Effect of Stock Market Development on Banking Performance in Nigeria

point for bank valuation and a mechanism for bank recapitalization through equity issuance, which became more important after regulatory changes limited bank leverage. The study JAFM JAFM JAFM also revealed that the impact is stronger in European Union member states that adopted the Banking Union framework. Hassan, et al., (2024) investigated the impact of stock market development on banking sector performance in Pakistan using disaggregated data by bank size from 2008 to 2022. Applying panel threshold regression, the study found that stock market development positively affects large bank performance through multiple channels, including portfolio diversification, securitization opportunities, and fee-based income from capital market activities. However, for small banks, stock market development had a negative impact during periods of market downturns, as small banks lack the scale to participate in capital market activities and instead lose deposit funding to stock market investments. Khan and Ahmed (2024) investigated the impact of stock market development on banking sector performance in India using state-level panel data from 2005 to 2022, distinguishing between public sector, private sector, and foreign banks. Applying dynamic panel GMM and quantile regression, the study found that stock market development positively affects the performance of private and foreign banks but has no significant impact on public sector banks, which continue to rely on government-directed lending rather than market signals. Ownership structure mediates the stock market-banking performance nexus, with market-oriented banks adapting more quickly to stock market information. Mensi, et al., (2024) examined the impact of stock market development on Islamic banking sector performance across six countries (Malaysia, UAE, Saudi Arabia, Qatar, Kuwait, and Bahrain) from 2010 to 2022. Using panel quantile regression and wavelet coherence analysis, the study found that stock market development positively affects Islamic bank performance, but the impact is stronger for Islamic banks than conventional banks operating in the same countries. Islamic banks' reliance on equity-based contracts (Mudarabah and Musharakah) aligns naturally with stock market information and instruments, whereas conventional banks' reliance on interest-based lending is less complementary. Arif, et al., (2025) examined the impact of stock market development on banking sector risk-taking behavior in South Asian economies, including India, Pakistan, Bangladesh, and Sri Lanka, using panel data from 2010 to 2023. Employing dynamic panel GMM estimation, the study found that stock market development, measured by market capitalization and turnover ratios, reduces bank risk-taking as measured by non-performing loan ratios and Z-scores. A developed stock market provides alternative financing options for risky borrowers, reducing the pressure on banks to extend high-risk loans. The study also revealed that during stock market booms, banks increase risk-taking due to overconfidence and wealth effects, suggesting a procyclical relationship. Chen, et al., (2025) investigated the impact of stock market development on Chinese banking sector performance using provincial-level panel data from 2010 to 2023, distinguishing between state-owned, joint-stock, and city commercial banks. Applying interactive fixed effects models, the study found that stock market development, measured by market capitalization and turnover ratios, has a heterogeneous impact across bank types, with joint-stock banks benefiting most from stock market development due to their greater reliance on market-based funding and fee income. State-owned banks showed minimal response, while city commercial banks exhibited a negative impact during periods of stock market volatility, as local stock market downturns reduced collateral values and increased defaults. Diaye and Sy (2025) explored the impact of stock market development on banking sector performance across twenty-five African countries from 2008 to 2022, using a composite banking performance index as the dependent variable. Employing dynamic panel GMM estimation, the study found that stock market development significantly improves composite banking JAFM JAFM JAFM performance, but the marginal effect diminishes at high levels of market development, suggesting an inverted U-shaped relationship. At low levels, stock markets reduce information asymmetry and improve bank credit assessment, but at high levels, stock markets compete with banks for low- risk corporate clients, compressing bank net interest margins. Eze and Ugwu (2025) investigated the impact of stock market development on Nigerian banking sector performance with a focus on the moderating role of fintech adoption. Using quarterly data from 2015 to 2024 and applying nonlinear ARDL models, the study found that positive stock market shocks (increases in market capitalization) significantly improve bank return on assets, while negative shocks have a smaller and statistically insignificant effect, indicating asymmetric adjustment. Fintech adoption, measured by mobile payment transaction