THE EFFECT OF LEVERAGE ON THE PROFITABILITY OF FIRST BANK PLC
ABSTRACT
This study examined the effect of financial leverage on the profitability of First Bank of Nigeria Plc. The research was motivated by the need to understand how the use of debt financing influences the performance of financial institutions, particularly in a highly regulated and competitive banking environment. The study aimed to assess the relationship between leverage and key profitability indicators such as return on assets (ROA), return on equity (ROE), and net profit margin. An ex-post facto research design was adopted for the study. Secondary data were obtained from the published annual reports and financial statements of First Bank Plc over a specified period. The data were analyzed using descriptive statistics and econometric techniques, including regression analysis, to determine the nature and significance of the relationship between leverage and profitability. Findings revealed that financial leverage has a significant impact on the profitability of First Bank Plc. While moderate use of debt was found to enhance returns due to tax advantages and increased capital for investment, excessive leverage was associated with higher financial risk, increased interest obligations, and potential decline in profitability. The study also found that effective management of debt levels is crucial in maintaining an optimal capital structure and ensuring financial stability. The study concluded that leverage plays a dual role in influencing profitability, acting as both a tool for growth and a source of financial risk. It recommended that management of First Bank Plc should adopt an optimal leverage strategy, maintain a balanced capital structure, and strengthen risk management practices to maximize profitability while minimizing exposure to financial distress.
Keywords: Financial Leverage, Profitability, Return on Assets, Return on Equity, Capital Structure, First Bank Plc.
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