This study presents empirical evidence of the effect of bank capital structure and liquidity on profitability using Nigerian data for the period 1980-2006 studied. The data were analyzed using descriptive statistics and the auto-regressive distributed lag (ADL) model. Specifically, the study applied data on an OLS methodology that incorporated unit root tests for stationarity and co-integration. We find a positive influence of cash reserve ratio, liquidity ratio and corporate income tax; and a negative influence of bank credits to the domestic economy, savings deposit rate, gross national savings (proxy for deposits with the central bank), balances with the central bank, inflation rate and foreign private investments, on banking system profits. We equally observe that liquidity ratio leads banks’ profits in Nigeria, closely followed by balances with the central bank and then, gross national savings and foreign private investments, followed suit in that order. We therefore recommend a drastic reduction in balances with central bank, liquidity ratio and cash reserve ratio profiles by the monetary authorities to enable banks create adequate credits and release more money into circulation for effective financial intermediation to occur; ensure effective and efficient management of bank liquidity by banks to moderate levels so as to optimize profitability, and curb perennial unethical banking practices such as directly engaging in trading, importation and exportation of goods, and other speculative deals, instead of lending to the domestic economy.
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