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| Financial Leverage and Bank Performance: An Empirical Study (2000 - 2019) |
Okonkwo, Jisike Jude and Okonkwo, Ebube Valentine,
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Abstract:
This study extensively investigated effectiveness of financial leverage in Nigerian banks for the period 2000-2019. The study adopted secondary data obtained from annual reports of banks, Central Bank of Nigeria and Nigeria Stock Exchange. Regression analysis, unit roots and diagnostic test were used in the analysis. The data was analyzed using the ordinary least square regression model to estimate the parameter of linear regression model as it minimizes the sum of the square roots. The study revealed that debt to equity ratio has negative but insignificant relationship with profit before tax of the deposit money bank. Before the 2005 recapitalization exercise, onus of leverage was on assets, using more debts to finance assets acquisitions led to fall in the profit of deposit money banks while after 2005, with higher capital base, the banks were secure enough to acquire assets through debts, debt to total asset ratio began to significantly correlate with profitability of the deposit money banks. It recommended that the growth of capital should be used as a buffer for the growth of debt: Increasing debt should be backed-up with proportional increase in the capital accounts in order for the banks to be able to account for shocks associated with volatile leverage. In other words, the level of leverage of a bank should grow in accordance with the size of its capital.
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