Measuring the Impact of Asset Quality on Banking Performance in Nigeria using the ARDL Model – A Case Study of Access bank Plc

Abstract

Giving the importance of credit creation by banks as one of the main drivers of the economy, the importance of having a adequate composition of assets and liabilities to avoid the potential effects of insolvency cannot be overemphasized. This why the Central Bank of Nigeria gives varying benchmark’s for banks depending on size, market spread, volume and other issues. Access bank is one of the largest and fastest growing banks with the highest incidence of corporate reconstructions in the post banking consolidation Nigeria. The research centers on a common problem to banks such as high inflation rates, exchange rate volatility, and regulatory requirements that can affect the management of their working capital, loan portfolio and solvency mix. Specifically, the problem is that Nigerian banks have experienced fluctuations in their profitability and liquidity in recent years, which may be attributed to inefficient asset quality management practices. A robust combination of tests were employed in analyzing data such as granger causality tests, unit root tests, Johansen cointegration tests and ARDL tests. In testing for liquidity, profitability and financial stability, ARDL results reveal a high and significant R-squared indicating a strong fit of the model to the data. Adjusted R-squared for the three hypotheses were also high and significant, suggesting that the model explains a significant portion of the variance. This means that the ARDL model explains a large portion of the variation in the dependent variables for each metric. The F-Statistic is high and significant, indicating that the model is statistically significant overall suggesting that the independent variables collectively have a significant impact on the dependent variable for each metric. The Akaike Info Criterion (AIC), Schwarz Criterion and Hannan Criterion have very close values suggesting consistency in the model selection process. The Durbin-Watson Statistic at indicates no significant autocorrelation in the residuals, but it’s generally acceptable). The ARDL model’s performance over the 20-year period under study suggests that it can be used to make reliable predictions and inferences about Access Bank’s financial stability. The model can be used to identify key factors influencing financial stability and inform strategies for maintaining or improving stability. It is recommended that the ARDL model be used to forecast future liquidity levels and identify potential risks or opportunities of banks. For further analysis it is advised to explore the specific relationships between the independent variables and the dependent variable. It is essential to evaluate the model's performance over time and update it as necessary to ensure its continued relevance and accuracy. It is also recommended that the model can be used to forecast future financial stability levels and identify potential risks or opportunities. Banks in Nigeria should prioritize asset quality management to improve their performance. Bank managers should focus on optimizing the cash conversion cycle to improve profitability. Policymakers should consider the impact of regulatory requirements on working capital management in Nigerian banks