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Non-performing loans and bank Non-

performing
performance: what role does loans and bank
performance
corporate social responsibility
play? A system GMM analysis 859
for European banks Received 20 October 2021
Revised 13 August 2022
25 November 2022
Rim Boussaada 4 January 2023
Accepted 6 February 2023
Higher Institute of Management of Tunis, University of Tunis, Tunis, Tunisia and
GEF-2A Lab, University of Tunis, Tunis, Tunisia
Abdelaziz Hakimi
Faculty of Law, Economics and Management of Jendouba, University of Jendouba,
Jendouba, Tunisia and
V.P.N.C Lab, University of Jendouba, Jendouba, Tunisia, and
Majdi Karmani
Excelia Business School, CERIIM, La Rochelle, France

Abstract
Purpose – This research investigated whether corporate social responsibility (CSR) can alleviate the negative
effect of non-performing loans (NPLs) on bank performance.
Design/methodology/approach – The research employed a sample of European banks over the 2008–2017
period. To resolve endogeneity and heterogeneity problems, the system generalized method of moments
(SGMM) model was employed.
Findings – First, bank NPLs were negatively and significantly associated with bank performance as
measured by the Q-Tobin ratio and the return on assets (ROA). Second, CSR scores exerted a negative and
significant effect on the level of NPLs. Finally, the results indicated that bank performance could benefit from
the interactional effect of CSR and NPLs.
Research limitations/implications – This study fills the gap in the debate over the mediating role of CSR in
the NPLs – bank performance interrelation. In addition, our SGMM analysis yielded more robust and efficient
results while resolving endogeneity and heterogeneity problems concerning CSR and bank performance or risk
in corporate finance.
Practical implications – CSR practices can play an essential mediating role in the NPLs–bank performance
relationship. CSR activities in the European context may reduce the level of NPLs and increase bank performance.
Originality/value – To the best of the authors’ knowledge, studies of the implications of CSR activities on the
banking sector are very limited. Indeed, this paper shows that CSR mediates the relationship between CSR
practices and NPLs. The results suggest that bank performance could benefit from the interactional effect of
CSR and NPLs.
Keywords Corporate social responsibility, Non-performing loans, Bank performance, European context,
System generalized method of moments
Paper type Research paper

1. Introduction
During the past two decades, policymakers and academicians have paid particular attention
to the role and implications of corporate social responsibility (CSR). A significant part of the
literature, based either on non-financial or financial institutions, considers CSR to be an Journal of Applied Accounting
Research
increasingly important topic (Fanti and Buccella, 2016; Arturo et al., 2018; Gangi et al., 2019; Vol. 24 No. 5, 2023
pp. 859-888
© Emerald Publishing Limited
0967-5426
JEL Classification — G30, L25, M14 DOI 10.1108/JAAR-10-2021-0283
JAAR Truong and Kim, 2019). In 2001, the European Commission (EC) defined CSR as the voluntary
24,5 contribution of a company to a better society and clean environment by integrating social and
environmental concerns in its activities. In 2011, the EC updated this definition, stating that
CSR is the “responsibility of companies for their impacts on society.”
Considering the singularities of financial institutions in terms of their activities and
economic role, traditionally, the financial sector was perceived as non-polluting (Herzig and
Moon, 2013). Nowadays, the concept of CSR is strongly considered in financial institutions,
860 especially banks. Banks seek to manage their banking activities ethically, taking into
consideration all social, economic, environmental and governance concerns. As corporations,
banks are concerned with the relationship between CSR policies and financial performance.
The social dimension of CSR for financial institutions has been introduced through the
financial inclusion process. Recognized as an important financial intermediary, banks allow
more access to credit and financial services with lower costs (Mukherjee and Chakraborty,
2012). The environmental dimension is incorporated into investment strategies and credit
policies (Cuesta-Gonz
alez et al., 2006).
Considered as a financial intermediary, banks present some specificities that differentiate
the CSR–performance relationship in their sector. Indeed, the 2008 international financial
crisis was taken as strong evidence that financial institutions banks, in particular did not
pursue their activities ethically. These practices led to more banking crises and failures and
caused several problems regarding employment and impoverishment (Lauesen, 2013). Hence,
the social dimension of CSR was abolished. Concerning the environmental dimension, due to
its global impact, the financial collapse was regarded as an ecological catastrophe (Kallis
et al., 2009; Scholtens, 2009). Moreover, granting loans to eco-friendly firms can result in lower
risk-taking and more innovative projects (Gangi et al., 2019; Batae et al., 2021). Additionally,
refusing credit to dirty industries may lower risk-taking and promote bank reputation (Caby
et al., 2022). Banks may also offer green financial products and services, such as green funds,
to strengthen their competitiveness, reputation and profitability (Batae et al., 2021).
Concerning the evolution of CSR practices, the EU was recognized as the first continental
organization to embrace the CSR movement. European institutions, external stakeholders
and national governments have since driven the development of CSR practices. Some
essential milestones have been reached since 2008. For example, in 2008, the EC presented the
“Sustainable Consumption and Production and Sustainable Industrial Policy Action Plan” to
improve the environmental performance and increase the demand for and consumption of
sustainable goods. One year later, the EC organized a forum on CSR for European
stakeholders. During the 2011–2014 period, the EC launched a serious program to strengthen
the implementation of CSR practices (MEMO/11/730).
In June 2017, the EC published guidelines to help companies disclose environmental and
social information. However, these guidelines are not mandatory. Companies may decide to
adopt either EU or national guidelines based on their characteristics and business environment.
In 2019, the EC published guidelines on reporting climate-related information. On April 21,
2021, the EC adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD),
which would amend the existing reporting requirements of the Non-Financial Reporting
Directive (NFRD). The first set of standards was to be adopted by October 2022. The COVID-19
pandemic and the war in Ukraine have placed significant pressure on the global community to
accelerate the transition to climate neutrality and to adopt an inclusive approach based on the
green and digital transition. For this reason, ahead of the 27th United Nations Climate Change
Conference (COP27) in Egypt, CSR Europe is convening sustainability leaders worldwide at the
European SDG Summit 2022: Together for an Inclusive Green Deal, on October 10, 2022.
Nowadays, banks share greater responsibility for sustainable development and are
increasing spending on CSR practices via the use of financial initiatives, such as microcredit
schemes, low-income banking and ethical, social and environmental funds and the removal of
barriers to credit access (McDonald and Rundle-Thiele, 2008; Prior and Argandona, 2009). Non-
Banking activities, particularly lending operations, affect and are affected by the CSR performing
strategy (Caby et al., 2022). Indeed, CSR in the banking system could improve the reputation
of banks and promote financial sustainability (Scholtens and Klooster, 2019).
loans and bank
The EU’s 2018 Sustainable Finance Action Plan calls for more research on the relation performance
between CSR activities and credit risk (The European Commission, 2018). The Action Plan
calls for “better integrating sustainability in ratings and market research” and, toward this end,
the EU has commissioned the European Securities and Markets Authority to evaluate the 861
extent to which sustainability issues are already integrated in credit ratings (Bannier et al.,
2022). According to a 2018 European Central Bank (ECB) official report issued by KPMG, a
multinational professional services network, many banks in Europe suffer from high levels of
NPLs for example, the ratio reached 17.70% in Cyprus in 2020 and 27.90% in 2019, 42.70% in
Q3 2017in Greece, 12.80% in Q2 2020 in Italy, with worrying levels for some other Central and
Eastern European countries. The report attributes this high level of NPLs to the following: (1)
the ineffective management of NPLs, (2) the reluctance of banks to sell NPLs due to the high
spread and information uncertainty and (3) the limitations on government assistance. The
report also outlines that these NPLs decrease profitability and may even undermine the
viability and sustainability of the issuing banks.
Therefore, for several reasons, it is very important to explore the interconnection between
CSR, credit risk and bank performance. First, numerous studies exist on the impact of CSR on
performance and risk for non-financial firms (Soewarno, 2018; Dyck et al., 2019; Ben Lahouel
et al., 2021; Jiang et al., 2020; Karmani and Boussaada, 2021). However, few studies have
drawn a connection between CSR and bank performance and/or risks (Gangi et al., 2019;
Truong and Kim, 2019; Belasri et al., 2020; Zhou et al., 2021). Most of these studies tested the
effect of CSR on either bank performance (Belasri et al., 2020; Zhou et al., 2021), bank risk-
taking (Nguyen and Nguyen, 2021), or bank risk profile (Gambetta et al., 2016). Although
credit risk is the most serious bank risk, no study has specifically explored the CSR–credit
risk relationship. This study sought to bridge this gap by examining whether socially
responsible banks behave differently from other banks in terms of credit risk management
based on a sample of 70 European banks over the 2008–2017 period.
The study aimed to answer the following research question: Can CSR alleviate the
negative effect of NPLs on bank performance? We expected that CSR practices can play an
important mediating role in the NPLs–bank performance relationship. Second, no studies
have explored the effect of CSR on bank credit risk through NPLs level. Credit risk is reflected
in the high level of NPLs and is considered to be “financial pollution.” Most prior research has
used either the spread of credit default swap (CDS) (Truong and Kim, 2019) or the provision
for loan losses (PLLs) (Gambetta et al., 2016). The current study measure bank credit risk
using the NPLs ratio, which is regarded as the most useful proxy for credit risk. Third,
contrary to Gambetta et al. (2016), who used logistic regression to investigate the link between
CSR and bank risk profile, in this study, we performed an SGMM analysis. This analysis
yielded more robust and efficient results. In corporate finance, SGMM resolves the
endogeneity and heterogeneity problems present in such relations between CSR and bank
performance or risk.
The remainder of this paper is structured as follows. Section 2 provides a literature review,
while Section 3 describes the research design. In Section 4, we discuss our empirical findings.
Section 5 offers some conclusions and policy recommendations based on these findings.