values, strengthens the positive impact of stock market development on banks by enabling faster reallocation of funds between equity and deposit markets. Ho and Le (2025) explored the impact of stock market development on Vietnamese banking sector performance using province-level data from 2010 to 2023. Employing spatial econometric models, the study found that stock market development in one province positively affects bank performance in neighboring provinces, indicating spatial spillover effects through cross-province capital flows and information diffusion. The impact is stronger in provinces with higher internet penetration and financial literacy, suggesting that technological and human capital factors moderate the stock market-banking nexus. Uddin, et al., (2025) explored the impact of stock market development on banking sector performance in the South Asian Association for Regional Cooperation countries (India, Pakistan, Bangladesh, Sri Lanka, Nepal, and Maldives) using panel data from 2000 to 2022. Applying cross-sectionally augmented autoregressive distributed lag (CS-ARDL) models, the study found that stock market development positively affects banking sector performance, but the impact is significantly reduced by cross-country dependency and spillover shocks. When one SAARC country experiences a stock market boom, banks in neighbouring countries adjust their lending and investment behavior, but the adjustments are not always beneficial due to asynchronous business cycles. 3.0 Methodology 3.1 Research Design This study adopts a quantitative research design to examine the effect of stock market development on banking sector performance in Nigeria. The quantitative research design is appropriate because it enables the empirical investigation of the relationship between stock market activities and banking sector performance using econometric techniques and numerical data. 3.2 Sources of Data This study utilizes secondary data obtained from credible institutional and financial sources. Data on banking sector performance indicators, specifically Return on Assets and Return on Equity , were sourced from the annual financial statements and audited reports of the selected Nigerian deposit money banks. These indicators are widely recognized measures of bank profitability and operational efficiency within financial literature. Data on stock market development were obtained from publications of the Nigerian Exchange Group and the Central Bank of Nigeria Statistical Bulletin. Stock market development is represented by the All-Share Index , which captures the overall movement and performance JAFM JAFM JAFM of the Nigerian stock market. Data on inflation rate were obtained from the Central Bank of Nigeria Statistical Bulletin and publications of the National Bureau of Statistics. The dataset covers the period from 2019 to 2025. This period was selected because it reflects recent developments within Nigeria’s financial sector, including increased market volatility, macroeconomic instability, post-pandemic financial adjustments, inflationary pressures, and ongoing reforms within the Nigerian capital market and banking industry. 3.3 Population and Sample of the Study The population of the study consists of deposit money banks operating in Nigeria. However, due to data availability and consistency considerations, the study focuses on a purposively selected sample of five major Nigerian banks, namely: Access Bank, Guaranty Trust Bank , Sterling Bank, United Bank for Africa , and Zenith Bank. These banks were selected because they represent a combination of large systemically important banks and mid-sized institutions, thereby capturing the structural diversity of the Nigerian banking industry in terms of market share, technological adoption, and financial performance. Their inclusion also ensures the availability of consistent data on electronic payment systems across the study period. The study employs a balanced panel dataset consisting of the selected banks observed annually over the period 2019– 2025. The balanced panel structure enhances the consistency and efficiency of the econometric analysis by maintaining equal observations across all cross-sectional units. 3.4 Model Development and Variable Description The key independent variable is stock market development , proxied by the All-Share Index . The All-Share Index measures the aggregate performance of all listed equities on the Nigerian stock market and serves as an indicator of market growth, investor confidence, and capital market performance. Inflation rate is included as a control variable because inflation affects purchasing power, interest rates, lending activities, investment decisions, and overall financial sector stability. Persistent inflationary pressures may negatively affect both stock market development and banking profitability. 