Credit Risk Management and Market Valuation of Listed Deposit Money Banks (DMB) in Nigeria

Abstract

This study examined the effect of credit risk management on the market valuation of publicly listed deposit money banks in Nigeria. Ex-post facto research design was adopted, and data sourced from thirteen (13) listed deposit money banks in Nigeria, being the sample size. Nonperformance loans, capital adequacy ratio, and loan to deposit ratio were proxies for credit risk management while market capitalization, and share price were proxies for market valuation. Firm size was used as a control variable. Data were collected over a ten- year period (2014-2023), and E-views 11.0 statistical software was employed to analyse the data. Findings indicated that non-performing loans ratio exhibited a negative and highly significant correlation with the market capitalisation, as well as with share price, whereas loan-to-deposit ratio had no significant effect on share price, but had a positive and significant effect on market capitalization. Furthermore, capital adequacy ratio exerted a positive and significant effect on the market capitalization, while having a non-significant effect on share price. Non-performing loans had a statistically significant adverse impact on both market capitalisation and share price, highlighting the importance of asset quality in affecting both long-term firm valuation and short-term price performance, while accounting for firm size. It was recommended, among other things, that the management of deposit money banks should employ dynamic loan-todebt-ratio management that is in line with market conditions and the availability of funding. In addition, regulators like the CBN should have criteria for capitalisation of banks with too many bad loans.