Abstract:

This study investigated the external factors (industry-specific and macro-economic variables) and their relationship with the profitability of deposit money banks in Nigeria. A sample of 14 banks was taken from the 22 deposit money banks in Nigeria. The sample period was fifteen years (2005 to 2019). The data for the external variables were extracted from the website of the Central Bank of Nigeria. Net interest margin (NIM) and return on equity (ROE) were used as proxies for profitability (dependent variable) while the independent variables include exchange rate (ER), crude oil price (COP), treasury bills discount rate (TB), call money rate (CMR) and long term interest rate (LINT). The study employed panel data analysis technique using the random effect model for model specification. The results show that exchange rate has a positive and significant impact on profitability measured by both NIM and ROE. Crude oil price has a significant impact on ROE but is insignificantly related to NIM. All the external interest rate variables (TB, CMR and LINT) do not have any significant impact on the two proxies of profitability. The study recommends that deposit money banks should effectively manage their exchange rate exposure in order to mitigate any adverse impact of exchange rate movement. It further recommends that the government should adopt measures that will diversify the nation’s revenue base to avoid over dependence on oil revenue