Journal of Legal, Ethical and Regulatory Issues (Print ISSN: 1544-0036; Online ISSN: 1544-0044)


Decomposition of Banks Return on Equity Using DuPont Model: Evidence from the Nigerian Banking Industry

Author(s): Emeka Nwuba, Alexander Ehimare Omankhanlen, Godswill Osagie Osuma

This study applied the DuPont model to analyse the profitability of deposit money banks in Nigeria. A sample of ten banks was taken from the quoted banks in Nigeria for a period of ten years (2009 – 2018). The adjusted DuPont model was used to decompose the Return on Equity (ROE) of banks in Nigeria into four components; net profit margin (NPM), Equity Multiple (EM), Asset Turnover (AT) and Tax Burden (TB). Results show that net profit margin is the only component out of the four that have significantly impacted on the ROE of the selected banks in the past ten years. Results further showed that banks with weak profitability have very high ratio of operating expenses to net operating income which consequently dragged down the NPM and by extension, the ROE. The paper recommends that banks in Nigeria should continue to improve their net interest margin by maintaining efficient balance sheet made up of low cost deposit liabilities and well-priced loan assets. In addition, less profitable banks can improve their returns by embarking on higher income diversification and prudent management of operating expenses

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