Impact of Performing Loans on Profitability of Banks in UK

The IMPACT OF
PERFORMING LOANS ON
the PROFITABILITY OF
BANKS

ABSTRACT
The banks have a commercial role to play in form of lending to important businesses and thus
has a wide number of operations attached to it. In the operations, there are a number of variables
such as loan to assets, bank size to assets, capital adequacy measured by assets, performing loans
affecting profitability of banks which again measured by return on assets and return on equity
come in to play. The significance of these variables are important for the business as well as its
investors. They are one of the important financial determiners of the financial position of the
company. Banks having these variables in check perform well in operations and contribute
economically to the country’s economic scenario. The study revealed findings of these variables
in which some variables were found to be positive as well as some negative in relation to profits
and total deposits of organisations. The scenario was based on banks of UK where there was also
seen corelation between the variables. There were variables found which were independent and
influencing the profits of the organisation in a major way such as loans. The revenue sources can
be termed as performing loans which increase the bank’s profitability and thus is an important
variable for progression of organisation. There were factors like capital adequacy which were
regulatory measures for liquidity but affecting profitability in a negative way which was
highlighted.
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TABLE OF CONTENTS
ABSTRACT.....................................................................................................................................2
TABLE OF CONTENTS.................................................................................................................3
CHAPTER 1: INTRODUCTION....................................................................................................4
Background of study....................................................................................................................4
Aims and objectives.....................................................................................................................5
Research questions.......................................................................................................................5
Dissertation Structure...................................................................................................................5
CHAPTER 2: LITERATURE REVIEW.........................................................................................8
Theme 1: The financial variables affecting profitability of UK banking industry......................8
Theme 2: The effect of financial variables on banking industry of UK......................................9
Theme 3: The impact of loans on banking sector profitability in UK.......................................10
CHAPTER 3: RESEARCH METHODOLOGY...........................................................................14
Research type.............................................................................................................................14
Research approach.....................................................................................................................14
Data collection...........................................................................................................................14
Sample........................................................................................................................................14
Data Analysis.............................................................................................................................15
Reliability and validity...............................................................................................................15
Research limitation....................................................................................................................15
CHAPTER 4: DATA ANALYSIS................................................................................................18
Theme 1: Bank capital to assets ratio........................................................................................18
Theme 2: Capital Adequacy ratio..............................................................................................20
Theme 3: Statistics excluding outliers.......................................................................................22
Theme 4: Regression analysis....................................................................................................23
Theme 5: Multicollinearity........................................................................................................24
CHAPTER 5: CONCLUSION......................................................................................................27
CHAPTER 6: RECOMMENDATIONS........................................................................................28
REFERENCES..............................................................................................................................29
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CHAPTER 1: INTRODUCTION
Background of study
The aim of this assignment is to study the impact of performable loans and financial
indicators on profitability of banks in UK. The banks play a vital role in economy of a nation,
there are several operations undertaken by banks like savings being kept as deposits, giving
interest on the savings to customers and perform operations of lending for businesses to grow.
Loans form a vital part in a bank’s business as this is the chief revenue source for banks in UK
(Sungheetha and Sharma, 2020). The UK banking system does not have high interest rates on
savings accounts but are ahead in loan performance. The banking sector stability is necessary for
growth of a nation’s economy. There are parameters which indicate the financial performance of
the bank and are judged through various parameters like solvency, profitability and liquidity. UK
banking sector has a number of banks working in private sector, international banks and
government banks. UK currently has 344 banks working and with physical banking, there has
been a steady growth in online and mobile banking too (Arkes, 2019). The Regulatory body of
banking in UK is Financial Conduct Authority and country has a central bank which is Bank of
England and is state owned. The services provided here are of current accounts, savings
accounts, overdrafts and loans, mortgages and insurance. Apart from these, banking sector also
provides mobile banking and business banking through digital measures.
It has been pointed out by experts that banks act as intermediaries facilitating economic
growth and improvement in financial stability. UK banks in previous decades have acted as a
channel for economic growth and emphasised on measures of financial inclusion in which the
villages have been included. Through this exercise, financial parameters have been kept in
consideration to maintain a check on profitability such ass return on investment and equity.
Talking of the UK banking sector, it is one of the most prominent in Europe, which accounts for
about a quarter of the banking assets with the Europe. From the statistical report of Bank of
England, assets in total amounted to above GBP 5 trillion at 2014 end. The UK banking sector is
one of the biggest banking centre internationally accounting for around 20 percent of the cross
border lending of the world. The nation has one of the important finance centres which has
increase of foreign banks presence. This can be gauged from the presence of 150 deposit taking
subsidiaries of foreign in UK which are from 56 different nations. Foreign banks account for
more than 55 percent of UK assets of banking sector.
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Despite the proliferation in banking services, lending in business has been an important
component of banks’ activities and other institutions of depository. It has been found in studies
that in around every European country, loans to firms and households account for around 55 %
of total bank assets with other earning assets which accounted for the rest.
The UK banking sector has been experiencing good growth substantially recently, with
witness to rapid expansion in assets. In the literature review provided there have been facts
investigating about the bank profitability determinants for UK. A number of variables such as
loan to assets, capital adequacy, performing loans and market concentration have been
considered in this regard and facts about them influencing profitability of UK banking sector
discussed. The difference between performing and non-performing loan is simple that in
performing loan borrower pays its debt payment on time while in non-performing borrower can't.
If any assets of the bank remain due up to 90 days than it is considered as performing assets and
loan while if any assets of the bank remain due even after the 90 days than it is considered as
non-performing assets and loan.
Aims and objectives
Aim:
 To study the impact of performable loans and financial indicators on profitability of
banks in UK.
Objectives:
 To identify the financial variables affecting profitability of UK banking industry.
 To analyse the effect of financial variables on banking industry of UK.
 To study the impact of loans on banking sector profitability in UK.
Research questions
The research seeks to find answers to these following questions:
Q.1. How have the financial variables affected performance and profitability of banks?
Dissertation Structure
Chapter 1: Introduction
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In this section of the dissertation and thesis, scholar will select the research topic and
determine the aims and objectives of the research along with the research question. This section
will also describe the background of the study on topic of impact of performing loans on
profitability of UK banks.
Chapter 2: Literature Review
This section of thesis will cover the secondary research on the research topic where
various authors views and opinions are considered. In this, various theme related to research
objectives are prepared in order to achieve the same.
Chapter 3: Research methodology
In this section, the methods will be present and select with the help of which scholar will
do research. This includes selection of research type, approach, data collection method,
sampling, data analysis, reliability and validity and research limitations.
Chapter 4: Data analysis
The data analysis section of the dissertation will cover the various tables and graphs
which describe the variables of performing and non-performing loans along with their impact on
UK banking sector. The analysis will be done using the thematic analysis method of qualitative
research in which scholar will prepare various themes, ratios formula, tables and graphs.
Chapter 5: Conclusion
The conclusion part of the thesis will conclude the key facts and points cover in this
whole research. This section will conclude what factors and results that scholar has identified
while conducting whole research.
Chapter 6: Recommendation
This is the last chapter of thesis where proper recommendation is provided to the readers
that they need to adopt. This section is basically present in the bullet points so that readers can
understand the part quickly and easily. The section covers the banking rules and regulation
which is recommended to the UK bank to deals with financial crises.
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