Nexus Among Financial Stability and Financial Performance

Abstract

The study finds how Pakistani commercial banks' financial performance is impacted by financial stability, specifically non-performing loans (NPL). It employs economic value-added (EVA) and return on assets (ROA) as performance measurements, taking into account macroeconomic data like gross domestic product (GDP), inflation, and monetary policy rates in addition to internal aspects like bank age and size. NPL and both financial performance metrics are negatively correlated, according to an analysis of panel data from 15 banks between 2020 and 2025. Furthermore, although the monetary policy rate has a negative impact on performance, its effect on EVA is considered negligible. On the other hand, variables like GDP, bank age, and size have a strong positive impact, especially on ROA. The study suggests that banks adopt more stringent financial stability guidelines, update these guidelines frequently to improve loan procedures, and evaluate the depreciated asset values used as collateral on an annual basis in order to improve financial performance. Notably, this study creatively uses EVA to investigate the relationship between financial stability and financial performance—a metric that was frequently disregarded in earlier research.