Credit risk management : a study of the impact on Maltese licensed banks

Abstract

Risk management is critical to both banks and policy makers, since a robust banking system promotes the financial stability of a country and increases the industry’s resilience in times of financial crisis. Considering that the granting of credit is one of the main activities and a key source of income for banks, credit risk is the leading risk they encounter. Therefore the management of this credit risk is assumed to have an impact on the profitability of banks. The main aim of this dissertation is to provide stakeholders with accurate information. The main aim of this dissertation is to analyse the relationship between credit risk management and the profitability of Maltese licenced banks. This dissertation also aims to assess the effectiveness of banks’ credit risk management through the use of a scorecard. Return on Assets and Return on Equity are used as the proxies for bank profitability, while the capital adequacy ratio and non-performing loans ratio are used to represent the credit risk management of the bank. Data was collected from 7 banks over the period 2005-2015, to answer the research question “What is the relationship between credit risk management and profitability of Maltese licenced banks, over the period 2005-2015?”. Statistical tests are incorporated in this study through the use of E-views to determine the significance of the relationship. The findings from this dissertation reveal that there is a positive relationship between credit risk management and bank profitability. Amongst the two proxies for credit risk management, the capital adequacy ratio has a positive effect on both return on assets and return on equity. On the other hand, the non-performing loan ratio is a weak indicator and has an insignificant effect on the majority of the banks under study. Moreover the results from the scorecard show that Maltese licenced banks are fairly strong in their credit risk management processes.