Effect of Exchange Rate Fluctuations on the Profitability of Quoted Banks in Nigeria

Exchange rate volatility is a persistent macroeconomic challenge in Nigeria, and its effect on bank profitability warrants careful empirical examination given the significant foreign currency exposure of Nigerian deposit money banks. This study examines the effect of exchange rate fluctuations on the profitability of quoted deposit money banks in Nigeria for the period 2012 to 2022. Secondary data were sourced from the annual reports of ten deposit money banks listed on the Nigerian Exchange Group and from the Central Bank of Nigeria Statistical Bulletin. Profitability was measured using return on equity and return on assets as dependent variables, while exchange rate volatility was measured by the standard deviation of the official naira-to-dollar exchange rate. Panel data regression using the fixed effects estimator was employed following the Hausman specification test. Results showed that exchange rate volatility had a significant negative effect on return on equity (coefficient = -0.023, p < 0.05) but an insignificant effect on return on assets at the 5% level, suggesting that equity holders bear the larger share of exchange rate risk. Banks with higher foreign currency loan portfolios recorded greater profitability losses during naira depreciation episodes. The study concludes that exchange rate instability poses a material risk to equity returns in the Nigerian banking sector and recommends active hedging strategies and foreign currency exposure limits as prudential risk management tools. Keywords: exchange rate fluctuations, bank profitability, return on equity, naira depreciation, Nigeria