2. Literature review
Compared to non-financial institutions, very few studies have been devoted to exploring the
effect of CSR activities on financial institutions (Wu and Shen, 2013; Gambetta et al., 2016;
JAAR Gangi et al., 2019; Truong and Kim, 2019). Two leading associations are examined with
24,5 respect to the effect of CSR on financial institutions. The first one investigated the CSR–bank
performance relationship, whereas the second one investigated the CSR–bank risk
relationship.
In the present study, we review prior relevant research relating to this topic. For each of
these studies, we provide information about their sample, chosen period, empirical approach
and main findings. The literature review was carried out to gain a better understanding of the
862 dynamic relationship that exists between NPLs and bank performance, CSR and NPLs and
CSR and bank performance in different regional contexts. This leads to making valuable
comparisons focused on identifying differences in the relationship between NPLs, bank
performance and CSR. Concerning regional contexts, we reviewed studies from America,
Europe, Asia and Africa. We were also interested in international research, i.e. in research
that transcended national borders.

2.1 The NPLs–bank performance relationship

Credit risk was recognized in the banking literature as the most serious threat to bank
performance and stability (Reinhart and Rogoff, 2011; Boussaada et al., 2022; Hakimi
et al., 2022).
Credit creation is the main income-generating activity for banks. As such, a high level of
NPLs will reduce a bank’s profitability. Credit risk degrades a bank’s performance through
increased PLL and lower interest income. Higher NPLs restrain bank capital, which is
simultaneously eroded by weak performance. In the same vein, the bank’s deteriorated
situation tends to elevate its funding costs. Therefore, banks with high expenses perform
worse (T€ol€o and Vir
en, 2021). Through effective credit risk management, banks not only
support the sustainability and profitability of their activities but also contribute to economic
stability and the efficient allocation of capital within the economy (Psillaki et al., 2010).
The existing literature on the credit risk–bank performance relationship provides mixed
results. Many studies have supported a negative association (Athanasoglou et al., 2008;
Berr
ıos, 2013; Cucinelli, 2015; Hakimi et al., 2022). However, fewer studies have reported a
positive association (Flamini et al., 2009; Hakimi et al., 2011). Indeed, banks can take more risk
to increase their profitability (Boussaada and Karmani, 2015). Risky projects require higher
interest rates. To increase their profitability, banks can adopt risk-taking behavior and
finance these risky projects, which have a high expected return but also a weak probability of
success.
Using a sample of Greek banks throughout 1985–2001, Athanasoglou et al. (2008) pointed
out that credit risk exerts a negative and significant impact on bank profitability. Along the
same line, Berr
ıos (2013) found a negative association between less prudent lending and net
interest margin. The Italian context was explored by Cucinelli (2015). Based on a sample of
488 Italian banks during the 2007–2013 period, the author concluded that a negative
association existed between credit risk and bank lending behavior.
For the Asian context, Abu Hanifa et al. (2015) used a sample of 18 banks over the 2003–
2013 period and found that credit risk significantly decreased the level of profitability in
Bangladesh. Similar results were found by Sufian (2009). The author used a sample of
Malaysian banks over the 2000–2004 period to assess the main determinants of bank
profitability. The empirical results showed that credit risk and loan concentration
significantly decreased the level of bank profitability.
In an emerging context, Laryea et al. (2016) explored the impact of NPLs on bank
profitability; the authors used a sample of 22 Ghanaian banks between 2005 and 2010. The
main findings of their study supported a negative relationship between credit risk and bank
profitability. Recently, Hakimi et al. (2022) investigated the interaction between credit risk,
liquidity risk and bank performance in MENA countries. The authors used a sample of 38 Non-
banks during the 2004–2017 period and performed a seemingly unrelated regression. The performing
empirical findings revealed that credit risk significantly decreased the level of bank
performance. An increase in bad loans leads to an increase in the NPLs ratio. In such
loans and bank
situations, borrowers are unable to fulfill their commitments, which culminate in the loss of performance
both the principal and the interest. Hence, the profitability of banks is reduced. Additionally,
with an increase in the level of NPLs, banks become more rigid, stickier and more restrictive
about credit distribution, which lowers interest revenues and, consequently, banking 863
profitability.
Nevertheless, fewer studies have reported a positive association between credit risk and
bank profitability. For example, Hakimi et al. (2011) explored this relationship for the
Tunisian context over the 1980–2009 period. The authors found that credit risk as measured
by the loans to assets ratio significantly increased the level of bank performance, measured
by the net interest margin ratio. An increase in loans led to an increase in the net interest
margin and, consequently, the level of bank performance. The same result was found by
Flamini et al. (2009) for a sample of 389 banks in 41 Sub-Saharan African countries during the
1998–2006 period.
H1. The NPLs ratio decreases bank performance.

