The Impact of Credit Risk Management on Profitability of Nordic Commercial Banks

Abstract: This thesis investigates credit risk management in Nordic commercial banks and its effect on profitability. Two determinants of credit risk are chosen according to relevant literature, namely loan loss provision ratio and capital adequacy ratio. Thirteen banks in total are then investigated across the 16 year time frame from 2000-2015. The results seek to address two essential questions. Firstly, it seeks to capture the relation between credit risk management and profitability of Nordic commercial banks in the full data sample. Loan loss provision ratio is found to have negative effect on the performance of banks, while capital adequacy ratio presents mixed results. Second part of the thesis focuses on the financial crisis component, most notably its impact on the change in credit risk management. It is shown that macroeconomic environment plays a bigger role in the decrease in profitability after the financial crisis than credit risk management does.