Determinants of loan loss provisions of commercial banks in Malaysia

2018 ◽  
Vol 16 (1) ◽  
pp. 24-48 ◽  
Author(s):  
Mohd Yaziz Mohd Isa ◽  
Yap Voon Choong ◽  
David Yong Gun Fie ◽  
Md. Zabid Hj Abdul Rashid
Keyword(s):  
Commercial Banks ◽  
Banking Sector ◽  
Panel Data Analysis ◽  
Faithful Representation ◽  
Loan Loss ◽  
Content Type ◽  
Independent Variables ◽  
Loan Loss Provisions ◽  
Interest Income ◽  
Net Profit

Purpose This paper aims to derive determinants of loan loss provisions (LLPs) of commercial banks in Malaysia. Design/methodology/approach A single-stage panel data analysis multiple regression model that contains a mixture of quantitative and qualitative elements is used. The LLPs is a dependent variable or regressor, and non-performing loan (NPL), interest income, net profit, loans and advances and gross domestic product (GDP) are the independent variables or regressor/explanatory variables. The moderating variable is “credit risk management” (CRM) and the intervening variable is “relevance and faithful representation”. Findings This paper suggests in LLPs, NPLs, interest income, loans and advances, net profit and GDP, as well as the moderating effect of CRM and the intervening effect of relevance and faithful representation, are determinants of the LLPs. The moderating variable CRM strengthens the relationship between the independent variables and the dependent variable. The intervening variable “relevance and faithful representation” brings about a more accurate reporting on the levels of the LLPs. Practical implications The association of the factors is investigated further to detect possible effect of multicollinearity and research to better understand how banks manage their risk as the current investigation is limited to banks in Malaysia. Social implications Loan loss provisioning issues of commercial banks in Malaysia are challenges for both regulators and the banking industry owing to the implementation of several new measures, the convergence with internationally accepted accounting standards and differences in loan grading and applications of different loan loss provisioning standards. Because of these challenges, Bank Negara Malaysia (the Central Bank of Malaysia) has tightened its supervision of commercial banks to ensure that banks are sufficiently and adequately provisioned. The banking sector plays a significant role, and it is important that it is resilient in the face of potential sources of systemic risk. And, like in other major ASEAN economies, the Malaysian’s financial system remains largely bank-dominated. Originality/value This study discovers whether Malaysian banks are sufficiently provisioned for the regional financial integration under the ASEAN Capital Markets Forum (ACMF) by the end of 2015, where several initiates have been initiated, including the harmonization of standards to encourage greater intra-regional investment flows and transactions and continued provisions of the much needed funds by the region’s private sectors.

Evaluating Loan Loss Provisioning for Non-Performing Loans and Its Impact on the Profitability of Commercial Banks in Bangladesh

2018 ◽  
Vol 2 (2) ◽  
pp. 33-41
Author(s):  
Fakir Tajul Islam
Keyword(s):  
Commercial Banks ◽  
Statistical Significance ◽  
Least Square ◽  
Business Success ◽  
Optimum Level ◽  
Loan Loss ◽  
Independent Variables ◽  
Loan Loss Provision ◽  
Interest Income ◽  
Dependent Variables

Through the collection and disbursement of money, banks often face the risk of default of the loan. These Non-Performing loans (NPLs) should be identified and cared for avoiding vulnerability to other risk. Banks may mitigate this risk using loan loss provisioning (LLP). Using the aggregate data of 56 commercial banks in the last 9 years (2009-2017), this study attempts to evaluate the Impacts of LLP maintained for NPLs on profitability, as it may help to take the level of the LLP, and NPLs in the optimum level of business success.  The dependent variables used in this study are Non-Interest Income to Total Assets and Net-Interest Income to Total Assets as a representative of the profitability of a bank. The dependent variables are analyzed using Least Square Multiple Regression on three independent variables, which were Gross NPL to Total Loans Outstanding, Loan Loss Provision Maintained, and Surplus/ (Shortfall) resulted from the required loan provisioning. The result showed that the profitability is very significantly influenced by the independent variables. NPLs and LLPs maintained by the commercial banks negatively related with the profitability of the business, especially LLPs shown statistical significance to impact on profitability negatively. it is better to take the LLPs and NPLs in the minimum level for maximum profitability of banks.

