The Impact of Credit Risk Management on Profitability of Commercial Banks: A Study of Europe

Banks today are the largest financial institutions around the world, with branches and subsidiaries throughout everyone’s life. However, commercial banks are facing risks when they are operating. Credit risk is one of the most significant risks that banks face, considering that granting credit is one of the main sources of income in commercial banks. Therefore, the management of the risk related to that credit affects the profitability of the banks. The aim of the research is to provide stakeholders with accurate information regarding the credit risk management of commercial banks with its impact on profitability. The main purpose of the research is to investigate if there is a relationship between credit risk management and profitability of commercial banks in Europe. We also aim to investigate if the relationship is stable or fluctuating. In the research model, ROE and ROA are defined as proxies of profitability while NPLR and CAR are defined as proxies of credit risk management. The research collects data from the largest 47 commercial banks in Europe from 2007 to 2012 and formulates four hypotheses which are related to the research question. A series of statistical tests are performed in order to test if the relationship exists. Other statistical tests are performed to investigate if the relationship is stable or not. The findings reveal that credit risk management does have positive effects on profitability of commercial banks. Between the two proxies of credit risk management, NPLR has a significant effect on the both ROE and ROA while CAR has an insignificant effect on both ROE and ROA. However, from 2007 to 2012, the relationships between all the proxies are not stable but fluctuating.