Cointegration and Error Correction Analysis of Non-Performing Loans and Return on Equity of Deposit Money Banks in Nigeria (2000-2025)

Abstract

This research investigated the impact of non-performing loan ratio (NPLR), loan loss provision ratio (LLPR), and capital adequacy ratio (CAR) on the financial performance of Deposit Money Banks in Nigeria from 2000 to 2024, using return on equity (ROE) as a performance indicator. Employing an ex-post facto research design, secondary data were collected from the annual reports of selected banks. The analysis utilized the Augmented Dickey-Fuller (ADF) unit root test, Johansen cointegration test, and Error Correction Model (ECM) to evaluate both short- and long term relationships among the variables. Findings indicate the existence of a long-run equilibrium relationship among the variables, as evidenced by the error correction term ECM (-1), which recorded a coefficient of -0.964289 and a significant p-value of 0.0066. This implies that approximately 96.43% of short-run disequilibrium is corrected annually. In the short run, NPLR (coefficient = 0.200765, p = 0.7856), LLPR (coefficient = 0.508688, p = 0.3621), and CAR (coefficient = 0.260466, p = 0.9269) exerted positive but statistically insignificant effects on ROE. The study concludes that although NPLR, LLPR, and CAR do not significantly influence bank performance in the short run, a stable long-run equilibrium relationship exists among the variables. The study therefore recommends strengthening loan monitoring and recovery practices, improving loan loss provisioning policies, and maintaining adequate capital levels to support sustainable profitability and financial resilience.