The Impact of Credit Risk on the Profitability of Selected Commercial Banks of Bangladesh

Abstract

The objective of the study is to find out the impact of credit risk on the profitability of selected commercial banks of Bangladesh. To perform this study, we have selected 10 commercial banks from 61 scheduled commercial banks. The selected banks consist of four categories. Among them, three are state owned banks, three are private owned non Islamic banks, three are private owned Islamic banks and one is specialized commercial bank. To show the impact of credit risk on profitability, we have selected ten variables which are calculated using data collected from 2009 to 2018. Among the ten variables, two variables have been used as dependent variables which include Return on Equity (ROE) and Return on Assets (ROA), and among the independent variables include seven bank specific variables and one macroeconomic variable. To find out the result, multiple-regression model has been used and shown the effects of independent variables on ROE & ROA separately. Besides this, an attempt has been made to find out the effect of Basel III on profitability. To show the effect, we have used three years data before Basel III and three years data after Basel III and showed the individual effect on ROE and ROA. The regression result shows that non-performing loan ratio (NPLR), Loan Loss Provision Ratio (LLPR) and macroeconomic variable GDP has a significant negative impact on profitability ratio ROE. The result also shows that Non-performing loan ratio (NPLR), Loan and advance to total deposits ratio (LATD) have a significant impact on profitability ratio Return on Assets(ROA). The regression result for Basel III effect represented that Nonperforming loan has a significant negative impact on Return on Equity (ROE) but this impact is less than that of before Basel III.