Credit Risk Management and Profitability in Commercial Banks in Sweden

Abstract: Credit risk management in banks has become more important not only because of the financial crisis that the world is experiencing nowadays but also the introduction of Basel II. Since granting credit is one of the main sources of income in commercial banks, the management of the risk related to that credit affects the profitability of the banks. In our study, we try to find out how the credit risk management affects the profitability in banks. The main purpose of our study is to describe the impact level of credit risk management on profitability in four commercial banks in Sweden. The study is limited to identifying the relationship of credit risk management and profitability of four commercial banks in Sweden. The results of the study are limited to banks in the sample and are not generalized for the all the commercial banks in Sweden. Furthermore, as our study only uses the quantitative approach and focuses on the description of the outputs from SPSS, the reasons behind will not be discussed and explained. The quantitative method is used in order to fulfill the main purpose of our study. We have used regression model to do the empirical analysis. In the model we have defined ROE as profitability indicator while NPLR and CAR as credit risk management indicators. The data is collected from the sample banks annual reports (2000-2008) and capital adequacy and risk management reports (2007-2008). The findings and analysis reveal that credit risk management has effect on profitability in all 4 banks. Among the two credit risk management indicators, NPLR has a significant effect than CAR on profitability (ROE). The analysis on each bank level shows that the impact of credit risk management on profitability is not the same. The credit risk management of Nordea and SEB has relatively similar impact on their profitability. While Handelsbanken’s results indicate that NPLR and CAR are very weak or incapable of predicting ROE. In case of Swedbank NPLR and CAR explains the variances in ROE with very low probability. Basel II application has strengthened the negative impact of NPLR on ROE. Unlike effect of Basel I, CAR has positive and insignificant effect on ROE.