Effect of Leverage and Non-Performing Loans on the Profitability of Deposit Money Banks: A Study of Listed Deposit Money Banks in Nigerian Exchange Group

This study investigates the intricate relationship between leverage, profitability, and the moderating effect of non-performing loans within the context of Nigerian deposit money banks. The research leverages panel data analysis of eight deposit money banks quoted on the Nigerian Exchange Group over the period 2013 to 2021. Findings from the study reveal that short-term leverage exerts a significant negative influence on profitability, as measured by return on assets (ROA). This underscores the need for prudent management of short-term financing sources. In contrast, total leverage shows an insignificant effect on profitability, indicating a relatively weaker impact. Notably, the study unveils the substantial moderating role played by the non-performing loan ratio in shaping the relationship between leverage and profitability. High non-performing loan ratios exacerbate the adverse impact of leverage on profitability, emphasizing the importance of effective non-performing loan management. The research provides valuable insights for deposit money bank management, encouraging diversified financing sources and strategic debt use while emphasizing non-performing loan reduction as essential for optimizing profitability. These findings contribute to the body of knowledge in banking and finance, supporting informed decision-making for financial institutions in Nigeria and potentially in similar contexts.