Studying the Link(s) between Credit Risk Management and Profitability of DMBs in Nigeria

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Authors

¹ Chukwunyelu, Ngozi Blessing

² Nnado Ifeanyi Celestine

³ Nwankwo, Geraldine Chinyere

⁴ Ejike, Chukwuma Kenneth

⁵ Ani, Uchenna Gloria

^{1,2,3,4 &5} Department of Accountancy, Enugu State University of Science and Technology, Enugu

² Corresponding Author & email addresses: [email protected]; +2348038113063

ABSTRACT

The study examined the effect of credit risk management on profitability of deposit money banks (DMBs) in Nigeria. Specifically, it analyzed the impact of non-performing loans (NPL), loan loss provision (LLP), and capital adequacy (CAR) on return on assets (ROA) of sampled firms. Panel least squares, specifically, Prais-Winsten panel corrected standard errors (PCSEs) regression were used to analyze the collated data. The Prais-Winsten regression correlated panels corrected standard errors (PCSEs) examined how npltta, llptta, cartta, and lnta affect roa. In respect to the coefficients, npltta has a coefficient (-9.5123). It implies that a unit increase in npltta reduces roa by 9.512 units. Further, this exertion is statistically strong given the p-value = 0.028 < 5% and t-statistic = -2.20. Conversely, llptta exerted a positive albeit nonsignificant influence on roa (coefficient = 7.72, p-value = 0.501 > 5% and t-statistic = 0.67). This implies that a unit increase in llptta increases roa by 7.72 units. cartta exerted a statistically very strong negative impact on roa (coefficient = -0.568, p-value = 0.005 < 5% and t-statistic = -2.83). This is most likely to emanate from an increased dividend / payout ratio. The adjusted R² value is 0.6323 i.e. 63.23% of the changes in the regressand are explained by the model predictors including the control variable. The F-statistic, a measure of the combined influence of all explanatory variables, is 40.36 and the corresponding p-value = 0.000. That is, the overall effect is very strong statistically. Nonetheless, original value of Durbin-Watson statistic DW = 0.5338 signals the presence of autocorrelation and other diagnostic issues hitherto corrected using PCSEs and transformed DW. Findings suggest that non-performing loans (npltta), capital adequacy (cartta) and natural logarithm of total assets (lnta) negatively and strongly influence profitability (roa) while only loan loss provision (llptta) exerted a nonsignificant positive impact on profitability. Further, DMBs adopting comprehensive procedures for appraising, monitoring and recovering loans, assessing borrowers’ creditworthiness is deemed necessary if not imperative to minimize NPL, LLP.

Key words: Credit risk, return on assets, DMBs.

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