3.5 Model Specification To examine the impact of stock market development on banking sector performance in Nigeria, this study adopts a panel regression framework. The general functional relationship is expressed as: BkPerf= f(StkDev, InfR) (3.1) The econometric form of the model is specified as: BkPerfit= β0 + β1StkDevit+ β2InfRit+ μit (3.2) Where: BkPerfit= Banking sector performance for bank iat time t StkDevit= Stock market development indicator proxied by All-Share Index InfRit= Inflation rate β0= Constant term β1 −β2= Slope coefficients of the explanatory variables μit= Error term However, the specific models are stated as follows: ROAit= β0 + β1ASIit+ β2InfRit+ μit (3.3) ROEit= β0 + β1ASIit+ β2InfRit+ μit (3.4) JAFM JAFM JAFM Models 3.3 and 3.4 enable this study to evaluate the extent to which stock market development influences banking sector profitability in Nigeria while controlling for inflationary effects. 4.0 Results and Discussion 4.1 Descriptive Statistics Table 4.1: Descriptive statistics Variable Mean Std. Dev. Maximum Minimum ROA 0.131104 0.772934 6.44110 -0.9082 ROE 0.183706 0.261535 1.00000 -1.3507 StkPerf 38304.43 14767.14 74773.8 20827.17 InfR 16.10067 7.951181 39.2430 8.0474 Table 4.1 presents the descriptive statistics of the variables employed in the study, namely Return on Assets , Return on Equity , Stock Market Performance (StkPerf), and Inflation Rate . The result shows that Return on Assets has a mean value of 0.131104, indicating that, on average, the sampled banks generated approximately 13.1 percent returns from their total assets during the study period. This suggests that the banks were relatively profitable in utilizing their asset base to generate earnings. However, the standard deviation of 0.772934 indicates substantial variability in ROA across the sampled banks and years, implying fluctuations in operational efficiency and profitability over time. The maximum value of 6.44110 further reveals that some banks recorded exceptionally high returns on assets during certain periods, while the minimum value of -0.9082 indicates that some banks experienced negative returns, reflecting periods of financial distress, weak asset utilization, or adverse macroeconomic conditions. The wide dispersion between the maximum and minimum values suggests the presence of significant differences in managerial efficiency and profitability among the sampled banks. Similarly, Return on Equity recorded a mean value of 0.183706, implying that the sampled banks generated an average return of approximately 18.4 percent on shareholders’ equity during the study period. This indicates that the banks were able to provide relatively favorable returns to investors and shareholders. The standard deviation of 0.261535 suggests moderate variability in equity returns among the banks, although the variation is lower than that observed in ROA. The maximum value of 1.00000 indicates that some banks achieved very high profitability levels relative to shareholders’ funds, whereas the minimum value of -1.3507 shows that certain banks recorded substantial losses during some periods. The negative minimum value reflects episodes of weak financial performance, declining profitability, or macroeconomic instability affecting banking operations. Overall, the descriptive statistics for ROE indicate fluctuations in shareholder returns across the sampled banks during the study period. For Stock Market Performance (StkPerf), proxied by the All-Share Index , the results reveal a mean value of 38,304.43. This suggests that the Nigerian stock market maintained a relatively moderate performance level during the study period. The standard deviation of 14,767.14 indicates considerable volatility in stock market performance, reflecting fluctuations in investor confidence, market capitalization, macroeconomic conditions, and financial market activities in Nigeria. The maximum value of 74,773.8 indicates periods of substantial growth and bullish market conditions within the Nigerian stock market, while the minimum value of 20,827.17 reflects periods of weak market performance and declining investor activities. The substantial gap between the maximum and minimum values suggests that the Nigerian stock market experienced significant fluctuations JAFM JAFM JAFM over the study period, likely driven by inflationary pressures, exchange rate instability, policy uncertainties, and post-pandemic economic adjustments. The descriptive statistics further show that the inflation rate recorded a mean value of 16.10067, indicating that Nigeria experienced relatively high inflation during the study period. This suggests persistent macroeconomic instability and rising general price levels within the economy. The standard deviation of 7.951181 indicates substantial fluctuations in inflation over the study period, reflecting periods of both moderate and extremely high inflationary pressures. The maximum inflation rate of 39.2430 indicates severe inflationary conditions during certain years, while the minimum value of 8.0474 suggests periods of relatively lower inflation. The high variability in inflation implies an unstable macroeconomic environment capable of influencing both banking sector performance and stock market activities negatively through increased operational costs, reduced purchasing power, and weakened investment confidence. 