History

Over the last decade, the world banking industry suffered due to economic downturn. It is widely accepted that the percentage of nonperforming loans (NPLs) is often associated with bank failures and financial crises in both developed and developing countries. In other words, the aggregate rate of nonperforming loans (NPLs) is commonly used as soundness indicators.

Nonperforming loan can be explained in term of default payment made by borrower for over 90days or the bank not received any payment until the maturity date depends on contract terms.

In view of this reality, its can analyzed the sensitivity of nonperforming loan to several key of macroeconomic variables. This is because problem loans are often used as an exogenous variable to explain other banking outcomes such as bank performance, failures, and bank crisis.

1.1 Background of Study

Nowadays, business in financial institution becomes more complex to deal with economics conditions. So, financial institutions need to work harder to maintain their performance and also profitability of business. In the study conducted, Public Bank has been chosen to take a look the reflection of the result. Established in 1966 by its Founder and Chairman, Tan Sri Dato’ Sri Dr. Teh Hong Piow, Public Bank is a leading financial services provider serving over five million customers in Malaysia.

The Public Bank Group is highly reputed for its prudent management, strong balance sheet, superior asset quality, superior customer service, strong corporate governance and effective corporate culture. Public Bank Brand is the best brand in financial services in Malaysia.

Study with attempt to focusing on how non performing loan react to those macroeconomic indicator will give an expectations of result to those independent variables. If NPL’s are kept active and constantly, thus it will break the economic growth and impairing the banking sector performance. In previous study conducted by Dimitrios, Angelos and Vasilios (2010), shows that the real gross domestic product growth rate and interest rate is negatively related to changes in the NPL, while the unemployment rate, interest rate and the inflation rates have a positive impact on the dependent variable In hope, the expectations result shows that the macroeconomics indicator has same significant influence on nonperforming loan of the Public Bank.

1.2 Problem Statement

NPLs create problems for banking sector’s balance sheet on the asset side. They also create a negative impact on the income statement as a result of provisioning for the loan losses.

There have three types of loan which is mortgage loan, business loan and consumer loan. From previous study, it’s show that the NPLs of consumer loans are the most sensitive towards a change in both gross domestic product growth rate, interest rates and inflation rates. As compared to the NPLs of business loans, there are most sensitive towards a change in the unemployment rate while NPLs of mortgage loans is the least sensitive to changes of macroeconomic factors (Dimitrios, Angelos and Vasilios 2005). These results are indicative of the differences in the driving forces behind NPLs for various types of portfolio loans.

Hence, the purpose of this study is to analyze and evaluate the performance of Public Bank in overall types of default risk toward macroeconomic variables. This can be as a reference and for general knowledge to individual and banking institution in handling lending activities and cash flow.

1.3 Research Question

In this study, there are several research questions that has been developed regarding the problem statement occurred. This main research questions is:

1. Does macroeconomics variable giving the serious impact on Nonperforming loan of Public Bank?

2. Does macroeconomic variable such as Gross Domestic Product (GDP), unemployment rate, inflation rate, and interest rates on base lending rate that are giving the most positive feedback of bank performance on the supply of credit?

This research questions will be useful for the guidelines to answering the problem statement clearly. Based on the research question result, hopefully that it will answering which macroeconomic variable giving the impact on non performing loan of Public Bank.

1.4 Objective of Study

This investigation of study is focused on the effect of nonperforming loan of Public Bank toward macroeconomic variable. Viewing quarterly in 2005 to 2009 as a reference of investigation, it can be used for bankers as a benchmark for their future planning.

The objective of the study are;-

1. To determine the relationship between Nonperforming Loan and macroeconomics variables.

2. To indicate that macroeconomic variables (GDP, unemployment rates, interest rates on BLR and inflation rates) will give the significance result of th