Financial Leverage and Commercial Banks Performance in Nigeria

Abstract

This study examined the effect of financial leverage on the performance of commercial banks in Nigeria, recognising that bank performance is critical for financial stability and economic growth. An ex-post facto research design was adopted, using secondary data from 25 commercial banks covering 2004 to 2023. The main objective was to investigate how three dimensions of financial leverage, that is, ratio of equity to total assets (EQTA), ratio of equity to total debt (EQTD), and ratio of long-term debt to total assets (LTDTA), influenced return on assets (ROA), a key indicator of performance. The study was anchored on the Trade-Off Theory, which emphasises achieving an optimal balance between debt and equity to maximise returns while minimising the risks of financial distress. Data were analysed with descriptive statistics and pooled ordinary least squares (POLS) regression. The findings reveal that EQTA and LTDTA have significant negative effects on ROA, while EQTD has a positive but insignificant effect. It is concluded that the capital structure of Nigerian banks requires careful management to enhance profitability. The study recommends optimising capital mix, reducing excessive long-term debt, and strengthening financial policies to achieve sustainable performance.