The Cyclicality of Loan Loss Provision and Income Smoothing Behavior of Commercial Banks Pre and Post IFRS: Evidence from Ethiopia

The study carried out an empirical investigation into the quantitative effect of credit risk on the performance of commercial banks in Nigeria over the period of 11 years (2000-2010). Five commercial banking firms were selected on a cross sectional basis for eleven years. The traditional profit theory was employed to formulate profit, measured by Return on Asset (ROA), as a function of the ratio of Non-performing loan to loan & Advances (NPL/LA), ratio of Total loan & Advances to Total deposit (LA/TD) and the ratio of loan loss provision to classified loans (LLP/CL) as measures of credit risk. Panel model analysis was used to estimate the determinants of the profit function. The results showed that the effect of credit risk on bank performance measured by the Return on Assets of banks is cross-sectional invariant. That is the effect is similar across banks in Nigeria, though the degree to which individual banks are affected is not captured by the method of analysis employed in the study. A 100 percent increase in non-performing loan reduces profitability (ROA) by about 6.2 percent, a 100 percent increase in loan loss provision also reduces profitability by about 0.65percent while a 100 percent increase in total loan and advances increase profitability by about 9.6 percent. Based on our findings, it is recommended that banks in Nigeria should enhance their capacity in credit analysis and loan administration while the regulatory authority should pay more attention to banks’ compliance to relevant provisions of the Bank and other Financial Institutions Act (1999) and prudential guidelines.

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Credit Management and Issues of Bad Debts: An Empirical Study of Listed Deposit Banks in Nigeria

Asian Journal of Economics Business and Accounting ◽

10.9734/ajeba/2020/v14i330195 ◽

2020 ◽

pp. 32-49

Author(s):

Peter E. Ayunku ◽

Akwarandu Uzochukwu

Keyword(s):

Risk Management ◽

Credit Risk ◽

Commercial Banks ◽

Random Effect ◽

Credit Risk Management ◽

Loan Loss ◽

Data Set ◽

Credit Management ◽

Loan Loss Provision ◽

The Impact

This study examines the impact of credit management on firm performance amidst bad debts, among Nigerian deposit banks. Five hypotheses were formulated following the dependent variables of Return on Asset and Tobin Q. The independent variables employed for this study include: Loan Loss Provision, Loan to Deposit Ratio, Equity to Asset Ratio, and Loan Write off. This study is based on ex-post facto research design and employed a panel data set collected from fourteen (14) commercial banks over six years ranging from 2014 to 2019 financial year. We analyzed the data set using descriptive statistics, correlation and Ordinary Least Square Regression Technique. The random effect models established that non-performing loan, loan loss provision and equity to asset impact significantly on banks’ performance in both Return on Asset and Tobin-Q models. This suggests that the sampled banks need to establish efficient arrangements to deal with credit risk management. In all, credit risk management indicators considered in this research are important variables in explaining the profitability of Nigerian commercial banks. However, based on the outcome from the empirical analysis, the study carefully recommends that investors and shareholders in these banks should be aware of the possible use of provisions for losses on non-performing loans by managers for smoothening of profits. The shareholders specifically should be ready to meet optimal agency costs to reduce the manager's information asymmetry by hiring competent internal and external auditors.

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The impact of discretionary loan loss provision of sharia financing on financial performance

Banks and Bank Systems ◽

10.21511/bbs.14(4).2019.04 ◽

2019 ◽

Vol 14 (4) ◽

pp. 34-41

Author(s):

Z Zulfikar ◽

Wahyuni Sri

Keyword(s):

Financial Performance ◽

Commercial Banks ◽

Structural Equation ◽

Equation Modeling ◽

Loan Loss ◽

Return On Assets ◽

Operating Income ◽

Loan Loss Provision ◽

Loan Loss Provisions ◽

The Impact

This study aims to investigate the role of discretionary loan loss provision of sharia financing on the Islamic commercial banks’ financial performance in Indonesia. Partial Least Squares-Structural Equation modeling (PLS-SEM) is used to examine the relationship between loan loss provisions and financial performance in 13 Islamic commercial banks for 4.5 years. The analysis of the outer model shows that the probability of default and loss given default are determinants of loan loss provision, while financial performance is determined by return on assets, non-performing financing, net operating margin, and operating costs on operating income. The results of this study indicate that loan loss provisions have a direct effect on financial performance. Further investigation shows that the return on sharia financing contributes to increasing the impact of loan loss provisions on financial performance (indirect influence). The findings contribute to the literature by showing that discretionary loan loss provision can occur in sharia financing. The study is very important in terms of awareness of management behavior related to financial performance. The study has implications for management policies related to the prerequisites of potential clients.

