Portfolio Diversification and Return on Equity of Deposit Money Banks in Nigeria

Abstract

Portfolio Diversification and return on equity of deposit money banks in Nigeria for the period 1990-2020 is the focus of this paper. Treasury bills, acquisition of ordinary shares capital, investments in subsidiaries, and foreign investments outside Nigeria were the explanatory variables and proxies for Portfolio Diversification while return on equity is the dependent variable for all deposit money banks in Nigeria, for the periods under review. In the course of the study, data were obtained from the website of Central Bank of Nigeria statistical bulletin and annual report of Nigerian Deposit Insurance Corporation (NDIC). The Augmented Dickey Fuller (ADF) test option was used to test for unit roots. The autoregressive distributed lag (ARDL) and bounds test tools were used to estimate the short and long run relationships respectively. The study discovered that at short run, treasury bills, and ordinary share capital are negatively related and not significantly related to return on equity, while investments in subsidiaries and foreign balances outside Nigeria are positively related to return on equity of DMBs at most lag periods. It was further observed that at different lag periods, the variables do not significantly predict the direction of return on equity of DMBs. Long run relationship was also observed to exist amid treasury bills, acquisition of ordinary shares capital, investment in subsidiaries, foreign investments outside Nigeria and return on equity of all deposit money banks in Nigeria for the period 1990- 2020. At short run period, DMBs should diversify into investments in subsidiaries, as this would improve return on equity. Deposit Money Banks should also diversify into foreign holdings that would yield positive net present values. Deposit money banks in Nigeria should diversify into foreign investments with the right mix that would improve retur