Examining the Effects of Banks' Credit Related Financial Disclosures and Loan Loss Provisions on Bank Stock Returns

Abstract

Banks represent a significant and influential sector of business worldwide. Most individuals and organizations make use of banks, either as depositors or borrowers. Banks play a major role in maintaining confidence in the monetary system through their close relationship with regulatory authorities and the regulations imposed on them by those regulatory bodies. Hence, there is considerable and widespread interest in the well being of banks, and in particular their solvency and liquidity and the relative degree of risk that attaches to the different types of their business. This is why the users of the financial statements of a bank are interested in its liquidity and solvency and the risks a bank is exposed to.

The users of the financial statements of a bank need relevant, reliable and comparable information that assist them in evaluating the fmancial position and performance of the bank and which is useful in making economic decisions. They also need information, which give them a better understanding of the special characteristics of the operations of a bank. Users need such information even though a bank is subject to supervision and provides the regulatory authorities with information that is not always available to the public. Therefore, disclosures in the financial statements of a bank need to be sufficiently comprehensive to meet the needs of both internal and external users.

Increasing volume of non-performing loans (either substandard, doubtful, or bad loans) in the bank's loan portfolio affects negatively the credit activity in the banks. Therefore, the credit problems represent a very important problem that face Egyptian banks.

As evidence to this problem, some Egyptian banks, notably the public sector banks, suffer from high non-performing loans ratio. The ratio of non-performing loans to gross loans in the Egyptian banking