Ho: Gross earnings have no
effect on bank profitability.
Hi: Gross earnings have effect
on bank profitability.
1.4. Scope
of the study
The study was restricted to 5
selected banks in Nigeria (EZEJELUE, et al, 2008)
1.5. Limitations
of the study
This study was constrained by lack
of research grant and current literature in the area of interest. However,
these serious limitations did not impair the academic content of the study.
2. LITERATURE REVIEW
After the banking crisis of the
1980s, 1990s, and beyond, banks now believe that high and quality gross
earnings hold the olive branch for improved profitability. In Nigeria for
instance, the 25 banks that emerged post-consolidation from 2004 spent most
part of the review period integrating their operations, with some raising
further capital, through mergers/acquisitions, initial public offers, right
issues, and private placements.
For example, First Bank’s
shareholders’ funds as at the end March 2007 rose by 27 percent standing at
N77.4 billion compared to N60.9billion in the previous year, while profit
before tax (PBT) rose from N19.8billion in 2006 to N22.0billion in 2007
(AJEKIGBE, 2007).
Barltrop and McNaughton (1997)
assert that the best evidence that a bank is viable is if it is able to sustain
consistent growth of high-quality earnings. And that it is desirable for a bank
to maintain earnings growth at a pace that yields a level of dividends
satisfactory to shareholders while also reinforcing its capital to asset ratio.
In such cases stable earnings will
contribute to making the bank attractive in the financial market. Earnings
represent the main sources of income for a bank and is derived from some major
sources such as (i) Operating income, (ii) Interest income, (iii) Commission,
(iv) Other operating income, and negatively affected by (v) Operating
expenses..
i) Operating income
Operating income includes all income
and expense items that represent the normal core business of a bank. According
to Barltrop and McNaughton (1997), specifically excluded are items that
represent extraordinary circumstances, prior period adjustments, or that are
unrelated to the normal business of a bank. The financial health of a bank is a
direct result of its earnings performance.
Inadequate earnings performance will
tempt even the best management to reach for profitability by engaging in
riskier business to shore up profitability, thus exposing the bank to increased
risk of failure. Low earnings performance is thus a leading indicator of
problems that may become cumulatively significant enough to show up in the
balance sheet and the related ratios years later.
ii) Interest income
Interest income includes all
interest received by the bank from all sources including interest on
overdrafts, interest on loans, among others. Barltrop and McNaughton (1997)
insist that the principal source of most banks’ earnings is interest
differential income, defined as interest income less interest expense. Interest
differential income usually accounts for at least 70 percent of a bank’s
income.
Net interest differential income
divided by total average assets over the period during which the income was
earned yields the net interest margin (NIM). The NIM is driven by the
composition of the balance sheet and by the interest rates applicable to the
individual asset and liability accounts. Effective management of the asset and
liability accounts can substantially lead to improved bank earnings and
profitability.
The ratio of net interest income (NII)
to average assets is used in measuring bank earnings and profitability. This
ratio typically represents the bank’s largest revenue component. While a higher
NII ratio is generally a positive sign, it can also be reflective of a greater
degree of risk within the asset base. For example, a high NII ratio could
indicate that management is making a large number of high-interest, high-risk
loans.
The NII ratio can be broken down
into interest income to average assets. These ratios and their related components
can be analyzed to determine the root cause(s) of any changes in the ratio and
their consequent effect on ROA, earnings and profitability. On the other hand,
the NIM indicates how well management employs the earning asset base.
The NIM is more useful than the NII
for measuring the profitability of the bank’s primary activities (buying and
selling money) because the denominator focuses strictly on assets that generate
income rather than the entire asset base. This is imperative because the ROA is
a common starting point for analyzing bank earnings because it gives an
indication of the return on the bank’s overall activities. A typical ROA level
is different, depending on the size, location, activities, and risk profile of
the bank and its overall earnings performance and profitability.
iii) Commission
These include time related fees –
for example, a commitment fee based on a percentage of the undrawn amount of a
line of credit and fees that reimburse the bank for the reasonable cost of
processing a loan or fees that recover expenses incurred to register interests
in security. Increasing competition among banks and frequent changes in the
disclosure and accounting requirements have made banks to cut down their
lending rates. This situation has led to dismantling of non-interest
differential services.
According to Barltrop and McNaughton
(1997) increased regulatory emphasis on capital adequacy requirements related
to the size of assets has encouraged banks to emphasize fee-based products and
services and on/off-balance-sheet credit substitutes in an effort to expand
income yielding business without increasing risk assets so as to avoid the need
for additional capital.
