Credit Risk and Profitability of ASEAN Commercial Banks: Granger Causality Test
Keywords:
ASEAN, Bank Profitability, Credit Risk, PVAR.Abstract
The purpose of this research is to study the profitability and credit risk causality of ASEAN commercial banks. Using data from 118 ASEAN commercial banks from 2002 to 2017, we measure profitability by the ratio of net return to assets (ROA) and net return to equity (ROE). Banking credit risk is measured by the ratio of loan loss provision to assets (LLP). We set up panel vector autoregression (PVAR) to estimate this relationship. Our results indicates that there is a two-way causal relationship between ASEAN bank’s profitability measured by (ROA) and credit risk. Meanwhile, there is an only one-way relationship between profitability by ROE on credit risk and the opposite direction does not occur. Our results support the "bad management", "skimping" and "moral hazard" hypotheses of Berger and DeYoung (1997). The results of this study are the basis for providing information for executives managers to improve the bank's profitability while ensuring safety.
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