Assessing the Consequences of Dividend Policy on Financial Performance of Domestic Systemically Important Banks in Nigeria

Abstract

In Nigeria, five banks have been designated as ‘too-big-to-fail’ given their critical importance to the wellbeing of the Nigerian economy. It is thus of critical importance to understand the factors that are important in ensuring that these Domestic Systemically Important Banks (D-SIBs) continue to perform well financially for the foreseeable future. This importance is further heightened by the fact that at the end of 2020, the Central Bank of Nigeria voiced its concern regarding the decline in the capital adequacy ratio and the increase in the ratio of non-performing loans of Nigerian banks. It is against this backdrop that this study investigates the effect of dividend policy on all of Nigeria’s D-SIBs. It determined whether the influence was homogenous among the selected banks. It found that in the short run, the effect of dividend policy on profitability is heterogenous among banks. This study adopted an ex post facto research design, with dividend policy and bank performance data obtained from the audited financial statements and official annual reports of five D-SIBs (First Bank, GTB, Zenith Bank, UBA, and Access Bank) over a 10-year period (2011–2020). The data were analyzed using panel regression and pooled mean group (PMG) estimators. The study observed that dividend policy had significant impact on the profitability and efficiency of these five D-SIBs, a partial impact on their valuation, and no impact on their liquidity and solvency. Managers of D-SIBs in Nigeria must find a balance between how much dividends they pay to their shareholders and how much they retain to ensure continued profitability.