How Banks Can Leverage Credit Risk Evaluation to Improve Financial Performance

Abstract

The research aims to examine the impact of credit risk evaluation on the financial performance of American and European commercial banks during the period 2017-2021. A set of 37 commercial banks were selected to represent the entire banking industry of those two continents. To measure this relationship, two mathematical models were created. Research has revealed that credit risk evaluation influences the financial performance of the American and European commercial banks as represented by ROE and ROA. The study also concludes that the credit risk evaluation indicators analyzed in this study have a substantial effect on the financial performance of American and European commercial banks. The study suggests banks enhance their credit risk evaluation to generate more profits. It also cites the indicators of non-performing loans or gross loans, provision for facilities loss/net facilities, as well as the leverage ratio as significant in determining credit risk evaluation. Banks must put together strategies that will not only limit the banks’ exposure to credit risk, but also enhance the banks’ performance, as well as competitiveness. Further research can be conducted in developing nations to understand the impact of credit risk evaluation in such economies.

Keywords

• credit risk
• financial performance
• commercial banks