The Impact of Credit Risk Management on the Financial Performance and Valuation of Banks in Nigeria

This study investigates the impact of Credit Risk Management (CRM) practices on the financial performance of Deposit Money Banks (DMBs) in Nigeria from 2010 to 2024. Amidst economic volatility, the trade-off between prudential risk measures and profitability remains empirically inconclusive. Using an ex post facto design, 210 observations from 14 listed DMBs were analyzed using Fixed Effects regression with robust standard errors. Credit risk was proxied by Loan Loss Provisions (LLP) and Capital Adequacy Ratio (CAR), while performance was dual-measured via Return on Assets (ROA) and Tobin's Q. Control variables included Firm Size, Leverage, Liquidity, Growth Opportunities, Age, and Profitability. Results indicate a divergent impact: LLP and CAR significantly negatively influence ROA, confirming the direct expense burden of prudential measures. Conversely, both variables significantly positively impact Tobin's Q, suggesting capital markets reward risk mitigation with higher franchise valuation. Furthermore, Liquidity exhibited a similar trade-off between profitability and stability. The study concludes that while robust CRM dampens short-term accounting returns, it enhances long-term firm value by reducing solvency risk and information asymmetry. These findings contribute to empirical corporate finance literature by reconciling accounting and market-based performance metrics within an emerging market context. Policymakers should implement phased recapitalization to prevent credit contraction, while investors must prioritize valuation metrics over immediate profitability. This research underscores the necessity of balancing regulatory compliance with sustainable strategic value creation for systemic resilience.