Evaluating profitability strategies and the determinants of the risk performance of sectoral and banking institutions

2018 ◽  
Vol 34 (3) ◽  
pp. 174-186 ◽  
Author(s):  
Walter Amedzro St-Hilaire ◽  
Patrick Boisselier
Keyword(s):  
Fixed Effects ◽  
Banking Sector ◽  
Risk Measures ◽  
Relevant Literature ◽  
Generalized Least Squares ◽  
Loan Loss ◽  
Content Type ◽  
Explanatory Variables ◽  
Loan Loss Provisions ◽  
Banking Institutions

Purpose The purpose of this paper is to evaluate the need to incorporate the loan loss provisions (LLPs) and risk measures in order to examine the repercussions on advancing approach and profitability. Design/methodology/approach The study investigates the effect of explanatory variables on profitability and advancing approach of the banks. The variables used in this study were determined, based on the review of relevant literature and established according to the availability of data for measurement purposes. Inspired by previous research, Hausman test is used in this study to determine whether a random or fixed effects generalized least squares model is best. The linear regression model is applied to strongly balanced panel data obtained from the ten commercial banks. Findings The findings demonstrate that Nigerian banking sector considers LLPs in terms of its decision making of advancing approach, while proper inclusion of credit, market and operational risk is more important for South Africa’s banks rather than the maintenance of provisions. Originality/value Moreover, the credit risk proves to be more needed factor of consideration for Nigerian rather for South African banks. This is an answer to the strong economy of South Africa as compared to Nigeria and more chances of default faced by Nigerian banks.

The determinants of bank profitability: empirical evidence from European banking sector

2016 ◽  
Vol 14 (1) ◽  
pp. 86-115 ◽  
Author(s):  
Elisa Menicucci ◽  
Guido Paolucci
Keyword(s):  
Banking Sector ◽  
Developed Countries ◽  
Policy Implications ◽  
Loan Loss ◽  
Data Set ◽  
Bank Profitability ◽  
Content Type ◽  
Loan Loss Provisions ◽  
European Banking ◽  
European Banks

Purpose The purpose of this paper is to investigate the relationship between bank-specific characteristics and profitability in European banking sector to find the role of internal factors in achieving high profitability. Design/methodology/approach A regression analysis is built on an unbalanced panel data set comprising 175 observations of 35 top European banks over the period 2009-2013. To this end, the empirical data are collected from Bankscope and a comprehensive set of internal characteristics is examined. Findings All the determinant variables included in the model have statistically significant impacts on European banks’ profitability. However, the effects are not uniform across profitability measures. Regression findings reveal that size and capital ratio are significant company-level determinants of bank profitability in Europe, while higher loan loss provisions result in lower profitability levels. Findings also suggest that banks with higher deposits and loans ratio tend to be more profitable but the effects on profitability are statistically insignificant in some cases. Practical implications This study has considerable policy implications, as the performance of the European banking sector depends on its efficiency, profitability and competitiveness. In view of these findings, some suggestions may be functional for bank regulatory authorities to intensify and sustain robustness and stability of the banking sector. Originality/value The results provide interesting insights into the characteristics and practices of profitable banks in Europe. Few econometric studies have empirically explored the determinants of bank profitability in Europe so far, even though similar studies have been conducted in several developed countries. Therefore, this paper tries to close an important gap in the existing literature improving the understanding of bank profitability in Europe.

scholarly journals Banking sector earnings management using loan loss provisions in the Fintech era

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Peterson K. Ozili
Keyword(s):  
Earnings Management ◽  
Banking Sector ◽  
Income Smoothing ◽  
Loan Loss ◽  
Content Type ◽  
Eu Countries ◽  
Loan Loss Provisions ◽  
Country Level ◽  
Show Evidence ◽  
Second Wave

PurposeThis paper analyzes banking sector earnings management using loan loss provisions (LLPs) in the Fintech era.Design/methodology/approachRegression methodology was used to examine earnings management in the Fintech era.FindingsThe findings show evidence for bank income smoothing using LLPs. There is greater income smoothing in the second-wave Fintech era compared to the first-wave Fintech era, and the presence of strong institutions did not lower income smoothing in the second-wave era. Bank income smoothing is also greater in (1) Bank of International Settlement (BIS) and EU countries than in non-EU countries and G7 countries, (2) well-capitalized banking sectors and (3) during economic booms in the second-wave Fintech era.Practical implicationsThe competition for loans and deposits by banks and Fintech lenders in the second-wave Fintech era created additional incentives for banks to engage in income smoothing to report competitive and stable earnings.Originality/valueThe study uses a unique approach to detect country-level earnings management in the banking sector. Also, this study extends the bank earnings management literature by introducing the Fintech era as a determinant of the extent of bank earnings management.

scholarly journals Bank loan loss provisioning during election years: cross-country evidence

2019 ◽  
Vol 16 (4) ◽  
pp. 413-431
Author(s):  
Peterson K. Ozili
Keyword(s):  
Banking Sector ◽  
Developed Countries ◽  
Income Smoothing ◽  
Bank Loan ◽  
Loan Loss ◽  
Political Factors ◽  
Content Type ◽  
Loan Loss Provisions ◽  
Provisioning Behavior ◽  
The Eu

