Empirical Examination of the Effect of Asset Quality on Financial Performance of Deposit Money Banks in Nigeria

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 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 (? = - 0.022478, P >0.05) and loan loss provisions have a negative significant effect on the financial performance of Deposit Money Banks in Nigeria (? = - 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 its loan achieve higher financial performance. So, to work properly in any economic condition the banks should have minimum or zero loan loss provision which provides financial soundness and stability