The impact of non-performing loans on households on the financial performance of banks in Macedonia

Abstract

The credit portfolio in banks with the traditional model of banking hasdominant role in the banks’ operations and. Loan portfolio quality it is the main generator of the banks’ results. The basic indicator for quality of the credit portfolio is the share of non-performing loans to total credit portfolio. Very often, the NPL loans are also a source of other risks, as liquidity risk and solvencyand increase the risk profile of the bank.This paper investigates the influence of the non-performing ratio on houseeholds on the financial performance ofbanking system in the Republic of Macedonia for the period 2010-2017. The analysis presents correlation and regression between non-performing loan ratio on housholds and profitability indicators: rate of return on assets and rate of return on equity, as well as the capital adequacy.The results of correlation shows a moderately high, negative correlation between the non-performing loans ratio and rates of return on equity and return on assets. Regression analysis shows that increasing the non-performing loans ratio has influence to reduce the bank profitability. KEY WORDS: non-performing loans, banks, credit portfolio, profitability, capital adequacy