Asset Quality Management and the Performance of Deposit Money Banks in Nigeria: A Co-integration and Variance Decomposition Analysis

Given the continued poor performance experienced in the banking sector as indicated by high levels of credit risk, poor quality loans and high incidence of non-performing loans, in spite of the frequent reforms that various governments in Nigeria have embarked upon, there is the need to constantly examine and analyse the factors that could affect bank performance with the aim of providing empirical evidence based on which solutions can be proffered. The paper examined the impact of asset quality management on the performance of deposit money banks in Nigeria. The paper adopted the ECM and co-integration techniques using annual aggregate data sourced from the CBN and the NDIC publications for the period 1990-2013. The findings of the study indicate that the selected measures of asset quality have significant impact on all the three indicators of bank performance namely- return on equity, return on total assets and return on shareholders’ fund respectively. In addition, the results of the impulse response and variance decomposition show that own shocks from the performance indicators ROE, ROTA and ROSF account for a greater proportion of the forecast errors of the variables within the ten-year forecast period. In the light of the above, it is recommended that deposit money banks in Nigeria should intensify their efforts in designing and implementing good asset quality management policies in order to further improve on their performance. This can be through human capacity building for personnel in the form of frequent professional training as well as strict adherence to the prudential guidelines.