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The Impact of Non-Performing Loans on the Profitability of Listed Euro-Mediterranean Commercial Banks

Author

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  • Ayrton Psaila
  • Jonathan Spiteri
  • Simon Grima

Abstract

Purpose: To analyze the impact of NPLs on listed commercial bank’s profitability, in particular their ROA (Return on Assets), in the Euro-Mediterranean area. We aim to determine whether the change in the level of NPLs in listed commercial banks is either positively or negatively impacting the ROA of the concerned banks. Furthermore, knowing that the liquidity and the solvency of a bank are both equally important to maintain a robust financial position, a Liquidity (LQDT) and Solvency (SLVT) ratio were considered to help explain the variances with NPLs and ROA. Design/Methodology/Approach: We adopted a purposive research design using panel data (2013-2017) from data published on Thomson Reuters Eikon or annual reports of the 35 listed commercial banks in the Euro-Mediterranean region. We used descriptive statistics and four regression models, namely; the Pooled OLS regression model, Fixed Effects (FE), Random Effects (RE) and the Arellano-Bond (AB), through STATA/IC 15.1. Findings: Findings show that there is a negative impact of NPLs on ROA, indicating that problematic loans negatively impact listed commercial bank’s profitability in the Euro-Mediterranean region. Also, it was indicated that the Solvency ratio (SLVT) is the only controlling factor that can significantly explain variances within NPLs and ROA. Practical Implications: These results carry with them significant consequences for the bank’s financial stability within the Euro-Mediterranean countries and the role of the risk management function of listed commercial banks.

Suggested Citation

  • Ayrton Psaila & Jonathan Spiteri & Simon Grima, 2019. "The Impact of Non-Performing Loans on the Profitability of Listed Euro-Mediterranean Commercial Banks," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(4), pages 166-196.
    • Handle: RePEc:ers:ijebaa:v:vii:y:2019:i:4:p:166-196
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    References listed on IDEAS

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    Cited by:

    1. Herry Achmad Buchory, 2023. "Banking Profitability: How do the banking intermediary, secondary reserve, operational efficiency, and credit risk effect?," GATR Journals jfbr214, Global Academy of Training and Research (GATR) Enterprise.
    2. Alexandra Horobet & Magdalena Radulescu & Lucian Belascu & Sandra Maria Dita, 2021. "Determinants of Bank Profitability in CEE Countries: Evidence from GMM Panel Data Estimates," JRFM, MDPI, vol. 14(7), pages 1-23, July.
    3. Sujan Chandra Paul & Mohammad Rakibul Islam & Sharmin Akter Mitu, 2021. "Nexus Unclassified Loans, Classified Loans, and Profitability: Evidence from Commercial Banks of Bangladesh," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 10(4), pages 99-114, October.

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    More about this item

    Keywords

    Non-Performing Loans; Return on Assets; Profitability; Solvency Ratio.;
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    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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