Such fee income can include loan
related fees, such as to cover the cost of the financial analysis or to secure
a loan commitment, that are effectively equivalent to interest, and non-related
fees such as for maintaining a current account, providing financial advice, or
for other trade-related documentary services. These quality fees are in most
cases classified under the commission income which forms a high percentage of
bank earnings.
iv)
Other operating income
According to Barltrop and McNaughton
(1997) fees have become an increasing source of revenue for banks as
competition and regulatory pressure on lending rates have forced an unbundling
of service pricing from interest differential income. Other operating income
typically involves income on investments, service charges, and fees. For
example, income from investments in many respects resembles interest because it
is income received that relates to the use of banks resources, service charges
relate to the normal periodic charges for providing a standard service and are
independent of transaction volume or risk.
Again transaction fees relate to
fees that are specifically transaction dependent and are based on the operating
cost of executing the transaction, not on the risk involved, while commission
is risk related and include letter of credit fees, documentary collection fees,
and funds transfer fees, where these are proportional to the amount of the
transactions.
v) Operating Expenses
The process of income generation by
a bank incurs operating expenses, including personnel costs, rent, insurance,
transportation costs, maintenance costs, advertising and other sundry expenses.
Banks are generally presumed to be inefficient in Nigeria because of the long
queues over the counters, epileptic automatic teller machines (ATMs), long
turnaround time for loan processing and high rate of loan default and
nonperforming loans among others.
Banks in Nigeria use limited
technology and cannot avoid incurring expenses required to provide quality
services needed to compete in the ever changing global financial market. They
also incur expenditure with regard to credit recovery activities. With the high
rate of non-performing loans in Nigeria, banks spend much on matters like legal
fees, hotel expenses, among others.
In addition, most transactions and
record keeping are usually done manually, and multiple reporting requirements,
particularly on insider lending require extensive manual processing, and at a
high cost. Because of the labour intensive nature of banking operations in
Nigeria human resource cost tend to be high. Similarly, while bank salaries are
often low at the lower levels, the pay at the top is usually high. Bank
executives in Nigeria are used to what may be called the “jumbo” pay. Such pay
went on even in banks with low earnings and heavy nonperforming loans.
There are cases of high cost of
renting bank premises and bloated expenses for service contracts on cleaning,
painting, building, repairs, furniture, machinery and equipment among others.
An inordinately high level of overhead expenses, and excessive salaries and
bonuses all have negative impact on bank earnings and profitability. Thus, an
understanding of the structure of a bank’s operating expenses is essential to
ensure a stable earnings pattern. A high operating expenses as a percentage of
net interest income would suggest inefficient management culminating to low
gross earnings and profitability.
2.1. Assessing
Quality of Bank Earnings
According to the FDIC (2015)
earnings quality is the ability of a bank to continue to realize strong
earnings performance in order to register impressive profitability ratios. It
reports that an inordinately high ROA is often an indicator that the bank is
engaged in higher risk activities. For example, bank management may have taken
on loans or other investments that provide the highest return possible, but are
not of a quality to assure either continued debt servicing or principal
repayment.
Short-term earnings will be boosted
by seeking higher rates for earning assets with higher credit risk. However,
earnings may suffer if losses in these higher-risk assets are recognized. Also,
a bank’s adversely classified and nonperforming assets, especially upon which
future interest payments are not anticipated, may need to be reflected on a
nonaccrual basis for income statement purposes. When such assets are not placed
on a nonaccrual status, earnings will be overstated.
Similarly, material amounts of
restructured loans may have a negative effect on earnings and therefore impair
profitability. Earnings performance can be enhanced by extraordinary items and
tax strategies. For example, a bank may dispose of high-yielding assets to
record gains in current earnings. Levels and trends in earnings performance
would be positive if sound management is sustained. Conversely, a bank might
dispose of assets at a loss to take advantage of tax loss provisions and
enhance future earnings potential.
Current earnings levels and trends
would be poor in such a case, but funds recaptured through this strategy may
greatly improve future earnings capacity. It is a condition that no analysis of
earnings is complete without an assessment of earnings quality and a complete
investigation and understanding of the strategies employed by bank management.
Assessing the quality of bank earnings is very important to ensure that
earnings are sufficient to cover fluctuations in net interest income or net
interest margin, the development of significant negative trends, nominal or
unsustainable earnings, intermittent losses, or a substantive drop in earnings
from the previous years.
