Correlation has been run on the variables Loan, Risk weighted asset (RWR), Net profit after Tax (NAPT), classified loan, capital adequacy ratio (CAR), Default rate, ROE.
| Loan | RWA | NAPT | II | CL | CAR | Default rate |
Loan | 1.000 | | | | | | |
RWA | 0.9967 | 1.000 | | | | | |
NAPT | 0.9418 | 0.9229 | 1.000 | | | | |
II | 0.8854 | 0.8566 | 0.9879 | 1.000 | | | |
CL | 0.7213 | 0.7555 | 0.4497 | 0.3226 | 1.000 | | |
CAR | 0.8699 | 0.8321 | 0.9282 | 0.9400 | 0.3773 | 1.0000 | |
Default rate | -0.9613 | 0.957 | -0.9665 | -0.9284 | -0.564 | -0.89 | 1.000 |
There exists a strong positive correlation between Loans and Risk-Weighted Assets. So high loan amount will increase the need for high tier 1 capital and tier 2 capital because the risk will increase the weighted risky asset. For Net Profit, after Tax and Risk-Weighted Asset Correlation coefficient is .9229, the result is significant. The risk-weighted asset is mostly formed of debt capital. More debt capital increases the profitability through more interest. So there exists a positive relation. The correlation between NAPT and loans is .9418, and the result is significant. The explanation is as follows. For Interest income& Loan, the coefficient is .8854. The more unclassified loan, the more interest income. The coefficient between Interest income & RWA is .8566, and there exists a strong correlation. In the case of Net profit & Interest income, the coefficient is .9879, and there exists a strong correlation. The More the interest, the more the income. The Classified loan & Loan correlation coefficient is .7214. It indicates a positive and strong correlation. Bur the result is not reliable because the result is insignificant. Normally the more the loan, the more the risk of being classified. The correlation coefficient between Classified loans and RWA is .7555. So there is a moderately strong relationship between these two variables at a 45 significance level. The more classified loan increases the need to have more provision for it. So the amount of risk-weighted assets increases. The NAPT & Classified loan has a moderate relationship, but the result is insignificant. Considering the relationship between CAR and Loan, The coefficient is .8699 indicates a strong relationship. But the insignificant result does not provide any reliable answer. The CAR and RWA have a strong coefficient of .8321.indicates a positive and strong relationship. The more the risk-weighted, the more the requirement of CAR. The coefficient between CAR and NPAT is .9282.indicates a strong positive correlation. More CAR will increase the profitability, decreasing the risk of insufficient capital.
The Default rate and Loan have a correlation coefficient of -0.9613. So there exists a negative relationship between these two variables. The default rate will decrease with the decrease of the loan. More the RWA, the more the default rate because the volume of the loan amount increases. So the correlation coefficient shows the result of .957. The Interest income and Default rate have a correlation coefficient of - .9284. There exists a strong negative correlation between these two variables. In reality, the increasing default decreases the interest income. The NAPT and default rate has a coefficient of - .9665. There exists a strong negative correlation between these two variables. In reality, the increasing default decreases the profitability.