Effects of Non-Performing Loans and Corporate Life Cycle on Financial Performance of Listed Deposit Money Banks in Nigeria

Abstract

This study examined the effect of non-performing loans and corporate life cycle on financial performance of listed deposit money banks in Nigeria. The study was motivated by the persistence of poor loan quality within the Nigerian banking sector and by the tendency of earlier studies to treat banks as structurally identical institutions. Thirteen deposit money banks quoted on the Nigerian Exchange Group were studied over the period 2010 to 2023 using a census sampling approach and an ex-post facto research design, giving 180 bank-year observations drawn from audited annual reports and Central Bank of Nigeria publications. Financial performance was proxied by Return on Assets and Return on Equity, credit risk was proxied by the Non-Performing Loan Ratio, while corporate life cycle stages were classified into growth, maturity and decline using the cash-flow-based procedure of Dickinson (2011). Bank size and capital adequacy ratio served as control variables. The data were analyzed using panel regression techniques, and a corrected fixed effect model with White cross-section covariance correction was adopted after diagnostic tests revealed heteroskedasticity and cross-sectional dependence. The results showed that the non-performing loan ratio has a negative and significant effect on both Return on Assets and Return on Equity. Corporate life cycle stages were also found to significantly affect financial performance, with growth and maturity stages recording positive coefficients and the decline stage recording a negative coefficient. More importantly, the interaction terms revealed that the growth and maturity stages weaken the damaging effect of non-performing loans on profitability, whereas the decline stage intensifies it. The study concludes that the effect of credit risk on bank profitability is conditional on the developmental stage a bank occupies, and recommends that bank managers, regulators and investors incorporate corporate life cycle positioning into credit risk management, supervisory design and investment appraisal.