Credit Risk and Banks’ Profitability in Malaysia

Abstract

This paper examines the relationship between credit risk and profitability of Malaysian local commercial banks which consist of eight banks they are Maybank, CIMB Bank, Hong Leong Bank, Public Bank, RHB Bank, AmBank, Alliance Bank, and Affin Bank. For the purpose of analysis this study covers a period of eight years from 2005 to 2012. The empirical tests employed in this study are Pooled Ordinary Least Square (OLS) and Panel regression. Based on the findings of this study its shows that the non-performing loan to total loan ratio (NPL/LA) and the ratio of loan loss provision to total loan (LLP/LA) have a negative effect on profitability meanwhile the total loan to total deposit ratio (LA/TD) found to have a positive effect on the return on asset (ROA). Overall the results of this study concluded that to some degree, Malaysia’s commercial banks have a very good credit risk policy.