Evaluating profitability strategies and the determinants of the risk performance of sectoral and banking institutions

Abstract

Purpose The purpose of this paper is to evaluate the need to incorporate the loan loss provisions (LLPs) and risk measures in order to examine the repercussions on advancing approach and profitability. Design/methodology/approach The study investigates the effect of explanatory variables on profitability and advancing approach of the banks. The variables used in this study were determined, based on the review of relevant literature and established according to the availability of data for measurement purposes. Inspired by previous research, Hausman test is used in this study to determine whether a random or fixed effects generalized least squares model is best. The linear regression model is applied to strongly balanced panel data obtained from the ten commercial banks. Findings The findings demonstrate that Nigerian banking sector considers LLPs in terms of its decision making of advancing approach, while proper inclusion of credit, market and operational risk is more important for South Africa’s banks rather than the maintenance of provisions. Originality/value Moreover, the credit risk proves to be more needed factor of consideration for Nigerian rather for South African banks. This is an answer to the strong economy of South Africa as compared to Nigeria and more chances of default faced by Nigerian banks.