Asset quality and banks performance: A panel data analysis of commercial banks

Download This Article

This work is licensed under a Creative Commons Attribution 4.0 International License.

Abstract

Asset quality management plays a critical role in shaping the financial health and profitability of banks. Moreover, the frequent loan scams have made banking activities questionable. Therefore, non-performing loans (NPL) must get proper consideration and supervision to lessen the occurrence of loan scams (Abdul Aziz et al., 2009). This study investigates the relationship between asset quality management and bank profitability, focusing on key indicators such as return on equity (ROE) and return on assets (ROA). Additionally, we examine specific metrics related to asset quality. The impact of asset quality management on bank profitability is investigated in this research through ten banks between 2017 and 2021. ROE and ROA will be used to measure the dependent variables of profitability; NPL, the total impairment charges to total operating income, and the total impairment charges to gross total loans (TL) will be used to measure the independent variables of asset quality management. Our analysis reveals a strong positive association between effective asset quality management and bank profitability. Banks that actively manage their asset quality tend to exhibit better financial performance. Specifically, higher provisioning for impaired assets (as reflected in the impairment charges ratios) is linked to improved bank stability and resilience.

Keywords: Asset Quality, Banks’ Performance, Non-Performing Loans, Total Impairment Charges to Gross Total Loans, Return on Assets, Return on Equity

Authors’ individual contribution: Conceptualization — S.A.E.; Methodology — M.H.I.; Software — M.H.I.; Validation — H.A.B.; Formal Analysis — H.A.B.; Investigation — N.M.Y.; Resources — N.W.S.E.; Data Curation —S.M.M.I.; Writing — Original Draft — S.A.E., N.M.Y., S.M.M.I., M.H.I., and N.W.S.E.; Writing — Review & Editing — H.A.B.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G20, G21, G29, G31, G34

Received: 29.11.2023
Accepted: 16.09.2024
Published online: 19.09.2024

How to cite this paper: Barakat, H. A., Elwahab, S. A., Yassin, N. M., Ibrahim, S. M. M., Ismail, M. H., & Eldin, N. W. S. (2024). Asset quality and banks performance: A panel data analysis of commercial banks. Risk Governance and Control: Financial Markets & Institutions, 14(3), 111–121. https://doi.org/10.22495/rgcv14i3p11