2.2 The CSR–bank risk relationship

Over the past two decades, CSR has become an increasingly important topic, and banks are
under increasing pressure from stakeholders to behave responsibly. In banking, credit risk
could be related to CSR. Banks are aware of their use of public resources (Wu and Shen, 2013),
and CSR can act as “moral capital” to explain how banks give back to society and insure
themselves against stakeholder sanctions in the event of mismanagement (Godfrey
et al., 2009).
The theoretical debate based on stakeholder theory (Freeman, 1984), agency theory
(Jensen and Meckling, 1976), and the over-investment perspective (Barnea and Rubin, 2010)
can be employed to shed light on the CSR–credit risk relationship.
Stakeholder theory first emerged in the early twentieth century. Essentially, stakeholder
theory concerns business ethics and organizational management. It also suggests that
companies are beholden to just one stakeholder their shareholders. Stakeholder theory
argues that a company would not exist without stakeholders. According to Freeman (1984,
p. 46), “a stakeholder is by definition any individual or group of individuals that can influence
or are influenced by the achievement of the organization’s objectives.”
With reference to stakeholder theory, credit risk should be influenced by the fact that
strong CSR activities help dissuade managers from adopting risky strategies (Jo and Na,
2012; Albuquerque et al., 2019; Bruna and Nicolo, 2020). Corporate social engagement is
regarded as a firm’s eco-systemic dialogue. Thanks to strategic dialogue with stakeholders,
firms deploying CSR practices are considered to be capable of achieving an effective social
and environmental disclosure (Rouine et al., 2022). Credit risk management can, therefore, be
determined by the strategic actions a bank undertakes to satisfy the expectations and
interests of different stakeholders.
Moreover, according to agency theory, CSR policies may play a monitoring role by
alleviating information asymmetry and agency problems (Cerbioni and Parbonetti, 2007).
Subsequently, these policies limit agency costs, ensure effective control, enhance the
efficiency of decision-making and moderate credit risk.
However, the over-investment perspective puts forth the management entrenchment
hypothesis. Indeed, some research has argued that CSR engenders a loss of valuable
resources due to the added expense incurred by investing in improved social betterment
JAAR (Vance, 1975). The adoption of CSR is considered to be a costly diversion of resources or an
24,5 opportunistic behavior of private benefit-seeking managers (Magnanelli and Izzo, 2017).
Managers who consistently demonstrate their commitment to CSR initiatives look to preserve
their reputation as good citizens (Barnea and Rubin, 2010) or seek support from their
stakeholders (Cespa and Cestone, 2007). As a result, the entrenchment strategy leads to
reduced profitability and induces an increased credit risk.
Several empirical studies have focused on the link between CSR and risks. For example,
864 Orlitzky and Benjamin (2001) examined the relationship between CSR and firm risk and
indicated a negative association between corporate social performance and financial risk.
Using a sample of 3,996 loans to US firms, Goss and Roberts (2011) investigated the effect of
CSR on bank debt. The authors found that firms with social responsibility concerns pay
between 7 and 18 times more than firms with good CSR practices. The authors argued that
lenders are more sensitive to CSR concerns in the absence of security. Additionally, they
reported that lenders’ views of CSR are dependent on borrower quality.
For the Asian context, Chang et al. (2013) investigated the link between CSR and the
probability of default. The main finding of this study supported a negative association
between good CSR practices and the probability of short-term default. Concerning the
European context, Gambetta et al. (2016) found a negative association between higher CSR
scores and the spread of CDS. Firms with higher CSR scores tend to have lower CDS slopes.
More recently, Bannier et al. (2022) studied the relationship between CSR and credit risk for
US and European firms over the 2003–2018 period. They showed that only environmental
aspects were negatively related to various measures of credit risk for US firms. However, for
European firms, both environmental and social aspects were negatively associated with
credit risk. Rouine et al. (2022) used a large-scale dataset, including observations from
S&P500 listed companies between 2002 and 2017. They concluded that the relationship
between CSR and a firm’s total risk was non-linear and wholly negative.
Whereas the academic literature has largely investigated the relationship between CSR
and firm risk, few studies have investigated credit risk-taking in the banking sector. Wu
and Shen (2013) examined a sample of 162 banks in 22 countries and showed that CSR was
negatively associated with NPLs. Using a sample of commercial banks in Vietnam from
2008 to 2017, Nguyen and Nguyen (2021) suggested that CSR activities reduce bank risk-
taking.
From this development, it appears that banks that adopt CSR activities are more likely to
have fewer NPLs. CSR policies are considered to be a pivotal factor in stakeholder
expectations, the reduction of informational asymmetry and the alleviation of agency costs.
Banks that meet all of these requirements tend to improve their management of credit risk.
Consequently, the probability of repaying their loans increases, consequently decreasing the
level of NPLs. Based on this development, we formulated the following hypothesis:
H2. Good CSR practices are associated with a lower level of NPLs.

2.3 The moderating effect of CSR between NPLs and bank performance
In corporate finance, CSR activities are more acknowledged in non-financial institutions.
Numerous studies have explored the impact of CSR practices on either firm performance
(Barnett and Salomon, 2012; Mu~ noz et al., 2015; Rodriguez-Fernandez, 2016) or the cost of
financing (Hamrouni et al., 2019, 2020; Desender et al., 2020). A significant volume of the
literature states that the CSR–performance relationship can be mediated by other factors,
such as governance practices (Han and Zheng, 2016; Soewarno, 2018; Dyck et al., 2019), firm
reputation (Rehman et al., 2020), innovation (Fischer and Sawczyn, 2013; Anser et al., 2018)
and institutional quality (Lopatta et al., 2016; Sun et al., 2019; Karmani and Boussaada, 2021).
However, few studies have focused on CSR activities in the banking sector.
 According to stakeholder theory, CSR is one of the determinants of credit risk strategy in Non-
the case of banks. Therefore, CSR activities can help us to understand the relationship performing
between NPLs and bank performance.
In the banking sector, the relationship between CSR engagement and financial
loans and bank
performance requires an analysis from at least three perspectives (Gangi et al., 2019): the performance
financial benefits of financing environmentally friendly borrowers; the efficient use of
resources within the bank; and the lowering of reputational risk. These perspectives are
related to credit risk-taking and contribute to reduce NPLs. 865
Indeed, offering loans to more responsible firms can result in lower risk-taking and more
innovative projects (Gangi et al., 2019; Batae et al., 2021). Moreover, refusing credit to non-
responsible parties may reduce risk-taking and improve bank reputation (Caby et al., 2022).
Indeed, under good management theory, prior research has concluded that there is a positive
association between CSR and good management (Waddock and Graves, 1997; Attig, 2012).
Management theory refers to how employees are managed and how frameworks for
management are created in companies. The theory explains what motivates employees and
how leaders can use these motivations to control and guide employees.
Based on the argument of bank reputation, Chemmanur and Fulghieri (1994) stated that
high-reputation banks have incentives to perform more rigorous evaluations of borrowers. In
the same vein, Bushman and Wittenberg-Moerman (2012) argued that high-reputation banks
are associated with stronger performance and loan quality. To the extent that CSR develops a
favorable reputation and enhances client satisfaction (Kang et al., 2010; Singal, 2014), banks
conducting CSR would select and attract more creditworthy borrowers, which would in turn
stimulate better asset quality and higher profitability (Wu and Shen, 2013).
Prior and Argandona (2009) pointed out that the CSR concept for financial institutions is
not limited to only a firm’s responsibility toward its stakeholders but also to its financial
intermediaries. Based on American banks, Bolton (2013) concluded that improving CSR
quality could effectively improve bank performance and reduce its risk. Studying a sample of
Indian banks, Maqbool and Zameer (2018) found a positive relationship between CSR and
financial performance. In addition, Fayad et al. (2017) argued that CSR exerts a positive
impact on the financial performance of Lebanese banks. They explained that investments in
improving the well-being of local people, the environment and the community lead to higher
returns.
Using a sample of 254 banks located in 16 transition countries of the former Soviet Union
and Central and Eastern Europe, Djalilov et al. (2015) studied the link between CSR and bank
performance during two different periods. The first period was qualified as stable (2002–
2005), while the second was classified as turbulent (2008–2012). The empirical results of the
structural equation indicated that CSR exerted a positive impact on bank performance during
the two periods. More recently, Zhou et al. (2021) explored the same association based on a
sample of listed banks in China from 2008 to 2018. The findings showed that, in the short run,
CSR negatively impacted the bank’s financial performance. However, this effect became
positive in the long run. The authors also found that green credit plays an important
mediating role in this relationship.
Some studies have investigated the link between CSR and bank efficiency. For example,
Belasri et al. (2020) used a sample of 184 banks in 41 countries over the 2009–2015 period to
explore this link. The empirical results showed that, in developed countries, CSR has a
positive impact on bank efficiency. The authors justified this positive association by
reference to the high level of investor protection and the high degree of stakeholder
orientation.
In sum, credit risk reduction through CSR engagement can have an impact on bank
profitability. The issue arising from the theoretical debate is the ability of bank commitment
JAAR to CSR practices to moderate the credit risk–bank performance relationship. Accordingly, we
24,5 formulated the following hypothesis:
H3. CSR practices moderate the relationship between NPLs and bank performance.
The hypotheses to be tested in this study can be summarized in Figure 1, while Figure 2
presents the interactional effect between the pillar score of CSR (ESG) and the level of NPLs.
866
3. Research design
3.1 Data
To investigate the dynamic relationship between CSR, NPLs and bank performance, we used
a sample of 70 European banks over 2008–2017, leading to 630 observations. The initial
selection comprised 214 banks. However, several banks were excluded due to the limited
availability and continuity of CSR and NPLs information. We eliminated banks for which all
CSR scores and NPLs information were missing for more than two years. Hence, the sample
size was reduced to 70 banks located in 19 European countries [1]. All CSR data used in this
study were collected from the Thomson Reuters Datastream. This database measures the
environmental score (ENVSC), social score (SOCSC), corporate governance score (CGVSC)
and composite environmental/social/governance (ESG). The scores were based on data
provided by ASSET4 ESG worldwide company-level data. For each pillar, a score was
attributed, ranging from 0 to 100 for each company. Bank specifics, such as bank size (SIZE),
bank capital (EQTA), liquidity (LADSF), liquidity risk (LTD), revenue growth (REVGR) and
leverage ratio (LEVER), and NPLs data were retrieved from Thomson Eikon [2] and FactSet
databases to minimize the extent of missing data. The macroeconomic variables used in the
study were the growth rate of the gross domestic product (GDPG) and the inflation rate (INF).
For more details on bank characteristics, see Table 1 below.

