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Impact of credit risk management on the profitability of the Irish banks

Jaiswal, Niharika Kamala Prasad (2020) Impact of credit risk management on the profitability of the Irish banks. Masters thesis, Dublin, National College of Ireland.

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Abstract

The objective of the study is to examine the impact of credit risk management on the profitability of the Irish banks. The sample of this study consists of 4 Irish banks: Allied Irish Bank, Bank of Ireland, Permanent tsb and Ulster Bank. Profitability is measured by Return on Equity (ROE) and credit risk is measured by Capital Adequacy Ratio (CAR) and Non-performing loans (NPL).

The financial ratios were calculated by the author from the annual financial reports of the banks for 11 years (2008 - 2018), which includes both the period of global economic crisis and recovery. The data has been analyzed through regression analysis for understanding the relation between credit risk management, NPL and CAR (independent variables) and profitability, ROE (dependent variable). The models are developed by making three variations in the data set: removing an outlier, lagging the dependent variable by one period and lagging the dependent variable with an outlier removed. A non-linear trendline is also examined for relevant models. Since, the data has both crisis and recovery period, a dummy variable is included. A qualitative variable called “economic condition” is introduced where “0” indicates crisis (2008-2012) and “1” denotes recovery (2013-2018).

The quality of the data set is also checked through diagnostic testing. The testing includes Autocorrelation and Heteroscedasticity. A test for Multicollinearity is also undertaken. Along with these, significance testing is also done.

The findings from the study tells that there is negative association of NPL with ROE and positive relationship between CAR and ROE. It is also observed that there is also a positive relationship between economic condition and the profitability of the Irish banks. The data doesn’t show evidence of Multicollinearity and Autocorrelation, but there is some evidence of the presence of Heteroscedasticity in the data.

Also, the study addresses the identified gap in the literature.

Key words: Non-performing loans, Capital Adequacy Ratio, Return on Equity, Credit risk management, Profitability, Regression

Item Type: Thesis (Masters)
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
H Social Sciences > HG Finance > Credit. Debt. Loans.
Divisions: School of Business > Master of Science in Management
Depositing User: Dan English
Date Deposited: 06 Feb 2021 10:33
Last Modified: 06 Feb 2021 10:33
URI: http://norma.ncirl.ie/id/eprint/4669

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