Moderating role of inflation on how loan and debt ratios influence profitability: A study of deposit money banks quoted on Nigerian Exchange

Abstract

This study aims to evaluate how non-performing loans, short term debt to total asset, debt to equity and loans to deposits ratios affect return on assets of deposit money banks quoted on the Nigerian Exchange. Furthermore, the study looks at how inflation moderates the relationship between these ratios and profitability. A sample size of eight (8) deposit money banks is selected for this study, while maintaining a ten (10) year scope of 2012 to 2021. Robust standard errors random-effects regression is used to test the hypotheses. The results are that non-performing loans ratio significantly and negatively affect return on assets (t-value = -6.05; p-value = 0.000); short term debt to total assets ratio negatively and insignificantly affect return on assets (t-value = -1.94; p-value = 0.052); debt to equity ratio significantly negatively affects return on assets (t-value = -9.33; p-value = 0.000); and loan to deposit ratio negatively and insignificantly affects return on assets (t value = -1.21; p-value = 0.226). Meanwhile, it is established that inflation has a positive insignificant effect on return on assets (t-value =1.77; p-value = 0.077). Inflation also moderates the relationship between the following ratios and return on assets: non-performing loan ratio (t-value = 3.93; p-value = 0.000), short term debt to total asset ratio (t-value= -4.06; p-value = 0.000) and debt to equity ratio (t-value = 2.13; p-value =0.033). Lastly, inflation does not moderate the relationship between loans to deposit ratio and return on assets (t-value = 1.45; p-value = 0.148). The policy implication of these for deposit money banks is that loan and debt ratios can influence profit differently during periods of high inflation.