3.2 Empirical approach and model specification

Since ordinary least squares and fixed- and random-effect models always face several
problems, such as omitted variables bias and measurement errors, our study employed the
SGMM model proposed by Blundell and Bond (1998). Recognized as the appropriate solution
for resolving endogeneity and heterogeneity problems, the SGMM model provides robust
results compared to the difference generalized method of moments (DGMM) model. Recently,
Ben Lahouel et al. (2021) reported that the SGMM model is more adequate for investigating
such relations between CSR and bank performance or risks other than traditional estimators
based on fixed or random effects. For all of these reasons, we deployed the SGMM model as an
empirical approach.

Non-performing loans
H1
(NPLs)

H2
Corporate social Bank performance
responsability (CSR)
Figure 1.
The effect of NPLs on
bank performance and CSR x NPLs H3
the moderating role
of CSR
Source(s): The authors
 Non-
4
performing
loans and bank
performance
3
NPLS
867
ROA

+1 SD
Mean
2 –1 SD

25 50 75
ESGS

0.08

NPLS
0.07
+1 SD
Qtobin

Mean
–1 SD

0.06

25 50 75 Figure 2.
ESGS Plot of the interaction
effect between ESGS
Note(s): ROA and Q-TOBIN are the dependent variable and NPLs
Source(s): The authors using the R software

The empirical strategy was carried out based on three steps. The first step aimed to assess the
relationship between NPLs and bank performance (PERF). The econometric model is given in
equation (1):
PERFi;t ¼ β0 þ β1 NPLsi;t þ β2 SIZEi;t þ β3 EQTAi;t þ β4 LTDi;t þ β5 LEVERi;t
þ β6 REVGRi;t þ β7 GDPGi;t þ β8 INF i;t þ εi;t (1)

The second step consisted of determining whether CSR can reduce the level of NPLs. First, we
tested the effect of the composite environmental/social/governance (ESG) score on the NPLs
ratio. Second, we gradually tested the impact of the four CSR scores (governance, economic,
environmental and social scores) on the level of NPLs. The econometric model is formulated
in the following equation (2):
JAAR Countries Number of banks (%) In the total sample
24,5
Austria 2 2.86
Belgium 2 2.86
Czech Republic 1 1.43
Denmark 3 4.29
Finland 1 1.43
868 France 3 4.29
Germany 3 4.29
Greece 3 4.29
Hungary 2 2.86
Ireland 1 1.43
Italy 11 15.71
Norway 2 2.86
Poland 6 8.57
Portugal 1 1.43
Spain 3 7.14
Sweden 3 4.29
Switzerland 5 7.14
Turkey 7 10.00
United Kingdom 9 12.86
Total 70 100

Bank characteristics
Minimum Average Maximum

Bank profitability (ROA) (%) 41.9 3.06 41.5

Bank size ln(total assets) 2.2 4.8 6.8
Bank capital (%) 2.1 6.9 14.3
Table 1. NPLs ratio (%) 0.003 6.3 85.1
Bank characteristics Liquidity risk (LADSF ratio) (%) 5.2 34.4 130.6

X
n
NPLSi;t ¼ β0 þ β1 CSRi;t þ β2 PEFRi;t þ β3 SIZEi;t þ β4 EQTAi;t þ β5 LTDi;t
i¼1

þ β6 LEVERi;t þ β7 REVGRi;t þ β8 GDPGi;t þ β9 INF i;t þ εi;t (2)

Pn
Where i¼1 CSRi;t is a matrix of CSR scores that covers all the scores pillar and the partial
scores of CSR.
The third step was aimed at assessing the interactional effect of NPLs and CSR on the level
of bank performance. In this step, we tested whether CSR can alleviate the negative effect of
NPLs on the level of bank performance. The tested model is given in equation (3):
X n
PERFi;t ¼ β0 þ β1 CSRi;t x NPLsi;t þ β2 CSRi;t þ β3 NPLsi;t þ β4 SIZEi;t þ β5 EQTAi;t
i¼1

þ β6 LTDi;t þ β7 LEVERi;t þ β8 REVGRi;t þ β9 GDPGi;t þ β10 INF i;t þ εi;t

(3)
Pn
Where i¼1 CSRi;t xNPLsi;t is a matrix of the interactional variables between CSR and
NPLs.The definitions of all of the variables and associated measurements are given in
Table 2.
 Variables Definition
Non-
performing
Dependent variable loans and bank
Q-TOBIN Bank performance Total Market Value of Firm/Total Asset Value of Firm
ROA Bank performance Net Income/total Assets performance
CSR variables
CGVSC Corporategovernance A score that measures a company’s systems and processes, 869
score which ensure that its board members and executives act in the
best interests of its long-term shareholders
ENVSC Environmental Score A score that measures a company’s impact on living and
nonliving natural systems, including the air, land, and water, as
well as complete ecosystems
SOCSC Social Score A score that measures a company’s capacity to generate trust
and loyalty with its workforce, customers, and society, through
its use of best management practices
ESGS Equal-Weighted Rating A pillar score that reflects a balanced view of a company’s
performance in environmental, social and corporate governance
Bank specifics
NPLs Non-performing loans The ratio of non-performing loans in % of total loans
SIZE Bank size The Napierian logarithm of total Assets
EQTA Bank capital Total equity to total assets
LTD Liquidity risk Total loans to total deposits
LADSF Bank liquidity Liquid assets to deposits and short-term funding
REVGR revenues growth The growth rate of total revenues
LEVER Bank Leverage Total debts/total equity
GDPG Economic growth The annual growth rate of the Gross Domestic Product
INF Inflation The Consumer price index
Interactional variables
ESGS*NPLs Interactional variable The interaction between ESG score and NPLs
ENVSC* Interactional variable The interaction between environmental score and NPLs
NPLs
SOCSC* Interactional variable The interaction between social score and NPLs
NPLs
CGVSC* Interactional variable The interaction between corporate governance score and NPLs Table 2.
NPLs Variables definition

4. Empirical results
In this section, we first analyze the descriptive statistics for all variables used in this study
and check for possible multicollinearity problems. Second, we discuss our empirical findings.

4.1 Summary statistics and correlation matrix

To generate more information about the data used in this study, Table 3 presents some
descriptive statistics.
The statistics displayed in Table 3 indicate that the average NPLs of European banks is
6.31%, with a maximum of 85.12%. Concerning the measures of bank performance, the mean
value of Q-Tobin is 11%. Some banks recorded weak accounting performance as the minimum
value was 0.10%. However, some other banks had a high-performance ratio of 34.3%. For the
second performance measure, the statistics showed that the average return on assets (ROA)
was 3.06%, with a maximum value of 41.52% and a minimum value of 41.99%.
Concerning the CSR measures, the mean value of all measures was around 60%, except for
the governance score, at only 50.14%. These statistics demonstrate that, on average,
JAAR Variable Mean Std. Dev. Min Max
24,5
ROA 3.069 6.705 41.996 41.523
Q-TOBIN 11.010 0.289 0.001 34.300
NPLs 6.312 9.363 0.003 85.129
SIZE 4.864 1.058 2.294 6.806
EQTA 6.905 2.190 3.300 14.348
870 LADSF 34.406 18.567 5.264 130.630
LTD 130.047 59.242 54.478 367.077
LEVER 0.290 0.171 0.000 0.983
REVGR 0.033 0.328 0.753 5.139
GDPG 1.296 3.206 9.132 25.163
INF 2.216 2.561 4.478 11.144
ESGS 57.372 19.095 15.260 94.620
ENVSC 62.405 31.031 8.440 95.330
Table 3. SOCSC 67.126 28.422 4.290 97.510
Descriptive statistics CGVSC 50.142 27.972 1.820 97.930

European banks in our sample were socially responsible. For the maximum value of CSR
scores, the statistics indicated a score of more than 95%, except for the environmental, social
and governance pillar score, with only 94.62%. The satisfactory average and maximum
values do not exclude the existence of banks with weak CSR scores. The descriptive statistics
indicate scores that are lower than 5%.
As bank specifics, the statistics indicate that the average bank size was 4.80 with a
maximum of 6.80 and 2.20 as the minimum value. On average, European banks recorded 6.90%
as bank capital, 34.4% as liquidity risk measured by the liquid assets to deposit and short-term
funding and 130% as liquidity measured by the loans to deposits ratio. In addition, the mean
value of revenue growth was 3.30%, with a maximum of 51.39% and a negative rate of about
0.02%. The mean value of the leverage ratio was 29%, with a maximum ratio of 98.30%.
The most remarkable finding from these statistics was that banks in the sample were, on
average, profitable but were of a relatively small size and had weak capital. Additionally, some
of these banks were faced with higher credit risk, with a maximum NPLs ratio of 85.10%.
Macroeconomic conditions were introduced in this study to control bank performance
using the GDPG and the INF. The descriptive statistics showed that the mean value of the
GDPG was 1.29%, with a maximum of 25.16% and 9.13% as a minimum value. For the INF,
the average value was 2.21%. The highest value was 11.14%, and the minimum value
was 4.47%.
After analyzing the descriptive statistics, the second step aimed to check for
multicollinearity problems among the independent variables. Table 4 presents the
correlation matrix and the level of significance.
Looking for the level of correlation between the independent variables, we noticed that all
of the correlations were very weak, which confirmed the absence of multicollinearity
problems. The only exception was observed between the CSR scores. Thus, we adopted an
empirical strategy that consisted of introducing, separately and gradually, these scores in our
econometric models to avoid multicollinearity problems.

