Effect of Credit Risk on Financial Performance of Listed Deposit Money Banks in Nigeria

Abstract

Banks are the largest financial institutions, with numerous branches and subsidiaries around the globe. However, the business of banking is not without drawbacks. Credit risk is one of the major threats facing the banking industry. This is due to the fact that money deposit banks derive a significant portion of their income through granting of credit. This study examines the effect of credit risk on financial performance of listed money deposit banks in Nigeria. The study utilized return on equity (ROE) as proxy for financial performance, while credit risk was represented by non[1]performing loan ratio (NPLR), loan loss provision (LLP), capital adequacy ratio (CAR) and; loans and advances to total deposit (LATD). The study adopts correlation research design and utilized secondary data extracted from the published accounts of the 14 listed money deposit banks in Nigeria from 2011 - 2020. Multiple regression was used for data analysis and results revealed LLP and CAR as having a direct and significant relationship with ROE, while NPLR and LATD have an insignificant effect on ROE. The study therefore recommends among others that quoted money deposit banks should raise the loan loss provision reserves to enable them give additional loans and absorb credit losses if they arise.