Effect of Bank Asset Default Risk on Profitability of DMBS in Nigeria

The business of lending exposes banks to default risk, one of the primary risks inherent in banking. This study examined the effect of default risk on the profitability of Deposit Money Banks in Nigeria over a 13-year period (2010 to 2022). The independent variables, representing bank asset default risk (income balance, capital adequacy ratio, provisioning coverage ratio, non-performing asset ratio, and economic trends), were regressed against the return on assets (ROA) as a proxy for bank profitability. An ex-post facto research design was adopted. Data were collected from the annual reports and financial statements of 10 listed deposit money banks selected from a population of 25 commercial banks in Nigeria. A panel regression based on the random effect model was found to be the most suitable for estimating all models. The results of the random effect model revealed that capital adequacy ratio had a negative and significant effect, while economic trends had a significant positive effect on the return on assets of deposit money banks in Nigeria. Other default risk variables (income balance, provisioning coverage ratio, and non-performing asset ratio) did not have a significant effect on bank profits. The study asserts that capital adequacy ratio (CAR) and economic trends (ET) are the primary determinants of bank profitability in Nigeria.