Effect of Financial Performance on Share Returns of Commercial Banks Listed at the Nairobi Securities Exchange

Abstract

Commercial banks in Kenya have reported a rise in their financial performance considerably. In the past ten years, the financial performance of banks listed at the Nairobi Securities Exchange(NSE) have been on the rise. However, when it comes to share prices and share returns, NSE has recorded stagnation in majority of the listed stocks including those for banks. This research sought to bring out the effect of financial performance on the stock returns among listed commercial banks at the NSE. Bank size, capital adequacy and liquidity were used as the control variables in the model. Descriptive research design was used. The target population was the 11 commercial banks listed at the NSE. Research variables data were derived from CBK, CMA and annual financial statements from 2016 to 2020 for all the 11 banks. Regression and correlation analysis were used to test the study hypotheses by establishing the relationship between financial performance and stock returns. The study found that financial performance (β=0.113, p=0.000), bank size (β=0.414, p=0.000) and capital adequacy (β=0.106, p=0.008) had a positive and significant effect on the stock returns among listed banks in Kenya. The study also found that liquidity (β=0.010, p=0.812) had no significant effect on the stock returns among listed banks in Kenya. The results also indicated R2 of 0.593 which implied that the selected independent variables contributed 59.3% to variations in stock returns. The study recommends that managers of commercial banks should develop strategies aimed at enhancing financial performance as this contributes to stock returns. Policies and recommendations developed by CBK and others should make it easier for banks to provide their services. It is recommended that banks in Kenya should focus on increasing their asset base, since larger banks benefit from economies of scale and stronger structures that assist them improve their stock returns. The study further recommends that future studies should focus on other institutions listed at the NSE such as insurance and manufacturing for comparison purposes. Future research should also look into how financial performance affects other factors besides the stock returns, such as company value, efficiency and growth. The study's results are beneficial to bank managers and policy makers since it provides relevant information and suggestions that will help them make better choices that will enhance their bank's share returns. As a result, they are in a better position to develop suitable plans and practices for their institutions improved financial performance management.