Portfolio Credit Risk, Concentration, and Stress Testing in Nigerian Banks

Loan portfolio concentration risk arises when a bank's credit exposure is unevenly distributed across borrowers, sectors, or geographies, creating vulnerability to correlated defaults that can destabilise an institution under adverse conditions. This study examines portfolio credit risk concentration and the outcomes of stress testing exercises in deposit money banks in Nigeria, using supervisory data and publicly available financial information. Secondary data on loan portfolio composition by sector, borrower size, and geographic location are combined with financial statement data from twelve listed banks for the period 2018 to 2022. The study develops a concentration risk index using the Herfindahl-Hirschman index applied to sectoral loan distributions and employs a credit value-at-risk framework to quantify tail risk under baseline, adverse, and severely adverse macroeconomic scenarios. The stress test scenarios are designed to replicate conditions experienced during the 2020 COVID-19 lockdown and the 2023 naira devaluation. The theoretical framework integrates portfolio credit risk theory, the credit risk transfer literature, and the macroprudential stress testing methodology developed by the Bank for International Settlements. The study evaluates whether the Central Bank of Nigeria's sectoral lending limits and large exposure guidelines have been effective in reducing concentration risk. Existing literature identifies high sectoral concentration in the oil and gas sector as the principal credit risk amplifier for Nigerian banks. This study updates and extends that analysis with scenario modelling and stress test calibration to current macroeconomic conditions. Findings carry implications for the Central Bank of Nigeria's Financial Stability Report, bank risk committees, and the Nigeria Deposit Insurance Corporation's resolution planning framework. Keywords: portfolio credit risk, concentration risk, stress testing, Nigerian banks, macroprudential