2.2. Bank
Capital and Earnings
The analysis of earnings includes
all bank operations and activities. When evaluating earnings, regulatory
agencies attempt to develop an understanding of the banks core business
activities. Core activities are those operations that are part of a bank’s
normal or continuing business. Therefore, when earnings are being assessed,
bank regulators want to be aware of nonrecurring events or actions that have
affected bank earnings performance positively or negatively, and which may
require an adjustment.
Examples of events that may affect
earnings include capital base, adoption of new accounting standards, extra
ordinary items, or other actions taken by management that are not considered
part of the bank’s normal operations such as sales of securities for tax
purposes or for some other reasons unrelated to active management of the
securities portfolio. The exclusion of nonrecurring events from the analysis
makes it easy to analyze the profitability of core operations without the
distortions caused by non-recurring items.
In this way, it becomes convenient
to compare earnings performance against the bank’s and industry wide
performance. This issue of capital
adequacy is important in earnings analysis because of its relationship with bank
profitability in which case a bank should have the flexibility to reduce
earnings. In undercapitalized banks, there may be need to strongly discourage
the continuation of cash dividends and other distributions so as to enhance
capital formation.
A sound earnings analysis could
further suggest the prohibition of dividend where the bank is undercapitalized
and has a high risk profile or carrying heavy nonperforming loans (NPLs) as
witnessed in Nigeria in the 1990s through 2011. Nonperforming loans as a
percentage of shareholders’ funds in Nigeria rose from 89.17 in 2002 through
91.99 in 2003 to 107.82 in 2004 which showed that all the shareholders’
interests in the Nigerian banking sector which should serve as a cushion for
the depositors’ funds were wiped away by nonperforming loans (NNAMDI; NWAKANMA,
2011).
A bank’s capital and profitability
are critically dependent on the quality of its loan portfolio, and financial
analysis is literally meaningless without a good understanding of the value of
the bank’s assets (BARLTROP; MCNAUGHTON, 1997).
3. METHODOLOGY
3.1. Participants
The sample comprised of 300
participants (200 females and 100 males) ranging in age from 21 to 70 (M =
46years; SD = 25). The participants were generated from the general population
across Nigeria.
3.2. Materials
A 20 item 5-point Likert-type scale
titled “Bank Earnings Questionnaire (BEQ)” was used to generate data. The
reliability of the instrument was confirmed by the Test-Retest technique. The
Likert scale has previously been found to be internally consistent (NWORUH,
2004).
3.3. Procedure
The materials for data collection
were personally administered on the participants by the investigator and
assisted by two research assistants. All the materials were retrieved and the
responses used for analysis.
3.4. Data
analysis
Data were analyzed through
descriptive and Chi-square statistical methods. The results were presented in
tables.
4. PRESENTATION OF RESULTS
Table 1: Extract of Gross
Earnings / Profits by Banks
|
S/No |
Bank |
Year Ended |
Gross Earning |
Profits |
|
1.
|
Access
|
30/6/2011 |
46
|
10 |
|
2.
|
Fidelity
|
30/6/2013
|
63 |
11 |
|
3.
|
Ecobank
|
30/9/2014 |
348 |
45 |
|
4.
|
First
Bank |
30/9/2014
|
333 |
74 |
|
5.
|
Zenith
|
31/12/2013
|
351 |
106 |
Source:
Field work, 2014.
Table 2: Capital Adequacy of
Banks
|
Capital Adequacy
Indicators |
Year |
|
|
2010
|
2011 |
|
|
Total
Qualifying Capital (N.bn) |
424.46 |
1900.31 |
|
Adjusted
shareholders funds (N.bn) |
312.36 |
1,934.93 |
|
Capital
to total risk weighted Asset Ratio (%) |
4.06
|
17.71 |
|
Number
of Banks |
24
|
20 |
Source:
Nigeria Deposit Insurance Corporation (2011) Annual Report and Statement of Accounts
Table 3: Earnings and
Profitability Indicators
|
Indicators |
Year |
|
|
2010
|
2011 |
|
|
Profit
Before Tax (N, billion) |
607.34
|
-6.71 |
|
Net
Interest Income (N, billion) |
824.62 |
817.14 |
|
Non-interest
Income (N, billion) |
462.76 |
845.65 |
|
Interest
Expense (N, billion) |
616.31 |
544.21 |
|
Operating
Expenses (N, billion) |
932.53 |
1,788.37 |
|
Yield
on Earning Assets (%) |
11.24
|
10.05 |
|
Return
on Equity (%) |
162.98 |
(0.28) |
|
Return
on Assets (%) |
3.91 |
(0.04) |
Source:
Nigeria Deposit Insurance Corporation (2011) Annual Report and Statement of
Accounts.