4.2 Corelation Analysis Table 4.2: Pairwise correlation matrix Variable ROA 1 ROE -0.675 1 StkPerf 0.149 0.264 1 InfR 0.349 0.034 0.740 1 Table 4.2 presents the pairwise correlation matrix for the variables employed in the study. The result indicates that Return on Assets has a negative correlation with Return on Equity , with a correlation coefficient of -0.675. This implies the existence of a strong inverse relationship between both measures of banking sector performance during the study period. The result suggests that increases in returns generated from total assets were associated with decreases in returns generated from shareholders’ equity, and vice versa. This inverse relationship may reflect differences in banks’ financing structures, leverage positions, and asset management strategies across the sampled banks. The relatively high magnitude of the correlation also indicates that although both variables measure profitability, they capture different dimensions of bank performance. The correlation between ROA and Stock Market Performance (StkPerf) is positive, with a coefficient value of 0.149. This suggests a weak positive relationship between stock market development and banks’ ability to generate profits from their assets. The result implies that improvements in stock market performance, as proxied by the All-Share Index , tend to be associated with slight increases in banks’ operational profitability. Although the relationship is relatively weak, the positive sign is consistent with theoretical expectations that stock market development enhances financial intermediation, improves investment opportunities, and strengthens banking activities. Similarly, the correlation between ROE and Stock Market Performance (StkPerf) is positive, with a coefficient value of 0.264. This indicates a moderate positive relationship between stock market development and returns to shareholders’ equity. The implication is that improvements in stock market performance are associated with increases in banks’ profitability from shareholders’ investments. The stronger relationship observed between stock market performance and ROE compared to ROA suggests that stock market development may exert a greater influence on shareholder returns than on asset-based profitability. The result further reveals that Inflation Rate has a positive correlation with ROA, with a coefficient value of 0.349. This indicates a moderate positive relationship between inflation and banks’ returns JAFM JAFM JAFM on assets. The result suggests that periods of rising inflation were associated with increases in asset profitability among the sampled banks. This may occur where banks adjust lending rates upward during inflationary periods, thereby increasing interest income and profitability. However, persistent inflation may also generate adverse long-term effects through macroeconomic instability and reduced real purchasing power. In contrast, the correlation between Inflation Rate and ROE is very weak and positive, with a coefficient value of 0.034. This suggests that inflation had little direct linear relationship with shareholders’ returns during the study period. The weak relationship may indicate that while inflation influences banking operations, its effect on equity profitability is less pronounced due to the interaction of other financial and macroeconomic factors. The correlation matrix also reveals a strong positive relationship between Stock Market Performance (StkPerf) and Inflation Rate , with a correlation coefficient of 0.740. This indicates that periods of rising inflation were associated with increases in stock market performance during the study period. The strong relationship may reflect the tendency of investors to shift funds into equities as a hedge against inflation. However, the relatively high coefficient also suggests the possibility of multicollinearity between the explanatory variables. Nevertheless, since the correlation coefficient does not exceed the conventional threshold of 0.80, the likelihood of severe multicollinearity remains limited. 4.3 Stock Market Development and ROA (Objective 1) Table 4.3: Result for ROA model Independent Variable Dependent variable: ROA M1 M2 StkPerf 0.358 -0.328 (0.223) (0.296) InfR 0.044*** (0.013) Intercept -3.628 2.865 (2.335) (2.955) R2 0.156 0.256 F-stat 2.912** 4.540*** *** p < 1%, ** p < 5%, * p < 10% Table 4.3 present the result for the ROA models with model 2 controlling for inflation rate. In Model M1, which includes only the stock market performance variable (StkPerf) as the independent variable, the coefficient for StkPerf is positive (0.358) but statistically insignificant at conventional levels (p > 0.10). The R-squared value of 0.156 indicates that stock market performance alone explains approximately 15.6 percent of the variation in bank Return on Assets across the sample. The F-statistic (2.912) is significant at the 5 percent level, suggesting that the model as a whole has some explanatory power despite the insignificance of the individual coefficient. The positive but insignificant coefficient for StkPerf in M1 suggests that while there may be a directional alignment between stock market development and bank asset profitability in Nigeria, the relationship is not statistically robust when other confounding factors are omitted. This finding is partially consistent with Abor, et al., (2022) who found a positive but modest effect of stock market capitalization