Purpose The purpose of this paper is to examine bank loan loss provisioning behavior during election years – focusing on the effect of elections on banking sector loan loss provisioning. Design/methodology/approach Regression analysis was used to analyze the behavior of bank loan loss provisioning in developed countries during election years. Findings The findings reveal that the banking sectors in developed countries have higher loan loss provisions (LLPs) in election years. Also, income smoothing is present in election years which supports the income smoothing hypothesis. Also, banking sectors with high capital levels have higher LLPs. Although, there were no significant differences in bank loan loss provisioning during election years across the four bloc, the EU banking sectors and the banking sectors of BIS member countries generally have higher LLPs while the non-EU banking sectors and the banking sectors of the G7 member countries generally have fewer LLPs. Originality/value The literature has not explored the effect of political factors such as “election-year risk” on the managers’ discretion in banks. This is the first study that explores the effect of political change on managerial discretion in banks.

scholarly journals Credit Risk and Profitability of Commercial Banks in Pakistan

2020 ◽  
Vol V (I) ◽  
pp. 75-89
Author(s):  
Sohail Farooq ◽  
Raza Muhammad Khan ◽  
Muhammad Akram Gilal
Keyword(s):  
Credit Risk ◽  
Commercial Banks ◽  
Banking Sector ◽  
Sufficient Evidence ◽  
Loan Loss ◽  
Loan Portfolio ◽  
Loan Loss Provisions ◽  
Bank Managers ◽  
Credit Portfolio ◽  
The Relationship

Credit risk in the credit portfolio of financial institutions has dented their profitability. This study examines the relationship between credit risk and profitability of commercial banks in Pakistan. For this purpose three performance measuresROA, ROE, and NIM are used by the study. To test the relationship and impact over the period 2006-2015 the study involved 28 commercial banks. During the period under investigation, the findings of the study reveal that credit risk, represented by loan loss provisions, has a meaningful effect on the profitability measures. The findings provide exciting insights into the influence of credit risk, besides other variables in the study, on the selected commercial banks profitability inside Pakistan, for bank managers, and foremost for policymakers. The study also has policy relevance in the form of providing policymakers sufficient evidence related to the presence of credit risk in the loan portfolio of the banking sector and the ways to overcome this chronic problem.

scholarly journals The Relationship between Market Power and Income Diversity with Ownership Structure as a Moderator – A Study of Vietnamese Commercial Banks

2019 ◽  
pp. 1-16
Author(s):  
Tin Ho ◽  
Quy Vo
Keyword(s):  
Market Power ◽  
Ownership Structure ◽  
Commercial Banks ◽  
Banking Sector ◽  
Panel Data Analysis ◽  
State Ownership ◽  
Operating Income ◽  
Interest Income ◽  
The Impact ◽  
The Relationship

The Project on Restructuring the Credit Institution System in the first period from 2011 to 2015 and the second period from 2016 to 2020 emphasizes the important role of reducing the relying on traditional activities and increase the share of income from non-credit services. The level of non-interest income, per contra, varies from bank to bank. The paper, therefore, was conducted to examine the relationship between market power and income diversity by using a sample of 26 commercial banks during 2007 to 2017. The market power was proxied by both conventional and adjusted Lerner index; the quotient of non-interest income to total operating income represents the income diversity; and ownership structure, treated as a dummy variable, plays a role as moderator this relationship. Additionally, bank characteristics and country characteristics were considered to be control and dummy variables in the research model. Based on panel data analysis with GMM estimator, the results point out that the bank with greater market power can generate more non-interest income. This relationship, moreover, is impacted by ownership structure, which explains the activities managers and owners do in a bank. For more specific, this paper also highlights the positive impact of state ownership on the association between bank market power and its income diversity. The findings are expected to add the gap in the existing literature, lacking of investigation the impact of market power on bank income diversity in Vietnamese banking sector and give some useful implications for investors, bank managers as well as policy makers to catch up the market fluctuations.

scholarly journals Banking sector Performance Evaluation in Ethiopia for the Period of Growth and Transformation Plan (GTP-II): Private vs. Public Commercial Banks

2021 ◽  
Author(s):  
Bekana Dembel Tura
Keyword(s):  
Exchange Rate ◽  
Financial Performance ◽  
Commercial Banks ◽  
Banking Sector ◽  
Secondary Data ◽  
Jel Classification ◽  
T Test ◽  
Total Income ◽  
Loan Loss ◽  
Interest Income

