This research looks at how commercial banks’ bottom lines are affected by their credit risk management strategies. Banks’ ability to detect, quantify, track, and reduce credit risk is directly related to their bottom line as it is the biggest cause of financial trouble for lending institutions. Profitability, as measured by ROA and ROE, is modeled as a function of four commonly used credit-risk indicators: NPLR, LLPR, CAR, and LDR. Bank size and liquidity are controlled for in the study, which adheres to an explanatory, quantitative research design based on panel-data methodology. A sample of commercial banks with licenses is used to do descriptive statistics, correlation analysis, and fixed-effects panel regression. According to the findings, profitability is negatively impacted by the non-performing loan ratio and the loan loss provision ratio, positively impacted by the capital adequacy ratio; a weaker, non-linear connection is observed with the loan-to-deposit ratio. These results show that one of the most important factors in a bank’s profitability is its careful credit risk management, which includes controls over the quality of its assets and sufficient capitalization. After outlining potential avenues for further study, the article finishes with some actionable suggestions for bank regulators and management.
Keywords: Bank Profitability, Credit Risk Management, Non-Performing Loans, Return on Assets, Return on Equity, capital adequacy commercial banks