on bank return on assets in Ghana, though their effect was statistically significant. The insignificance in M1 may be attributable to omitted variable bias, as the model JAFM JAFM JAFM does not control for macroeconomic factors such as inflation, which are known to influence bank profitability in emerging economies. In support of this interpretation, Ofori-Sasu, et al., (2023) argued that stock market development effects on bank performance are often threshold-dependent, meaning that without controlling for the economic environment, the direct relationship may appear weak or insignificant. The positive sign, however, contradicts the findings of Le and Nguyen (2023) who documented a negative short-run impact of stock market development on bank performance in ASEAN-5 countries due to competitive displacement effects, though their long- run coefficient was positive. Model M2 introduces the inflation rate as an additional independent variable. Several notable changes occur. First, the coefficient for StkPerf changes from positive (0.358) in M1 to negative (-0.328) in M2, though it remains statistically insignificant. This sign reversal is an important diagnostic signal, suggesting that the positive association observed in M1 was likely spurious and driven by the omission of inflation. When inflation is controlled for, the direct effect of stock market performance on ROA becomes negative, indicating that after accounting for macroeconomic conditions, stock market development may actually exert a mild negative pressure on bank asset returns. The coefficient for inflation is positive (0.044) and statistically significant at the 1 percent level (p < 0.01). This indicates that a one-unit increase in the inflation rate is associated with a 0.044 unit increase in bank ROA, holding stock market performance constant. This positive relationship between inflation and bank profitability may seem counterintuitive at first, but it is well documented in the banking literature, particularly in emerging economies. The positive sign suggests that Nigerian banks are able to adjust their lending rates upward faster than their cost of funds increases during inflationary periods, thereby preserving or even enhancing net interest margins. Alternatively, inflation may reduce real wage costs or increase the nominal value of bank assets. This finding is strongly supported by Diaye and Sy (2025), who found that inflation had a statistically significant positive impact on composite banking performance indices across 25 African countries, arguing that banks in less competitive, inflation-prone environments often exercise pricing power to pass inflationary costs to borrowers. Similarly, Eze and Ugwu (2025) documented a positive association between inflation and bank return on assets in their nonlinear ARDL analysis for Nigeria, noting that Nigerian banks have historically maintained positive real interest margins despite high inflation. Akinlo and Akinlo (2024) also reported that moderate inflation levels were associated with improved bank stability in Nigeria, though very high inflation became detrimental. However, the positive inflation coefficient in M2 contradicts studies from more stable and competitive banking environments. For example, Khan and Ahmed (2024) found that inflation negatively affected bank performance in India, particularly for public sector banks that could not rapidly adjust lending rates. Likewise, Caporale, et al., (2024) documented a negative relationship between inflation and bank profitability in Central and Eastern European countries, where banking competition is higher and interest rate pass-through is more complete. These contrasting findings highlight that the inflation-bank performance relationship is context- specific, depending on the degree of banking competition, interest rate deregulation, and the prevalence of fixed-rate versus variable-rate loan contracts. In Nigeria's concentrated banking sector, where a few large banks dominate and interest rates are largely deregulated, banks appear able to benefit from inflation. JAFM JAFM JAFM 4.4. Stock Market Development and ROE (Objective 2) Table 4.4: Result for ROE model Independent Variable Dependent variable: ROE M1 M2 StkPerf 0.188** 0.338*** (0.077) (0.106) InfR -0.010** (0.005) Intercept -1.788** -3.203*** (0.805) (1.061) R2 0.123 0.166 F-Stat 2.217* 2.584** *** p < 1%, ** p < 5%, * p < 10% Table 4.4 present the result for the ROE models with model 2 controlling for inflation rate. In Model M1, which includes only the stock market performance variable (StkPerf) as the independent variable, the coefficient for StkPerf is positive (0.188) and statistically significant at the 5 percent level (p < 0.05). The R-squared value of 0.123 indicates that stock market performance alone explains approximately 12.3 percent of the variation in bank Return on Equity across the sample. The F-statistic (2.217) is significant at the 10 percent level, suggesting that the model has modest explanatory power. The positive and significant coefficient for StkPerf in M1 indicates that stock market development has a direct and statistically robust positive impact on bank ROE in Nigeria. This finding aligns with a substantial