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Factors Affecting the Loan Loss Provision in Vietnamese System of Commercial Banks

Journal of Economic Development ◽

10.24311/jed/2014.222.06 ◽

2014 ◽

Vol 222 ◽

pp. 89-106

Author(s):

NGUYEN THI THU HIEN ◽

PHAM DINH TUAN

Keyword(s):

Commercial Banks ◽

Loan Loss ◽

Factors Affecting ◽

Loan Loss Provision

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Income Smoothing via Loan Loss Provision in Credit Cooperative Banks

FINANCIAL REPORTING ◽

10.3280/fr2016-002002 ◽

2017 ◽

pp. 33-54

Author(s):

Stefano Azzali ◽

Luca Fornaciari ◽

Tatiana Mazza

Keyword(s):

Financial Reporting ◽

Group Structure ◽

Income Smoothing ◽

Least Square ◽

Net Income ◽

Loan Loss ◽

Loan Loss Provision ◽

Italian Law ◽

Cooperative Banks ◽

Using Data

This research investigates whether income smoothing via loan loss provision is lower for Credit Cooperative Banks than for non-Credit Cooperative Banks. Using data collected from the financial reporting of a sample of private banks, and Ordinary Least Square models based on net income or its variation, as used by previous literature, we find that income smoothing through loan loss provision is lower in Credit Cooperative Banks than in banks with different ownership structures. Results remain the same using several robustness tests (decomposition of loans, quality of loans, change in economic growth, cluster and fixed effect, effect of financial crisis). Mutual ownership, smaller size, and the local boundaries that characterize Credit Cooperative Banks may reduce the need for managers to manipulate earnings. Our findings give a positive evaluation of the recent Italian Law No. 18/2016 which reforms Credit Cooperative Banks, and imply that benefits of Credit Cooperative Banks ownership structure may derive from the group structure which gives a higher level of stability and solidity.

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

Asian Finance & Banking Review ◽

10.46281/asfbr.v2i2.222 ◽

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.

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The Impact of Earnings variability and Regulatory Measures on Income Smoothing: Evidence from Panel Regression

Journal of Central Banking Theory and Practice ◽

10.2478/jcbtp-2021-0009 ◽

2021 ◽

Vol 10 (1) ◽

pp. 183-201

Author(s):

Amina Malik ◽

Haroon Aziz ◽

Buerhan Saiti ◽

Shahab Ud Din

Keyword(s):

Commercial Banks ◽

Stock Exchange ◽

Reporting Quality ◽

Income Smoothing ◽

Capital Adequacy ◽

Panel Regression ◽

Loan Loss ◽

Loan Loss Provisions ◽

Regulatory Measures ◽

The Impact

Abstract This study investigates the impact of variability in earnings, stringent regulatory measures and the trend of extending loans while keeping in view deposit ratio on income smoothening practices for a sample of 20 commercial banks listed on the Pakistan Stock Exchange (PSX) from the year 2010 to 2017. The likelihood of smoothing activities is measured through its widely used proxy, i.e. loan loss provisions (LLPs). Moreover, earnings before tax and provisions (EBTP) and loan to deposit ratio (LD) have been incorporated to determine the impact of earnings and loans to deposit ratio on income smoothening. We find that commercial banks are less likely to manage earnings through smoothening practices, which shows that commercial banks adhere to regulatory restrictions. This is further supported by the fact that income smoothing activities decrease as a result of the increase in capital adequacy ratios after the imposition of stringent rules, which exert greater regulatory pressure on banks, whereas the pace of income smoothing increases as a result of an increase in loans to deposit ratio, which reveals that banks take credit risk but manage within the ambit of regulatory restrictions. Based on the findings, we argue that the imposition of regulatory restrictions through the State Bank of Pakistan (SBP) has not only discouraged income smoothening through loan loss provisions but also enhances reporting quality. The results of this study provide useful insights for investors, creditors and stakeholders.

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The Cyclicality of Loan Loss Provision in Brazilian Commercial Banks

Brazilian Business Review ◽

10.15728/bbr.2018.15.3.3 ◽

2018 ◽

Vol 15 (3) ◽

pp. 246-261

Author(s):

Antônio Araújo ◽

Paulo Lustosa ◽

José Dantas

Keyword(s):

Commercial Banks ◽

Loan Loss ◽

Loan Loss Provision

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ANALISIS INCOME SMOOTHING PADA PERBANKAN ISLAM NEGARA-NEGARA TELUK DI TIMUR TENGAH

Jurnal Ilmiah Akuntansi dan Keuangan ◽

10.32639/jiak.v6i2.91 ◽

2017 ◽

Vol 6 (2) ◽

pp. 55-64

Author(s):

Prima Shofiani

Keyword(s):

Income Smoothing ◽

Capital Adequacy ◽

Loan Loss ◽

Loan Loss Provision ◽

Capital Adequacy Ratio

Penelitian ini bertujuan menguji income smoothing menggunakan loan loss provision (LLP) pada perbankan Islam. Sampel penelitian ini adalah bank-bank Islam negara-negara Teluk Timur Tengah. Variabel dependen dalam penelitian ini adalah loan loss provision (LLP) dan variabel independen adalah total pembiayaan, non performing finance (NPF) dan capital adequacy ratio (CAR). Analisis data menggunakan regresi data panel dengan EViews 7. Hasil penelitian menunjukkan bahwa non performing finance (NPF) berpengaruh positif terhadap LLP. Total pembiayaan tidak berpengaruh positif terhadap loan loss provision (LLP) dan capital adequacy ratio (CAR) tidak berpengaruh positif terhadap loan loss provision (LLP). Kata Kunci: loan loss provision (LLP), Income smoothing, Bank Islam

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