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Does credit growth predict lower returns for large banks?

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  • Parija, Arpit Kumar

Abstract

Prior research finds that bank credit growth predicts lower bank equity returns in subsequent years. Stocks of banks with high credit growth are initially overvalued. Eventually, these banks underperform. Shareholders realize their mistakes and lower share price, thus generating lower returns. We argue that such correction of mispricing happens to a lesser extent for large banks and show that for large banks, the decline in equity return following an increase in credit growth is minimal. This finding is consistent with government guarantees that protect shareholders of large banks, but not small banks.

Suggested Citation

  • Parija, Arpit Kumar, 2025. "Does credit growth predict lower returns for large banks?," Finance Research Letters, Elsevier, vol. 75(C).
    • Handle: RePEc:eee:finlet:v:75:y:2025:i:c:s1544612325001461
    DOI: 10.1016/j.frl.2025.106881
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    References listed on IDEAS

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    More about this item

    Keywords

    Credit growth; Return predictability; Large banks;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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