The Impact of Corporate Risk on Profitability of Sri Lankan Listed Banks and Diversified Financial Companies

Abstract

This research examines the impact of corporate risk on the profitability of Sri Lankan listed banks and diversified financial companies. Corporate risk is assessed through credit risk (measured by Gross Non-Performing Loans to Total Loans, GNLP), market risk (measured by Net Interest Margin, NIM), and operational risk (measured by Cost-to-Income Ratio, CIR). Profitability is evaluated using Return on Assets (ROA), Return on Equity (ROE), Net Profit Margin (NPM), and Operating Profit Margin (OPM). The study utilizes a quantitative research methodology, analyzing data from 2014 to 2024. Sample companies are LOLC Holdings, Commercial Bank, HNB, MBSL, ASIA Capital PLC, Commercial Credit and Finance PLC, Central Finance Company PLC, Senkadagala Finance PLC, People's Leasing & Finance PLC etc. Multiple regression analysis reveals that GNLP significantly affects both ROA and ROE, indicating that an increase in GNLP leads to a substantial decrease in profitability. NIM also significantly influences ROA and ROE, enhancing profitability, while CIR negatively impacts these metrics. The study finds that none of the independent variables significantly impact OPM. These findings highlight the critical role of effective credit risk and market risk management in enhancing the profitability of financial institutions. The research provides valuable insights for policymakers, regulators, and financial managers aiming to bolster the financial stability and performance of Sri Lanka's banking and diversified financial sectors