Asset Quality and Financial Performance of Deposit Money Banks in Nigeria

Asset Quality and Financial Performance of Deposit Money

Abstract

The performance of a banking institution is largely driven by its ability to increase its customers' 
patronage, retain them and manage its assets and liabilities to enhance optimal returns.This can 
be done through banks maintaining adequate capital and quality assets for better performance. 
Even though banks are highly regulated and capital adequacy requirements have been in place 
since 1988 in Nigeria, many banks have experienced poor performance, as indicated by high 
levels of credit risk, poor-quality loans and a high incidence of non-performing loans. It is, thus, 
imperative to ascertain the effect of asset quality on the financial performance of Deposit Money 
Banks (DMBs) in Nigeria. This study employed ordinary least square regression analysis with 
emphasis on fixed effect and random effect models. The findings of this research revealed that 
non-performing loans have a negative and not significant effect on the financial performance of 
DMBs in Nigeria (â = - 0.022478, P >0.05), and loan loss provisions have a negative significant 
effect on the financial performance of Deposit Money Banks in Nigeria (â = - 0.002954, P < 
0.05). The results showed that asset quality is a key factor affecting the financial performance of 
Deposit money banks. It confirmed that Deposit Money Banks with good management of their 
loans achieve higher financial performance. So, to work properly in any economic condition, the 
banks should have a minimum or zero loan loss provision, which provides financial soundness 
and stability.