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Bank Characteristics and Credit Risk as Determinants of Financial Performance of Tier-1 Deposit Money Banks in Nigeria (2000–2025)

Akemieyefa, Matthew, Essien, Amos Ukpe

Abstract

The financial performance of banks is critical to financial system stability and economic development, particularly in emerging economies where banks operate under volatile macroeconomic conditions and elevated credit risk. Despite extensive empirical evidence, the determinants of bank profitability remain inconclusive, prior studies relied on relatively short observation periods, and examined credit risk and bank-specific characteristics independently. This study investigates the joint effects of bank characteristics and credit risk on the financial performance of Tier-1 Deposit Money Banks in Nigeria from 2000 to 2025 using a balanced panel. Financial performance was measured using return on assets and return on equity , while panel regression analysis was estimated using a fixed-effects model selected through the Hausman specification test. The findings reveal that non-performing loans significantly reduce profitability by ROA 0.084% and ROE 0.614%, while the cost efficiency ratio also exerts a significant negative effect (ROA: 0.031%; ROE: 0.258%). Conversely, capital adequacy ratio, loan-to-deposit ratio and bank size positively and significantly enhance financial performance. Average lending rate and bank age have statistically insignificant effects on profitability. The study contributes to the banking literature by providing long-term evidence on the combined influence of credit risk and bank-specific characteristics within an integrated empirical framework, while extending the application of Portfolio Theory and Credit Risk Theory to Nigeria's banking sector. The findings imply that strengthening credit risk management, maintaining adequate capitalization, improving operational efficiency, and sustaining prudent lending and liquidity management are essential for enhancing bank profitability, financial resilience, and the stability of the Nigerian banking industry.

Keywords

Financial performance; Credit risk; Bank characteristics; Tier-1 Deposit Money Banks; Fixed-effects model; Nigeria.

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