Effects of non-performing loans on earnings and quality of bank assets : comparative study of some selected commercial banks in Saudi Arabia

Abstract EN

This study investigates the effects of NPLs on earnings and quality of bank assets, for three of the top 10 banks in KSA, these banks were chosen which considered as fairly representative of the commercial banking sector in KSA based on their largest proportion percentage of the total assets of commercial banks at the end of the year 2012.

The selected banks are: NCB Bank, A1 Rajhi Bank and Samba Bank.

We used as dependent variables 6 measures of profitability widely employed in the banking literature such as, Debt Ratio, Return on Assets Ratio, Return on Equity Ratio, Equity Multiplier Ratio, Assets Utilizations Ratio, Marginal Profit Ratio.

And non- performing loans as independent variable, during the period 20122018-.

Secondary data were used to carry out ratio analyses, and trend analyses which were correlated to the variables.

The study used Pearson correlation coefficient to carried out analysis, It is founded that bank non- performing loans (NPLs) have significant relationship on earnings and assets quality of banks.

That is, it can be concluded that NPLs play a crucial roles on earnings and assets quality of banks in KSA.

The results indicated that there is negative relationship and significantly correlated between non- performing loans and earnings and assets equality of banks when Debt Ratio, Return on Assets Ratio, Assets Utilizations Ratio and Marginal Profit Ratio are used as a measures of earnings and assets quality of banks but the relationship becomes positive and significantly correlated with Return on Equity Ratio and Equity Multiplier Ratio.The results of this study highlighted several implications and recommendations bank managers need in KSA, to thoroughly scrutinize client data and information during the credit analysis stage so to reduce informational gaps and increase access to complete, accurate and reliable information concerning credit risk and higher quality of bank assets.

Equally, banks management needs to employ cost efficiency mechanisms in managing their loan portfolio