Effect of CAMELS Financial Indicators on Profitability of Systemically Important Banks (SIBs) in Nigeria

Abstract

In Nigeria, following the classification of banks into systemically important banks (SIBs) and non-systemically important banks (non-SIBs) in 2013, there has been concern about whether or not the designated SIBs are playing their leading role in financial performance and soundness in the industry. One of the tools that has been used by academics and financial analysts to evaluate the overall financial performance and soundness of banks over the years is the acronym of CAMELS, which stands for capital adequacy, assets quality, management efficiency, earnings ability, liquidity and sensitivity to market risk. This paper assessed the effect of CAMELS financial indicators on profitability of SIBs in Nigeria using secondary data extracted from the financial statements and account of seven (7) SIBs over the period of nine years (2010 – 2018). The paper formulated six hypotheses and applied multiple regression to analyse the data. After subjecting the data to relevant tests of robustness, the result of the pooled OLS regression revealed that capital adequacy, asset quality, management efficiency, liquidity and sensitivity to market risk have significant effect on profitability of SIBs in Nigeria. Based on the findings, the paper recommended among other things that CBN should be carrying out its on-site examination function more regularly to increase its surveillance on the SIBs in order to ensure that imprudent and unethical behaviour that erodes liquidity, quality capital and shareholders’ funds are spotted early. In addition, management of SIBs should use strategies that would enable them reduce lending related expenses in order to enhance their earnings ability and consequently increase the profit volume of their banks.