4.2 Discussion of results

As we described in the empirical methodology, we followed three steps to investigate the role
of CSR in the NPLs–bank performance relationship. For this reason, the empirical findings
are presented and discussed based on these three steps. The first step consisted of exploring
 NPLs SIZE EQTA LTD LADSF LEVER REVGR GDPG INF ESGS ENVSC SOCSC CGVSC

NPLs 1.0000
SISE 0.2706* 1.0000
EQTA 0.0858* 0.1964* 1.0000
LTD 0.0179 0.0338 0.5915* 1.0000
LADSF 0.1235* 0.2594* 0.3691* 0.2444* 1.0000
LEVER 0.0250 0.0251 0.0567 0.2018* 0.2818* 1.0000
REVGR 0.0124 0.0695 0.0250 0.1024* 0.0283 0.1189* 1.0000
GDPG 0.0527 0.0549 0.1167* 0.5397* 0.1924* 0.1926* 0.0363 1.0000
INF 0.1546* 0.0487 0.2224* 0.5051* 0.0630 0.0727 0.1211* 0.2997* 1.0000
ESGS 0.1487* 0.4907* 0.2654* 0.1375* 0.0312 0.0547 0.0095 0.0392 0.0208 1.0000
ENVSC 0.0764 0.4800* 0.2000* 0.1315* 0.0531 0.0155 0.0318 0.1024* 0.0551 0.8437* 1.0000
SOCSC 0.0809 0.4114* 0.2262* 0.1462* 0.0487 0.0590 0.0155 0.0813* 0.0465 0.8417* 0.8489* 1.0000
CGVSC 0.1084* 0.1430* 0.3809* 0.3051* 0.0594 0.0464 0.0195 0.0847* 0.2336* 0.6675* 0.5023* 0.5362* 1.0000
Note(s): * indicates significance at a level of 5%
performance
performing
loans and bank

871
Non-

Correlation matrix
Table 4.
JAAR the NPLs–bank performance relationship. The results of the SGMM model are displayed in
24,5 Table 5. In this study, bank performance was measured using two proxies. Columns (1) and
(2) give the results when performance was measured by the ROA. The results of the Q-Tobin
ratio are presented in Columns (3) and (4).
To detect autocorrelation in terms of levels and to determine the validity of the
instrumental variables, we performed the Arellano and Bond and Sargan tests, respectively.
This was done to provide support for the regression results of the SGMM model. Both the
872 Sargan and serial correlation tests did not reject the null hypothesis of the correct
specification. The p-values of the AR(2) and Sargan tests were greater than 5%.
The results displayed in Table 5 indicate that bank performance positively depends on
lagged performance, bank capital, bank liquidity, the revenue growth rate and the level of
growth. However, bank performance is negatively sensitive to an increase in the NPLs ratio,
bank size, the LTD ratio, the leverage ratio and the inflation rate. We found that bank
performance in the current year was positively and significantly associated with the level of
performance of the previous year. This result was confirmed for the two performance
measurements: the Q-Tobin ratio and the ROA. This means that a satisfactory level of
performance recorded in the previous year could positively influence the level of performance
in the current year.
The empirical banking literature confirmed that NPLs exert a negative impact on bank
performance. We found that the coefficient of NPLs was negative and significant in both
regressions with Q-Tobin and ROA. NPLs are considered to be “financial pollution” i.e. the
higher the level of NPLs, the weaker the level of performance. An increase in doubtful loans
leads to high risk-taking by banks and non-payment of credits, both of which lower the
profitability of banks and can even lead to bank failure. Additionally, a decrease in the quality
of the loan portfolio due to bad loans decreases the ability to pay back those loans. In some
cases, this results in a loss of the principal and the interest revenue. Hence, bank performance
is decreased. In addition, banks with a high level of NPLs ratio become stickier and more

