Fixed Income Security and Profitability Indicator for Deposit Money Bank in Nigeria

Abstract

This study examined the effect of fixed income securities on the profitability of deposit money banks in Nigeria, with return on assets used as the measure of bank profitability. The study focused on treasury bills, corporate bonds, government bonds and commercial papers as key explanatory variables. Annual time series data covering the period 1995 to 2024 were sourced from the Central Bank of Nigeria Statistical Bulletin and Banking Supervision Reports. The study adopted an ex post facto research design and applied the autoregressive distributed lag model and the error correction mechanism to analyse both the short run and long run relationships among the variables. Preliminary diagnostic tests including unit root tests, bounds cointegration test, serial correlation test, heteroskedasticity test and stability tests were conducted to ensure the reliability of the model. The findings revealed that treasury bills exerted a negative and insignificant effect on return on assets, while corporate bonds, government bonds and commercial papers exerted positive but statistically insignificant effects in the short run. The error correction term was negative and statistically significant, indicating the presence of a stable long run relationship and a high speed of adjustment to equilibrium following short run shocks. The study concluded that investments in fixed income securities contributed to income stability but had limited short run impact on bank profitability in Nigeria. The study recommended that deposit money banks should optimise their asset allocation strategies by reducing excessive exposure to low yield instruments and improving risk management practices to enhance profitability.