Effects of credit risk on financial performance of quoted Deposit money banks in Nigeria

Abstract

This study investigates the effect of credit risk on the financial performance of quoted deposit money banks in Nigeria. It specifically examines how non-performing loans (NPL), loan-to-deposit ratio (LDR), and loan loss provision (LLP) influence profitability, proxied by return on assets (ROA). The population comprises all twelve deposit money banks listed on the Nigerian Exchange Group, from which eleven were purposively selected based on data availability and consistency in financial reporting over a ten-year period (2015–2024). The study adopts an ex post facto research design and utilizes secondary data obtained from the banks’ audited annual financial statements, the Nigerian Exchange Group Factbook, and the Central Bank of Nigeria Statistical Bulletin. Descriptive statistics, correlation analysis, and diagnostic tests were conducted, followed by panel regression analysis, with the Hausman test indicating that the random effects model was the most appropriate estimator. The results show that NPL exerts a negative but statistically insignificant effect on ROA, LDR has a positive yet insignificant impact, while LLP exhibits a positive and significant relationship with financial performance. These findings imply that effective loan provisioning enhances performance, whereas credit quality and intermediation efficiency remain critical but not yet optimized. The study recommends that banks strengthen credit monitoring systems, maintain optimal loan–deposit structures, and implement prudent provisioning practices to achieve sustained profitability and financial resilience.