PERF is ROA PERF is Q-TOBIN

Coef. Z-statistics Coef. Z-statistics

PERF(1) 0.077 11.180*** 0.470 70.680***

NPLs 0.377 19.100*** 0.001 12.650***
SIZE 7.907 7.800*** 0.047 13.250***
EQTA 0.105 9.000*** 0.0004 12.000***
LTD 3.854 16.080*** 0.016 24.370***
LADSF 0.031 4.480*** 0.002 6.760***
LEVER 31.469 16.110*** 0.021 2.940***
REVGR 1.775 4.070*** 0.008 4.570***
GDPG 0.046 1.400 0.002 28.070***
INF 0.115 2.880*** 0.002 13.190***
_cons 25.269 4.640*** 0.158 8.990***
AR (1) 1.924 2.439
Prob 0.054 0.014
AR (2) 0.602 1.197
Prob 0.547 0.231
Sargan 45.469 50.036
Prob 0.369 0.214
Table 5. Obs 394 397
The impact of NPLs on Note(s): ***, indicates significance at a level of 1%
the firm performance (Z-statistics are values with asterisk)
restrictive toward credit distribution. In this case, these behaviors result in a decrease in Non-
interest revenue, which in turn lowers bank performance. Hence, H1 is confirmed. This performing
finding is in line with Hamdi et al. (2018) and Hakimi et al. (2022).
Similar to the effect of NPLs, the findings also indicated that bank size is negatively and
loans and bank
significantly associated with bank performance at the 1% level of significance. An increase in performance
bank size significantly decreases the level of bank performance. As big banks tend to
diversify their banking activities, their large size is usually associated with several problems,
particularly asymmetric information and higher cost of information, conflict of interest and 873
governance problems and at times ineffective communication and coordination. All of these
problems negatively affect decision-making, which culminates in bad loan quality, thereby
increasing the level of NPLs and lowering bank performance. This result corroborates those
generated by Hakimi et al. (2022) and Barros et al. (2007).
Bank capital and bank liquidity are the two main important inputs for bank activities.
Thus, it is irrefutable that these two indicators play a pivotal role in bank performance. The
empirical findings indicate that bank capital (EQTA) and bank liquidity (LADSF) are
positively and significantly correlated with both the Q-Tobin and ROA ratios. It has been
strongly documented in the banking literature that well-capitalized banks should be more
profitable and more stable. Having a sufficient capital adequacy ratio and liquidity level,
these banks can support unexpected losses and withstand macroeconomic shocks and
financial crises. This finding is in line with Hakimi et al. (2022), Garc
ıa-Herrero et al. (2009) and
Abreu and Mendes (2002).
Contrary to the effect of bank capital and bank liquidity, we found that an increase in the
loans to deposits ratio significantly decreases bank performance. In particular, bank
activities are based on liquidity. Hence, the insufficient level of liquidity limits the
fundamental function of banks, which consists of granting loans. Banks that have a high
liquidity risk level are more unstable and more exposed to bankruptcy risk. Several prior
empirical studies have confirmed the negative association between liquidity risk and bank
performance (Ghenimi et al., 2017; Hakimi et al., 2017, 2022; Hamdi et al., 2018; Hassan
et al., 2019).
Revenue growth is considered to be an important driver of bank performance in the
European context. The results indicate that the coefficient is positively and highly
significantly correlated with the dependent variables ROA and Q-Tobin. Higher revenue
growth substantially increases net banking income and improves the level of bank
performance. On the contrary, the findings indicate that the ratio of total debts to total equity
is negatively and significantly associated with the dependent variables. The results in
Table 4 suggest that an increase in this ratio significantly decreases the level of bank
performance as measured by Q-Tobin and ROA. In the banking literature, the debt to equity
(D/E) ratio is recognized as a key financial metric that reflects potential financial risk. Banks
tend to increase the D/E ratio when the cost of debt is lower than the cost of equity. However,
in the modern economy, bank capital regulation is necessary. A higher ratio of D/E means an
increase in debt compared to equity. An increase in the interest rate increases financial
expenses that lower net banking income and decrease bank performance.
Concerning the effect of the macroeconomic environment, we found that bank
performance benefits from a high level of growth and a weak level of inflation. A higher
level of economic growth indicates the economy’s overall health, while a higher rate of
inflation implies macroeconomic uncertainty and instability. An increase in GDP growth
increases the ability of borrowers to repay their loans. Hence, it decreases the level of NPLs
and improves bank performance.
However, an increase in the inflation rate, particularly when it is unexpected, tends to
increase interest expenses as well as the likelihood of non-repayment of loans, which
JAAR consequently decreases bank performance. This finding is consistent with those produced by
24,5 Boussaada and Hakimi (2021), Athanasoglou et al. (2008), Calza et al. (2003) and Revell (1979).
As we found that NPLs significantly decrease the level of European bank performance, we
aimed in the second step to assess how CSR can affect the NPLs ratio. As a measurement of
CSR, we used the pillar ESG score (Columns 1 and 2) and the partial scores: environmental
(Columns 3 and 4), social (Columns 5 and 6) and governance (Columns 7 and 8).
Table 6 lists the results of the SGMM method for the CSR–NPLs relationship. Like the
874 estimates displayed in Table 5, we found that both the Sargan and serial correlation tests did
not reject the null hypothesis of the correct specification. The p-values of the AR(2) and the
Sargan tests were greater than 5%. This provides support for the regression results of the
SGMM method.
The results displayed in Table 6 indicate that CSR significantly reduces bank NPLs. This
effect is confirmed for the pillar score (ESG) and also for the partial environment and social
scores. The results also show that bank size, revenue growth, and GDP growth are negatively
and significantly correlated with NPLs. However, this dependent variable is sensitive to an
increase in liquidity risk and the inflation rate.
The findings indicate that three of four proxies of CSR significantly reduce the level of
NPLs. More specifically, we found that the pillar score (ESG) and the environmental (ENVSC)
and social (SOCSC) partial scores were negatively and significantly correlated with credit risk
as measured by the NPLs ratio. Indeed, bank social engagement helps to dissuade managers
from adopting risky strategies. CSR policies reduce informational asymmetry and alleviate
agency costs, thereby decreasing credit risk. Consequently, H2 is confirmed.
This level of good management leads to more responsible operation decisions that reduce
the probability of default and, consequently, the level of NPLs. In addition, managers of firms
that are highly engaged in CSR practices are generally more conservative in their accounting
and operating decisions. Thus, their decision-making will be improved and the financing of
risky investments will be reduced. Hence, the level of NPLs will decrease (Strahan, 1999).
Furthermore, it was reported that the more socially responsible a firm is, the more
motivated customers will be to support it (Lichtenstein et al., 2004). Therefore, borrowers of
socially responsible banks will make every possible attempt to repay their loans, decreasing
the probability of default and reducing the level of NPLs. Prior studies have concluded that
firms that are highly socially responsible face lower risk, particularly the probability of
default (Lee and Faff, 2009; Chang et al., 2013).
In the four regressions, we found that bank size was negatively and significantly
associated with the NPLs ratio. The larger the bank, the lower risk-taking is. An increase in
bank size is related to an increase in bank reputation. In this case, large banks tend to grant
good loans with sufficient guarantees that reduce their NPLs ratio. In addition, large banks
are more experienced with hedging and with the management of credit risk.
This result is in line with those of Boussaada et al. (2022), Boussaada and Labaronne (2015)
and Hu et al. (2004). Considered as reciprocal risks, there is strong evidence of a positive
relationship between liquidity risk and credit risk. The results in Table 5 indicate that
liquidity risk is positively and significantly correlated with the NPLs ratio. Without sufficient
guarantees, a higher loan to deposit ratio substantially increases the NPLs ratio. Banks that
record high liquidity risk are more exposed to credit risk. In addition, we found that a higher
LADSF ratio increases the NPLs ratio. Under speculative behavior and higher risk-taking,
and due to higher interest revenues, banks can grant bad loans without sufficient guarantees.
In most cases, these banks will turn to NPLs, resulting in a loss of principal and interest.
Under a stable macroeconomic environment marked by a high level of economic growth,
the level of NPLs will be decreased. A high level of GDP growth means a high level of
production and value-added. Hence, the quality of the loan portfolio is improved, and the
ability of borrowers to repay their loans is increased. Thus, the level of NPLs is reduced. This
 NPLs NPLs NPLs NPLs
Coef. Z-statistics Coef. Z-statistics Coef. Z-statistics Coef. Z-statistics

NPLs(1) 1.029 199.950*** 1.052 201.610*** 1.033 204.080*** 1.029 186.630***

SIZE 0.001 0.330 0.004 1.380 0.005 1.490 0.002 0.580
EQTA 0.127 5.620*** 0.112 6.440*** 0.129 6.180*** 0.132 7.890***
LTD 0.057 22.260*** 0.058 19.800*** 0.060 30.120*** 0.058 22.110***
LADSF 3.871 0.960 3.449 0.130 4.211 0.970 4.109 1.410
LEVER 0.428 8.040*** 0.512 9.820*** 0.455 8.370*** 0.447 7.720***
REVGR 0.256 44.620*** 0.268 35.780*** 0.259 41.400*** 0.253 32.720***
GDPG 0.237 5.456*** 0.045 7.090*** 0.435 3.870*** 0.784 6.541***
INF 0.196 25.260*** 0.187 28.330*** 0.203 29.930*** 0.197 24.540***
ESGS 0.006 2.390**
ENVSC 0.021 10.610***
SOCSC 0.003 3.440***
CGVSC 0.004 1.340
_cons 3.220 4.400*** 5.028 8.720 3.771 5.020 3.328 3.770
AR (1) 1.727 1.726 1.727 1.729
Prob 0.084 0.084 0.084 0.083
AR (2) 0.330 0.270 0.327 0.344
Prob 0.740 0.786 0.743 0.730
Sargan 41.752 42.480 43.638 42.155
Prob 0.525 0.493 0.444 0.507
Obs 389 389 389 389
Note(s): *, ** and *** indicate level of significance at 10%, 5% and 1% respectivelly
(Z-statistics are values with asterisk)
performance
performing
loans and bank

875
Non-

The effect of CSR on

Table 6.

environmental, social,
three partial scores:
is ESG score and the
the level of NPLs (CSR

