The impact of credit risk on commercial banks profitability in China

Abstract

This study determined the relationship between credit risk and the profitability of commercial banks in China. It considered the credit risk (Non-performing loans, NPLs) as a key variable and the profitability of commercial banks (Net interest spread) as a dependent variable. A descriptive-correlational research design was adopted in this quantitative research. Dataset is 12 Chinese commercial banks from owned commercial banks, city commercial banks, and joint-stock commercial banks for the period 2006 to 2016. Data has been collected from the wind database, and Bloomberg, and analyzed using panel data analysis, which is a fixed-effect model. The finding of the study demonstrates that credit risk has a significant impact on the profitability of commercial banks in China, which means the relationship between them is positive. Thus, the study suggested that to improve financial performance, the managers for commercial banks of China need to focus on sustaining the Non-performing loans.