Assessment of credit risk impact on financial performance of commercial banks in EU countries

Abstract

The aim of this master thesis was to assess the impact of credit risk on financial performance of EU commercial banks. Four determinants were chosen according to the relevant literature to measures the credit risk of EU commercial banks: Non-performing loan ratio; Loan loss provision ratio; Non-performing loans to total loans and Capital adequacy ratio. The financial performance was measured using such measures as return on assets (ROA), return on equity (ROE) and net interest margin. The study period consisted of ten years from 2008 -2017 and data for 46 EU commercial banks was collected from Bank scope using Bloomberg system. The study employed regression analysis using SYS GMM (generalized method of moments) to test the hypotheses. Bank size was used as a control variable to absorb the dynamics of independent (credit risk) variables. The findings revealed that net interest margin is correlated with LLPR .However, weak association was found between non-performing loan ratio, loan loss provision ratio and ROE. Therefore, it can be concluded that even though the banks were facing credit risk during researched post crisis period, they were still able to make profit and the reason could be that banks after global financial crisis were managing credit risk efficiently by having enough capital buffers to absorb the credit risk.