and governance)
JAAR finding is concurrent with the work of Athanasoglou et al. (2008) and Calza et al. (2003).
24,5 Contrary to the effect of GDP growth, the empirical results indicate that inflation increases
the level of NPLs. When inflation is unexpected, it increases financial expenses, which in turn
damage the ability of borrowers to repay their loans and increase the level of NPLs. This
result is in line with those of Boussaada et al. (2022) and Revell (1979).
As we found that the NPLs ratio decreases the level of bank performance and CSR reduces
the level of NPLs, we assumed that the interaction between CSR and NPLs could alleviate the
876 negative effect of NPLs. The empirical results of this interactional effect are given in Table 7.
Findings in Table 7 indicate that bank profitability is positively and significantly
correlated with the three scores of CSR. The environmental, social and governance scores
significantly improve bank profitability. First, CSR builds consumer trust with banks.
Customers become more reliant on socially responsible banks. In addition, banks that are
more engaged in CSR practices provide positive customer outreach that improves the public
image of these banks, enhances their financial services and improves their performance. CSR
can also boost employee productivity and engagement by making better ethical decisions.
This positively turns on these banks since it lowers risks (bad loan decisions) and improves
bank performance.
Similarly to the findings in Table 4, results indicate that the ratio of NPLs significantly
decreases bank profitability. This negative effect is more pronounced when profitability is
ROA. As discussed in the results in Table 5, an increase in NPLs results in a loss of the
principal and the interest revenue. Hence, bank performance has decreased. In addition,
banks with a high level of NPLs ratio become stickier and more restrictive toward credit
distribution. In this case, these behaviors result in a decrease in interest revenue, which in
turn lowers bank performance.
From the results displayed in Table 7, we also made three notable observations
concerning the interactional effect. The first is that bank performance benefits from the
interactional CSR–NPLs relationship. However, no significant impact was found with regard
to the interaction between NPLs and the pillar score ESG. Good CSR practices alleviate the
level of NPLs and hence improve bank performance. We found that the coefficients of the
interactional variable were positive and significant for both ROA and the Q-Tobin ratio.
Findings indicate that the interaction between NPLs and all scores (environmental, social and
governance) significantly improves the bank’s performance. This means that more
engagement in CSR practices reduces NPLs and increases bank performance. Being
socially responsible encourages banks to act ethically and consider the social, environmental
and economic impacts of their business. Socially aware managers also possess the skills
needed to run banks effectively. CSR, for external stakeholders, may help banks to develop a
favorable reputation and increase client satisfaction levels; it may also enhance a bank’s
future and intangible stock market value. More socially responsible banks are less risky and
more profitable.
The second observation is that there was a positive association between the interaction
variables (CSR*NPLs), but with low coefficients. Thus, to fully benefit from this interactional
relationship, banks are asked to engage more in CSR practices or to implement reforms that
will improve the management of loan activity and reduce the level of NPLs. The third
observation is related to the effect of the corporate governance score in the interactional
relationship. For this score, the effect was positive but less significant when ROA was the
dependent variable and not significant when Q-Tobin was the measure of bank performance.
Hence, we accept H3. This led us to conclude that concerted efforts are being made to improve
European bank governance to reduce the level of NPLs, enhance bank performance and fully
benefit from the positive effect of CSR.
Compared to the results given in Table 4, there was no significant change regarding the
effect on bank performance. We found that bank performance benefits from an increase in
 PERF is ROA PEFR is Q-TOBIN
CSR is CSR is
ESGS ENVSC SOCSC CGVSC ESGS ENVSC SOCSC CGVSC

PERF(1) 0.216 0.242 0.202 0.231 0.436 0.391 0.434 0.419

40.170*** 34.620*** 46.650*** 50.160*** 38.450*** 29.540*** 36.300*** 26.140***
CSR 0.006 0.028 0.039 0.005 0.001 0.001 0.002 0.001
0.860 8.270*** 22.230*** 3.440*** 1.330 10.970*** 4.650*** 8.060***
NPLs 0.230 0.140 0.136 0.059 0.001 0.001 0.002 0.008
21.880*** 20.280*** 19.430*** 15.030*** 1.770* 3.660*** 0.640 0.470
SIZE 2.589 3.143 3.097 2.911 0.040 0.031 0.038 0.039
34.080*** 43.680*** 65.920*** 40.450*** 8.560*** 7.410*** 9.690*** 5.830***
EQTA 0.025 0.029 0.020 0.022 0.004 0.002 0.004 0.004
9.190*** 9.470*** 5.430*** 6.240*** 9.370*** 7.540*** 9.640*** 10.060***
LTD 0.307 0.450 0.347 0.289 0.016 0.017 0.016 0.015
8.990*** 13.290*** 8.910*** 6.420*** 24.560*** 23.970*** 20.750*** 17.590***
LADSF 0.036 0.025 0.033 0.034 0.003 0.007 0.003 0.001
12.510*** 6.450*** 10.300*** 11.770*** 1.120 3.020*** 1.020 3.280***
LEVER 3.839 3.105 2.569 3.402 0.015 0.012 0.026 0.037
42.240*** 32.730*** 40.410*** 28.800*** 2.190** 1.060 3.280*** 7.060***
REVGR 0.782 0.753 0.783 0.779 0.006 0.005 0.005 0.010
9.950*** 9.480*** 14.140*** 12.230*** 3.320*** 2.860*** 2.750*** 4.940***
GDPG 0.264 0.261 0.281 0.266 0.002 0.002 0.002 0.002
26.740*** 20.170*** 29.620*** 23.130*** 19.330*** 15.370*** 18.430*** 10.300***
INF 0.029 0.034 0.012 0.014 0.002 0.002 0.002 0.003
2.360** 1.770* 0.750 1.250 6.950*** 7.230*** 13.390*** 9.090***
ESGS 3 NPLs 0.003 0.008
1.350 0.600
ENVSC 3 NPLs 0.001 0.005
10.590*** 2.180**
SOCSC 3 NPLs 0.001 0.007
12.080*** 2.050**
CGVSC 3 NPLs 0.000 0.009
2.280** 3.360***
_cons 12.986 16.528 13.332 15.082 0.164 0.112 0.143 0.164
18.270*** 19.850*** 19.160*** 24.560*** 6.130*** 4.800*** 7.010*** 5.440***

(continued )
performance
performing
loans and bank

877
Non-

of NPLs and CSR on

the bank
The interactional effect
Table 7.

performance (PERF)
 24,5

878
JAAR

Table 7.
PERF is ROA PEFR is Q-TOBIN
CSR is CSR is
ESGS ENVSC SOCSC CGVSC ESGS ENVSC SOCSC CGVSC

AR (1) 2.256 2.216 2.259 2.250 2.405 2.512 2.479 2.557

Prob 0.024 0.026 0.023 0.024 0.016 0.012 0.013 0.010
AR (2) 0.767 0.872 1.729 0.719 1.228 1.489 1.332 1.154
Prob 0.443 0.382 0.387 0.471 0.219 0.136 0.182 0.248
Sargan 44.954 45.248 46.280 43.505 49.063 47.815 46.539 46.775
Prob 0.390 0.378 0.338 0.449 0.243 0.285 0.328 0.320
Obs 394 394 394 394 397 397 397 397
Note(s): *, ** and *** indicate the level of significance at 10%, 5% and 1% respectively
(Z-statistics values are with asterisk)
bank capital, revenue growth and GDP growth. However, any increase in bank size, the LTD Non-
ratio, the leverage ratio and the inflation rate significantly decreased the level of bank performing
performance. All of these associations are discussed in Table 5.
loans and bank
performance
4.3 Robustness checks (the sample without banks from Turkey, Switzerland and Norway)
The initial sample of 70 banks included not just countries in the EU but banks from many
other countries as well, so long as their regulations partly differed from those of the EU. As a 879
robustness check, we tested the sample without banks from Turkey, Switzerland and
Norway. Hence, 14 banks [3]were excluded, leaving a final sample of 56 banks. The empirical
findings are outlined in Tables 8 and 9.
Table 8 summarizes the results of the first and second steps described in the sub-section of
empirical approach. The first step aimed to check the relationship between NPLs and bank
performance. The second step consisted of determining whether CSR can reduce the level
of NPLs.
Using the sub-sample, Table 8 demonstrates that the results are robust. We found that the
ratio of NPLs was negatively and significantly associated with bank performance as
measured by Q-Tobin. Additionally, the findings indicated that CSR significantly contributes
to a reduction in the level of NPLs. We found that the ESG score, the social score, and the
corporate governance score significantly decreased the level of NPLs. However, the
environmental score was found to have no significant effect.
Table 9 presents a robustness check of the third step, which assesses the interactional
effect of NPLs and CSR on the level of bank performance. These results are similar to those of
the whole sample. We found that the interaction between scores of CSR and NPLs
significantly improved bank performance. Findings indicate that the interaction between
environmental score (ENVSC*NPLs), social score (SOCSC*NPLs) and governance score
(GOVSC*NPLs) and the NPLs are positively associated with the level of performance. This
positive effect was confirmed for both ROA and Q-Tobin. However, the interaction between
NPLs and the pillar score (ESGS*NPLs) does not exert any significant effect on bank
performance.

