Profit persistence in the Ghanaian banking industry: a first order autoregressive approach

Purpose This study investigates the level of profit persistence in Ghana’s banking industry following the 2017/2018 banking sector clean-up exercise. It segments the clean-up exercise into pre-crisis, crisis and post-crisis periods to compare profit persistence behaviour in the sector. Design/methodology/approach Using secondary data comprising financial sector variables for 208 months obtained from the Financial Soundness dataset of the Central Bank of Ghana spanning 2006–2023 in completed years, the study employs the first-order autoregressive (AR1) time series estimation technique to generate the results. Findings The result suggests that short-run profit persistence varied in the pre-, during and post-bank sector cleaning-up exercise in Ghana. Regarding short-run profit persistence in the banking sector of Ghana, the study finds that the bank sector clean-up exercise may have significantly reduced profit persistence in the industry. It was observed that short-run profit persistence reduced from about 96.62% in the crisis period to about 48.80% after the cleaning-up exercise. The results further suggest that competition was improved in the sector since long-run profit persistence reduced from 154.12 in the crisis period to 8.26 after the clean-up exercise. Research limitations/implications The available financial data on banking were constrained to the Ghanaian banking sector. Further research is needed to extend the financial data set by including the entire financial sector of Ghana. Again there remains more work to do in clarifying why some banks are persistently profitable and the country variables that appear to affect bank profits. Practical implications The results of the different crisis periods during the Bank Clean-Up Exercise in Ghana provide information for investors, industry experts and regulators seeking optimal policies for bank performance management in terms of sustained profitability. Originality/value This study provides the first empirical examination of profit persistence in Ghana’s banking industry, employing an autoregressive model (AR1) to provide more accurate insights. Unlike most of the previous studies that have been conducted on either publicly quoted firms or firms of minimum sizes, this study is based on data that have very few restrictions on firm size, and therefore provides a more accurate picture of the industry. Further, although the dynamic panel model such as the Generalised Method of Moments (GMM) estimator has been the general econometric method to analyse profit persistence, the present study enhances the method by using the autoregressive model of order one AR(1). The findings of this study are policy-relevant, highlighting factors influencing bank profits and their sustainability, aiding regulators and industry stakeholders in optimizing performance management.