Moderating Effect of Systematic Risk on the Relationship between Financial Risk and Financial Performance of Deposit Money Banks in Nigeria

Abstract

This study examined the relationship between financial risk factors (credit risk and operational risk) and financial performance in selected deposit money banks (DMBs) in Nigeria, with a focus on the moderating effect of systematic risk. The study population consisted of all DMBs listed on the Nigerian Stock Exchange. Data was collected from their annual reports and accounts for the period of 2012 to 2021. Partial Least Square Structural Equation Modeling (PLS-SEM) was used to analyse the data and assess the cause-and-effect relationships among variables. The findings revealed that credit risk had a significant negative effect on financial performance. Operational risk was also found to have a significant negative effect on financial performance. Additionally, systematic risk was found to have a significant negative effect on financial performance. Systematic risk was found to significantly moderate the relationship between credit risk and financial performance. However, systematic risk was not found to significantly moderate the relationship between operational risk and financial performance, suggesting that the impact of operational risk remained consistent regardless of market conditions. The study concluded that credit risk, operational risk, and systematic risk all played significant roles in the financial performance of DMBs in Nigeria. Based on these findings, recommendations were provided to strengthen credit risk management, improve operational risk management, enhance systematic risk monitoring and mitigation, and conduct further research to deepen the understanding of risk-performance dynamics in the banking sector. This study contributed to the literature on risk management and financial performance in the Nigerian banking industry and offered practical implications for DMBs to enhance their risk management practices and achieve better financial performance.