Abstract The main objective of this study was to evaluate and compare the financial performance of commercial banks in Ethiopia during the implementation of growth and transformation plan II. Moreover, determinants of financial performance were examined. The study was conducted using secondary data obtained from National Bank of Ethiopia, and official website of each commercial bank. Multiple panel regression and independent sample t-test were used to show the relationship and to compare the financial performance of commercial banks between the study periods. The ratio of non-interest expenses to total expense, log_net profit per employee, interest income to total income, and exchange rate were variables with positive and significant effect on the financial performance of commercial banks while log_total loans per branch and inflation affected negatively the financial performance measured by return on assets. Whereas, the ratio of debt to equity, log_net profit per employee, total liquid assets to total deposits, interest income to total income, and exchange rate have positive and significant impact while the ratio of loan loss provision to total loan, log_total loans per branch, and inflation negatively and significantly affected financial performance measured by ROE. The independent sample t-test shows that except the ratio of total loans to total deposits, and total capital to total assets the remaining variables did not show significant different between state and public owned banks.JEL classification: M14 M4 M1

How to explain the liquidity risk by the dynamics of discretionary loan loss provisions and non-performing loans? The impact of the global crisis

2019 ◽  
Vol 45 (2) ◽  
pp. 244-262 ◽  
Author(s):  
Youssef Mohamed Riahi
Keyword(s):  
Financial Services ◽  
Banking Sector ◽  
Liquidity Risk ◽  
Loan Loss ◽  
Global Crisis ◽  
Content Type ◽  
Loan Loss Provisions ◽  
Significant Difference ◽  
The Impact ◽  
Practical Implications

PurposeThe purpose of this paper is to investigate the impact of discretionary loan loss provisions (DLLPs) and non-performing loans (NPLs) on the liquidity risk of both Islamic banks (IBs) and conventional banks (CBs) before and after the global crisis that hit nations belonging to the Gulf Cooperation Council (GCC).Design/methodology/approachThis empirical study uses balanced panel data on 16 IBs and 58 CBs operating in the six Gulf Cooperation states covering 2000–2014. The data were obtained from the Bankscope database and the banks’ annual reports.FindingsThe results indicate that NPLs affect liquidity risk differently across the banks – specifically, there is a significant difference in the funding and managing of liquidity between the two bank types. The authors find that the influence of DLLPs does not vary across the banks in the overall analysis and before the crisis. This finding provides insights into the unique nature of banking risks in dual banking systems. The authors also find that after the crisis, the discretionary LLPs affected liquidity risk differently across the banks.Practical implicationsThis study has several practical implications. First, the findings suggest that the Islamic Financial Services Board and other IBs regulators should reassess several regulations, principles and products in order to reduce their credit and liquidity risks. Second, the study emphasizes the need for banks to perform a careful assessment of the effects of their LLP policies. Finally, the findings are also relevant to bankers, as they provide empirical evidence on the effect of loan growth on bank liquidity, suggesting that bankers should improve their loan management.Originality/valueFirst, this is the first study to examine discretionary LLPs, NPLs and liquidity risk in IBs; it is also the first comparative study between Islamic and CBs. Second, the study provides evidence on how the global crisis impacted the banking sector and identifies some of the main determinants of liquidity risk for both Islamic and CBs operating in GCC countries.

scholarly journals PENGARUH CASH HOLDING, PROFITABILITAS, DAN FINANCIAL LEVERAGE TERHADAP INCOME SMOOTHING PADA PERUSAHAAN MANUFAKTUR

EkoPreneur ◽  
2019 ◽  
Vol 1 (1) ◽  
pp. 13
Author(s):  
Ibram Pinondang Dalimunte ◽  
Woni Prananti
Keyword(s):  
Income Smoothing ◽  
Profit Margin ◽  
Cash Holding ◽  
Financial Leverage ◽  
Loan Loss ◽  
Independent Variables ◽  
Loan Loss Provisions ◽  
Basic Industry ◽  
Net Profit ◽  
Equity Ratio

The objectives of this study are examine whether manufacture companies sector basic industry and chemicals that is listed in Indonesia Exchange over periode 2013-2017 do earning management with income smoothing through manipulating the amount of loan loss provisions along with influenced factors. Dependent variable used in this study is income smoothing, independent variables used in this study is cash holding, profitabilitas (net profit margin), and financial leverage (debt to equity ratio). This research used purposive sampling and kuantitatif, in determining sampel selection. A total of 22 companies sampel from 66 companies population. Eckel’s coefficient was used as a tool to indentify income smoothing. Subsequently performed descriptive statistics and logistic regression analysis to test each hypothesis by used eviews 7.0. The results of this study found that cash holding had no effect to income smoothing, profitability proxied by net profit margin and financial leverage proxied by debt to equity ratio had effect to income smoothing. and Simultaneously the cash holding, profitability, financial leverage had significantly effect to  income smoothing. Keywords: Income Smoothing, Cash Holding, Profitability, Financial Leverage. Keywords: Income Smoothing, Cash Holding, Profitability, Financial Leverage.

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