Credit Risk Assessment and the Financial Performance of Deposit Money Banks in Nigeria

This study investigated the impact of credit risk assessment on the financial performance of deposit money banks in Nigeria over a 14-year span from 2010 to 2023. Utilizing econometric tools including the Ordinary Least Squares (OLS) method, descriptive statistics, and post-estimation diagnostics, the research explored how credit risk variables influence bank performance. Financial performance was measured using Return on Equity (ROE), while credit risk was assessed using three indicators: the non-performing loans ratio (NPLR), loan-to-deposit ratio (LDR), and capital adequacy ratio (CAR). The results showed that the non-performing loan ratio (NPLR) had a negative and statistically significant effect on ROE (β = -0.580743, p = 0.0454), indicating that higher levels of non-performing loans ratio reduce profitability. Although the loan-to-deposit ratio demonstrated a positive effect on ROE, this relationship was not statistically significant (β = 0.128974, p = 0.8655). Conversely, the capital adequacy ratio exhibited a negative and statistically significant effect on ROE (β = -3.099653, p = 0.0106), suggesting that higher capital buffers might constrain profitability under certain conditions. The study concluded that credit risk indicators play a crucial role in determining the financial performance of Nigerian deposit money banks. Based on the findings, the following recommendations were made: i. Central Bank of Nigeria (CBN) should strengthen credit appraisal and monitoring frameworks within banks to reduce non-performing loans ratio. ii. CBN should adopt a more adaptable, risk-sensitive approach to capital adequacy requirements, particularly for institutions with robust risk management systems. iii. CBN and the Nigerian government should promote increased lending to the real sector by offering credit guarantees or interest rate incentives to key economic industries.