5. Conclusion and policy recommendations

There is abundant literature on the effect of NPLs on bank performance. However, few
studies have investigated the effect of CSR on the banking sector. To date, no study has
scrutinized the effect of the interaction between CSR and NPLs on bank performance. The
current work filled this gap by using a sample of 70 European banks throughout 2008–2017
and employing the SGMM method as an econometric approach.
The empirical findings of this work support three main conclusions. First, as confirmed by
prior research, we found that an increase in the NPLs ratio significantly decreased the level of
bank performance. Second, we found that CSR exerts a significant impact on credit risk as
measured by the NPLs ratio. Third, bank performance benefits from the interactional
relationship between CSR scores and the NPLs ratio for the three scores (environmental,
social and governance).
Concerning the effect of the other explanatory variables, as bank-specific factors, we
found that bank performance is more sensitive to an increase in bank size, the LTD ratio, the
leverage ratio and the inflation rate. However, any increase in bank capital, revenue growth
and GDP growth significantly increases the level of bank performance.
The results of this paper may have some important policy implications for either bankers
or policymakers. First, there is an urgent need for more engagement in CSR practices to
reduce NPLs and increase bank performance. CSR practices should be improved through
JAAR Results of the first equation (equation 1) Results of the second equation (equation 2)
24,5 ROA Q-TOBIN NPLs NPLs NPLs NPLs

PERF(1) 0.201 0.395

45.560*** 61.050***
NPLs 0.054 0.001
1.360 7.900***
880 NPLs (1) 1.113 1.112 1.109 1.118
8.870*** 8.040*** 9.430*** 8.590***
SIZE 2.800 0.004 0.829 0.415 0.832 0.697
31.630*** 2.720*** 2.550** 1.240 2.590*** 2.440**
EQTA 0.015 0.000 0.002 0.002 0.005 0.006
3.930*** 3.790*** 0.290 0.330 1.040 1.090
LTD 0.034 0.000 0.066 0.067 0.066 0.063
14.050*** 3.720*** 12.890*** 17.740*** 14.090*** 10.160***
LADSF 0.212 0.010 0.310 0.298 0.372 0.319
8.110*** 26.590*** 8.340*** 8.060*** 6.310*** 9.140***
LEVER 2.536 0.006 4.217 4.439 5.187 4.543
26.230*** 0.840*** 3.610*** 3.960*** 3.900*** 3.320***
REVGR 0.929 0.005 0.862 0.891 1.548 0.856
11.040*** 2.890*** 10.440*** 11.810*** 2.150** 12.770***
GDPG 0.342 0.001 0.477 0.477 0.513 0.465
25.770*** 10.440*** 27.690*** 31.440*** 15.880*** 22.130***
INF 0.096 0.004 0.432 0.431 0.509 0.467
6.250*** 23.080*** 7.850*** 10.820*** 12.750*** 13.420***
ESGS 0.034
3.190***
ENVSC 0.006
1.260
SOCSC 0.018
3.740***
CGVSC 0.003
3.390
_cons 12.607 0.064 8.463 8.006 7.883 6.778
23.000*** 11.040*** 34.600*** 3.530*** 3.930*** 3.550***
AR (1) 1.974 2.116 1.645 1.655 1.67 1.657
Prob 0.048 0.034 0.099 0.097 0.094 0.097
AR (2) 1.268 1.018 0.428 0.311 0.373 0.373
Table 8. Prob 0.204 0.343 0.668 0.755 0.709 0.708
Results of the
Sargan 37.629 33.754 32.955 35.37 34.917 32.594
robustness check:
(Sample without banks Prob 0.702 0.842 0.866 0.789 0.805 0.875
from Turkey, Obs 269 304 294 294 294 294
Switzerland, and Note(s): **and *** indicate the level of significance at 5% and 1% respectively
Norway) (Z-statistics values are with asterisk)

better integration of CSR standards in banks and by communicating sustainable business

goals clearly and briefly. Encouraging employees to take breaks and, sometimes, to
decompress, as well as promoting reflection, refreshment and re-charging, is essential.
Moreover, addressing climate change and social justice should be at the core of CSR.
Second, according to the findings of this study, we noticed that the effect of CSR differed
across the pillar scores. For the effect of either NPLs or bank performance, we found that the
ESG and the environmental and social scores were the most effective in reducing NPLs and
enhancing bank performance. On the contrary, the corporate governance score was found to
have no significant effect in almost estimates. Consequently, to control the level of NPLs and
 PERF is ROA PEFR is Q-TOBIN
CSR is CSR is
ESGS ENVSC SOCSC CGVSC ESGS ENVSC SOCSC CGVSC

PERF (1) 0.129 0.150 0.148 0.151 0.384 0.351 0.352 0.366
13.840*** 27.640*** 14.200*** 30.430*** 40,630*** 26,180*** 24,600*** 28,810***
CSR 0.015 0.034 0.006 0.011 0.010 0.003 0.007 0.004
2.520** 6.070 2.520** 3.400 1,240 3,850*** 1,250 2,560**
NPLs 0.018 0.019 0.016 0.016 0.001 0.001 0.001 0.001
6.450*** 7.280*** 5.700*** 5.120*** 7,980*** 7,410*** 8,820*** 8,240***
SIZE 1.568 2.369 1.905 1.928 0.006 0.008 0.002 0.004
17.890*** 25.140*** 19.120*** 33.560*** 3,380*** 2,780*** 1,010 1,140
EQTA 0.286 0.103 0.096 0.064 0.001 0.008 0.003 0.004
13.220*** 8.230*** 14.160*** 12.130*** 3,380*** 2,650*** 4,200*** 4,340***
LTD 0.033 0.160 0.036 0.017 0.001 0.001 0.005 0.003
0.640 6.200*** 0.820 0.400 3,880*** 2,010** 1,820* 2,790***
LADSF 0.015 0.013 0.016 0.014 0.011 0.010 0.011 0.012
2.720*** 3.750*** 3.350*** 3.390*** 13,790*** 12,710*** 13,860*** 12,840***
LEVER 0.901 1.657 0.686 1.109 0.003 0.005 0.003 0.004
6.090*** 19.480*** 2.880*** 8.780*** 2,410** 3,230*** 2,510** 2,160**
REVGR 0.561 0.513 0.503 0.627 0.010 0.007 0.003 0.012
6.930*** 10.120*** 9.710*** 12.090*** 0.870 0.460 0.330 0.860
GDPG 0.232 0.238 0.223 0.240 0.001 0.001 0.001 0.001
17.930*** 22.650*** 13.720*** 18.610** 3,930*** 0.430 6,120*** 5,920***
INF 0.110 0.114 0.113 0.111 0.004 0.004 0.005 0.004
1.080 1.520 3.260*** 3.180*** 17,930*** 18,740*** 15,460*** 12,280***
ESGS 3 NPLs 0.005 0.004
1.210 1.320
ENVSC 3 NPLs 0.001 0.001
4.470*** 3.190***
SOCSC 3 NPLs 0.001 0.002
9.280*** 8.790***
CGVSC 3 NPLs 0.001 0.001
5.520*** 10.310***

(continued )
performance
performing
loans and bank

881
Non-

Switzerland, and
interactional effect

from Turkey,

Norway)
(Sample without banks
results of the
Robustness check: the
Table 9.
 24,5

882
JAAR

Table 9.
PERF is ROA PEFR is Q-TOBIN
CSR is CSR is
ESGS ENVSC SOCSC CGVSC ESGS ENVSC SOCSC CGVSC

_cons 6.515 9.934 8.498 9.592 0.074 0.060 0.048 0.035

5.280*** 15.840*** 8.650*** 11.610*** 6,090*** 4,140*** 5,370*** 1,910*
AR (1) 2.065 2.127 2.096 2.118 1.220 1.244 1.204 1.220
Prob 0.038 0.033 0.036 0.034 0.222 0.213 0.228 0.222
AR (2) 1.839 1.738 1.683 1.562 1.781 1.710 1.629 1.778
Prob 0.072 0.082 0.092 0.118 0.074 0.087 0.103 0.075
Sargan 30.129 32.702 29.276 31.237 34.890 34.051 33.721 34.742
Prob 0.931 0.872 0.945 0.908 0.806 0.833 0.843 0.811
Obs 294 294 294 294 294 294 294 294
Note(s): *, **and *** indicate the level of significance at 10%, 5% and 1% respectively
(Z-statistics values are with asterisk)
to improve their profitability, European banks should invest more in ESG and environmental Non-
and social scores than in the corporate governance score. Third, particular attention should performing
be paid to stabilizing macroeconomic conditions, one of the main factors that affects bank
performance.
loans and bank
This study had some limitations, such as the small size of the sample. In addition, we did performance
not consider the effect of bank governance in particular, board characteristics. We believe
that strong (weak) bank governance can improve (degrade) bank performance. Also,
institutional quality particularly corruption, rule of law and government stability could 883
mediate the CSR–NPLs and bank performance relationships. All of these considerations will
be examined in future research.

Notes
1. For more details on the list of countries, the number of firms and the percent of the total sample, see
Table 1.
2. We used the new Thomson Reuters ESG database, including controversies (ESGC), not the old
Thomson Reuters ESG score.
3. In the robustness check, we excluded seven banks from Turkey, five from Switzerland, and two from
Norway.

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Corresponding author
Rim Boussaada can be contacted at: boussaada.r@gmail.com

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