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Credit Quality and Stock Returns of Commercial Banks

Author

Listed:
  • Nawazish Mirza

    (La Rochelle Business School - Excelia Group)

  • Amir Hasnaoui

    (La Rochelle Business School - Excelia Group)

  • Birjees Rahat

    (La Rochelle Business School - Excelia Group)

Abstract

Commercial banks exhibit distinctive dynamics that are priced in their stock returns. This paper evaluates conventional asset pricing models using an exchange rate adjusted portfolio of banking firms from fourteen European countries and proposes a banking specific risk factor. Our findings suggest that credit quality premium (proportion of non-performing loans to total loans and measured as BdMGd - bad minus good) is systematic in nature. Hence, investors demand incremental risk premium for investing in banking stocks with lower credit quality. We also note that the credit quality premium is more significant for banks that are smaller in size. We conclude that the variation in stock returns for banking firms is better explained by an asset pricing framework augmented for credit quality as compared to conventional pricing propositions. These findings have considerable implications for portfolio management and pricing of banking equities, notably in an international context.

Suggested Citation

  • Nawazish Mirza & Amir Hasnaoui & Birjees Rahat, 2020. "Credit Quality and Stock Returns of Commercial Banks," Economics Bulletin, AccessEcon, vol. 40(1), pages 1-17.
    • Handle: RePEc:ebl:ecbull:eb-19-00868
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    References listed on IDEAS

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    Cited by:

    1. Jamila Abaidi Hasnaoui & Syed Kumail Abbas Rizvi & Krishna Reddy & Nawazish Mirza & Bushra Naqvi, 2021. "Human capital efficiency, performance, market, and volatility timing of asian equity funds during COVID-19 outbreak," Journal of Asset Management, Palgrave Macmillan, vol. 22(5), pages 360-375, September.
    2. Umar, Muhammad & Ji, Xiangfeng & Mirza, Nawazish & Rahat, Birjees, 2021. "The impact of resource curse on banking efficiency: Evidence from twelve oil producing countries," Resources Policy, Elsevier, vol. 72(C).
    3. Chen, Zhonglu & Umar, Muhammad & Su, Chi-Wei & Mirza, Nawazish, 2023. "Renewable energy, credit portfolios and intermediation spread: Evidence from the banking sector in BRICS," Renewable Energy, Elsevier, vol. 208(C), pages 561-566.

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    More about this item

    Keywords

    Banking Stocks; Credit Quality; International Portfolios;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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