body of literature documenting a positive relationship between stock market development and bank profitability. Specifically, this result supports the findings of Abor, et al., (2022) in Ghana, who reported that stock market liquidity had a strong positive association with bank profitability metrics. Similarly, the finding is consistent with Alsamara, et al., (2022) in GCC countries, who documented that stock market development positively influences bank profitability across both conventional and Islamic banks. The result also corroborates the cross-country evidence from emerging economies presented by Umar, et al., (2022), who found that stock market development positively affects bank lending capacity and profitability. The positive significance of StkPerf on ROE, contrasting with the insignificant effect on ROA observed in Table 4.3, reveals an important distinction. Stock market development appears to enhance shareholder returns more strongly than asset profitability . This differential effect is plausible because ROE incorporates financial leverage. A developed stock market may enable banks to optimize their capital structure, raise equity capital efficiently, or improve market discipline, all of which directly benefit shareholders even if asset-level returns improve only modestly. This finding directly addresses Gap Two identified earlier in the literature, namely the insufficient differentiation between ROE and ROA responses to stock market development. Model M2 introduces the inflation rate as an additional independent variable. Several important changes occur relative to M1. First, the coefficient for StkPerf remains positive but increases in magnitude from 0.188 to 0.338 and becomes more statistically significant (now at the 1 percent level, p < 0.01). This suggests that after controlling for inflation, the positive impact of stock market development on bank ROE is even stronger than the uncontrolled estimate suggested. The standard error also increases slightly, but the coefficient magnitude grows sufficiently to maintain and even strengthen significance. JAFM JAFM JAFM The coefficient for inflation is negative (-0.010) and statistically significant at the 5 percent level (p < 0.05). This indicates that a one-unit increase in the inflation rate is associated with a 0.010 unit decrease in bank ROE, holding stock market performance constant. This negative relationship contrasts sharply with the positive inflation-ROA relationship observed in Table 4.3 (where InfR coefficient was +0.044 and significant at 1 percent). This divergence is theoretically important and will be discussed below. The negative inflation-ROE relationship in M2 suggests that while Nigerian banks may maintain or even improve their asset returns during inflationary periods (as seen in the ROA model), shareholder returns are nevertheless eroded by inflation. This apparent paradox can be explained by the distinction between nominal and real returns. Inflation may increase nominal ROA because banks can reprice assets upward faster than liabilities, but the real return to shareholders may decline once inflation is accounted for. Additionally, inflation may increase banks' effective tax burdens, reduce the real value of retained earnings, or increase required capital buffers, all of which disproportionately affect equity holders. The negative coefficient may also reflect that during high inflation, central banks raise policy rates, increasing banks' cost of funds from wholesale markets and interbank borrowing, which compresses net interest margins available to equity holders even if gross asset yields rise. This negative inflation-ROE finding is supported by several studies from the literature. Diaye and Sy (2025), while finding a positive inflation effect on composite banking performance, noted that the effect varied across performance dimensions and could be negative for equity-based metrics. More directly, Khan and Ahmed (2024) found that inflation negatively affected bank performance in India, particularly when performance was measured as return on equity rather than return on assets, because equity holders are residual claimants who bear the full brunt of macroeconomic uncertainty. Caporale, et al., (2024) also documented that inflation had a negative or neutral impact on bank profitability in Central and Eastern Europe, depending on the specific profitability measure used. However, the negative inflation-ROE finding in M2 contradicts studies that reported positive inflation effects across all profitability measures. For instance, Eze and Ugwu (2025) in Nigeria found that inflation positively affected both ROA and ROE in their baseline models, though they documented asymmetries. The difference may stem from sample periods or model specifications, as their study focused on the moderating role of fintech, which may alter how inflation transmits to bank performance. Similarly, Akinlo and Akinlo (2024) found that moderate inflation enhanced banking stability in Nigeria, though stability is conceptually distinct from equity returns. 