Profitability and credit risk management : a comparative analysis of Maltese banking groups and selected European groups (1990 - 2009)

Abstract

The main aim of this study is to determine the extent to which the profitability of local and foreign banking groups is affected by the effectiveness of the credit risk management (CRM) practices and techniques. The research method adopted in this dissertation involves analysing accounting ratios over a period of 20 years (1990 - 2009) using multiple regressions combined with the qualitative research part conducted through face-to-face interviews with local Credit Risk Officers of the selected institutions. The qualitative aspect has also been supplemented with other information obtained from the risk management reports. In the model, profitability has been measured by means of ROE and ROA, whereas NPLR and LLR were set as CRM indicators. The study indicates that foreign European institutions adopt highly sophisticated risk governance structures, credit risk rating models and mitigation techniques compared to local banking groups. This has triggered a higher profitability dependence on the effectiveness of these CRM systems. Despite the adoption of statistical models, expert judgement and experience still features in the whole risk management process in determining the inputs and evaluating the outputs of the model. Moreover, the results indicate that whereas the NPLR exerts a negative effect over profitability in all groups, the impact of the LLR cannot be determined with certainty. The findings indicate that CRM has relatively similar impact on the profitability of local Groups A and B which have comparable CRM characteristics and practices. In contrast, Group C's results indicate that both NPLR and LLR are incapable of predicting profitability.