Table
4: Chi-square Test
|
Participants |
Agreed |
Disagreed |
Strongly
agreed |
Strongly
disagreed |
Neutral |
Total |
Calculated
value |
Table value |
Level of
significance |
d/f |
|||||
|
|
No |
% |
No |
% |
No |
% |
No |
% |
No |
% |
|
|
|
|
|
|
Male |
15 |
5 |
20 |
6.7 |
10 |
3.3 |
30 |
10 |
25 |
8.3 |
100 |
|
|
|
|
|
Female |
20 |
6.7 |
30 |
10 |
50 |
16.7 |
40 |
13.3 |
60 |
20 |
200 |
|
|
|
|
|
Total |
35 |
11.7 |
50 |
16.7 |
60 |
20 |
70 |
23.3 |
85 |
28.3 |
300 |
13.34 |
9.48 |
0.05 |
4 |
4.1. Discussion
Bank earnings are important for bank
profitability. Financial failure occurs when a bank is insolvent in the sense
that it cannot meet its current obligations out of current profit as they
become due even if its total assets exceed its total liabilities. Gross
earnings are used in managing capital inadequacy to increase the level of
profit retention of a bank.
Therefore, profitability in the form
of retained earnings is typically one of the key sources of capital generation.
A sound banking system is built on profitable and adequately capitalized banks.
Profitability is a revealing indicator of a bank’s competitive position in
banking markets and of the quality of its management. The gross earnings or the
profitability of a bank is often measured in relation to its rate of return on
investment that encompasses total assets or capital employed or shareholders
equity.
Banks usually devote time in
analyzing and presenting their facts and figures in their Annual Reports with
regard to gross earnings and profitability, because it is the tinted glasses
through which the general public assesses the performance of the bank. For
example, while presenting its financial performance in 2007 Ajekigbe states:
The Bank and our subsidiaries recorded impressive results which impacted
positively on the performance of the group.
The Group’s total balance sheet size
plus contingent liabilities grew by N351billion from N732.8billion in 2006 to
N1.08 trillion in 2007. With all its income lines reporting significant
increases over the corresponding figures for the preceding year, gross earnings
increased to N90.32 billion from N67.44billion recorded in the preceding year.
The bank reports that with
appropriate mix of business lines profit before tax and exceptional items rose
by 41.4 percent from N18.13billion in 2006 to N25.56billion in 2007. Also
profit after tax rose by 17.2 percent from N17.38billion in 2006 to
N20.37billion in 2007. Interest income on performing loans and advances, and
income from both local and foreign placements all recorded appreciable
increases. As at end – March 2007, the Group’s shareholders’ funds rose by 29.7
percent, standing at N83.38billion compared to N64.28 billion in 2006.
Gross earnings in terms of interest
income, commission, charges and other fees form the bases for bank
profitability. This evidence supports the findings of Barltrop and McNaughton
(1997) that earnings are critical for bank profitability.
4.2. Recommendations
·
While
banks must earn interest income from loans and advances, they should maintain a
reasonable spread between interest charged and interest paid on deposits. This
will not only reduce the level of nonperforming loans portfolio exacerbated by
interest charges, but also attract more deposits to the banking sector.
·
Banks
should encourage prudent management of financial resources with regard to
expenditure. There are instances where banks with high gross earnings report
losses due to inappropriate expenditures.
·
Prudent
lending practices should be encouraged to reduce nonperforming loans to related
insiders, because nonperforming loans erode bank earnings and profitability.
·
Bank
supervision should be regular to recommend corrective measures. The seemingly
annual post mortem exercises have not helped in checking mismanagement and bank
failures in Nigeria.
·
The
regulatory authorities should ensure proper composition of the board of banks
to enhance corporate governance culture. This will make room for the efficiency
needed in sound bank management.
4.3. Scope
for further study
Further study should be conducted to
examine the relationship between discretionary expenditures and bank losses
with a view to finding a solution to the problems of bank failures in Nigeria.
5. CONCLUSION
Prudent bank management enhances gross
earnings that result to bank profitability. This study provides evidence of
banks that their profit before tax (PBT) was highly positively correlated with
their gross earnings. Even though there can be other measures of bank soundness
profitability is one key indicator of such and also profitability in the form
of retained earnings helps to sustain a bank’s capital formation. Through
statistical analysis it was found that gross earnings have strong positive
relationship with bank profitability, and this result supports the views of
Greuning and Bratanovic (2003) and Barltrop and McNaughton (1997). This is the
import of the study.
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