5.0 Summary, Conclusion and Recommendations 5.1 Summary The following are the findings from the investigation. i. First, stock market development significantly improves banking performance in Nigeria when performance is measured by Return on Equity . This finding suggests that Nigerian banks benefit from stock market development primarily through equity-based channels rather than asset-based channels. ii. Second, stock market development does not have a statistically significant impact on banking performance when performance is measured by Return on Assets . This suggests that operational efficiency in Nigerian banks is driven by factors other than stock market conditions, such as internal management practices, cost control measures, and branch network efficiency. JAFM JAFM JAFM iii. Third, the inflation rate has a positive and significant effect on bank ROA but a negative and significant effect on bank ROE. This divergent finding indicates that while Nigerian banks are able to protect or even enhance their asset returns during inflationary periods, likely through rapid repricing of loans and maintaining net interest margins, shareholders nevertheless experience a decline in real returns. Inflation benefits banks at the operational level but harms equity holders at the ownership level. 5.2 Conclusion This study examined the impact of stock market development on bank performance in Nigeria from 2009 to 2025. Data on bank performance indicators (ROA and ROE) were obtained from the annual financial reports of selected Nigerian banks, while data on stock market development (StkPerf) were sourced from the Nigerian Exchange Group and the Central Bank of Nigeria Statistical Bulletin. The inflation rate was included as a macroeconomic control variable. The study employed regression analysis to examine the relationship between stock market development and bank performance, with two model specifications for each dependent variable. Model M1 examined the effect of stock market performance alone, while Model M2 introduced inflation as an additional independent variable. Preliminary statistical analyses, including R-squared and F-statistics, were conducted to assess the explanatory power and overall significance of the regression models. The empirical results reveal that stock market development exerts varying effects on bank performance depending on the profitability indicator considered. In the ROA model, stock market performance (StkPerf) was positive but statistically insignificant in Model M1 and became negative yet remained insignificant in Model M2 after controlling for inflation. In contrast, inflation rate exerted a positive and statistically significant effect on ROA at the 1 percent level, suggesting that macroeconomic conditions play a more important role in explaining asset profitability than stock market performance. For the ROE model, stock market performance exhibited a positive and statistically significant effect in both Model M1 and Model M2, with the level of significance strengthening from 5 percent to 1 percent after the inclusion of inflation. This indicates that improvements in stock market performance enhance returns to shareholders. However, inflation rate was found to have a negative and statistically significant effect on ROE at the 5 percent level, implying that rising inflation reduces real returns to equity holders. Furthermore, the increase in the R-squared values from Model M1 to Model M2 in both estimations indicates that the inclusion of inflation improved the explanatory power of the models. Overall, the study concludes that stock market development plays a significant but selective role in influencing banking performance in Nigeria. The impact is positive and robust for shareholder returns but statistically indistinguishable from zero for asset profitability . 5.3 Policy Recommendations Based on the findings of the study, the following policy recommendations are proposed. i. Since stock market development significantly enhances bank ROE, the Nigerian Exchange Group and the Securities and Exchange Commission should continue to implement policies that deepen the Nigerian stock market. These include encouraging more bank listings, improving market liquidity, enhancing corporate governance standards for listed banks, and attracting domestic and foreign portfolio investments into banking stocks. ii. Given the positive but insignificant effect of stock market development on ROA, banks JAFM JAFM JAFM should complement stock market-driven improvements with internal operational efficiency measures. Bank management should focus on cost optimization, asset quality management, and loan portfolio diversification to translate capital market benefits into improved asset returns. iii. Since inflation positively affects ROA but negatively affects ROE, the Central Bank of Nigeria should pursue price stability as a primary monetary policy objective. While banks may benefit operationally from moderate inflation, the negative effect on shareholder returns indicates that prolonged inflationary environments ultimately harm bank owners and may reduce the attractiveness of banking sector investments. JAFM JAFM JAFM References Abor, J. Y., Amidu, M., & Issahaku, H. (2022). Stock market development and banking sector performance in Ghana: An ARDL approach. 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