The Study of the Effect of Credit Risk Management on Financial Performance of Banks Listed on Tehran Stock Exchange

Author Name(s): AkramSadeghi , MortezaFaraji
Author Email: Mortezafaraji.uni@gmail.com

 Abstract

The main aim of the present study is to examine the effect of credit risk management on financial performance of banks listed on Tehran Stock Exchange during the time frame of 2010 to 2014. Statistical population of the present study is consisted of all private and state banks and considering the availability of information, final sample volume is consisted of 20 banks. In this study, credit risk, loss reserve resulting from past due maturity credit and loans and capital adequacy ratio of banks were considered as independent research variables, in order to study their effect on banks’ performance (return on assets).

Results of data analysis by using multiple-variable linear regression at 95% confidence indicated that there is a reverse relationship between credit risk and reserve resulting from past due maturity credit and loans with banks’ performance. On the other hand, it was also indicted that there is a direct relationship between liquidity ratio and capital adequacy ratio of banks with banks’ performance.

Keywords

Credit risk, capital adequacy, financial performance, return on assets

Introduction

In a market in which banks’ interest margin is always reducing due to increased competition and always a pressure is felt for more costs reduction. Credit risk models create a kind of relative superiority for banks and credit institutions with predicting the loss associated to failure to repay loans. Credit risk models with measuring risk and with creating a wise relationship between risk and return can provide us with the possibility of assets’ pricing. On the other hand, credit risk models provide the possibility to optimize the composition of credit portfolio and to determine banks’ economic capital for reducing capital costs (Caouette, 1998). Among the prominent characteristics of today’s competitive world, we can refer to profound and fast changes in technical – scientific fields and Successive challenges of social – economic systems in international competition field. Those companies would gain an appropriate place in the field of competition that with optimize use of the existing facilities and appropriate used of new resources for producing goods and delivering services with high quality can be a customer-oriented, unique and

Conclusion 

Research hypothesis 1 testing

According to table 9, significance level (sig) of the variables of credit risk level (0.041) is smaller than the considered significance level in the present study (5%); also, t-statistic absolute value related to this variable (2.302) is larger than the obtained t-value from the table with the same degree of freedom. Hence, H0 is rejected at 95% confidence level and H1, indicating that there is a significant relationship between credit risk level and banks’ performance, is confirmed. On the other hand, considering the coefficient value of this variable (-1.567), it can be concluded that for each unit of increase in credit risk level;banks’ performance reduces 1.567 units. These findings are to some extent consistent with the studies of Taghavi&Lotfi (2005), Mohammad Pourzarandi&MansoureGholamreza (2006), Mirza Hassan Hosseini &SomayehGhaderi (2010), Zhang Young & Zhu Yuande (2013), AlhandroMiko&AugoPanitza (2006), KatsoTushiShimizo (2012), MichealBrai et al. (2013), Patrick Bair et al. (2013) and MantosDalis et al. (2014).

 

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