Impact of Credit Risk Management on Bank Performance: An Empirical Study from Commercial Banks of Pakistan Listed at Pakistan Stock Exchange (PSE)

Abstract

This study investigated the impact of credit risk management on the performance of commercial banks of Pakistan listed at Karachi Stock Exchange. For empirical analysis secondary data of 13 commercial banks for the period of 2005 to 2013 is collected from the annual reports of commercial banks. Three performance measures; Return on Asset (ROA), Return on Equity (ROE) and Net Interest Margin (NIM) have been used as dependent variables, while the ratio of nonperforming loans (NPLR), Loan and advances ratio (LAR), liquidity ratio (LR), loan loss provision ratio (LLPR) and capital adequacy ratio (CAR) have been considered as explanatory variables. Moreover, bank size has been used as a control variable in this study. Descriptive statistics, correlation and regression analysis have been employed to achieve the objectives of the study. Findings have revealed the fact that NPLR, LAR, and LR have negative and significant impact on ROA while CAR and size have positive and significant impact. Moreover, The NPLR and LAR have significant negative impact on ROE and CAR has positive impact. In relation to the last performance measure NPLR is negatively associated while LR, CAR, and size have strong positive impact on NIM. The ratio of LLP has negative and insignificant association with all three performance measures. The results of pooled regression analysis revealed that bank performance is inversely affected by the credit risk management and capitalization contributes positively in bank performance.