DETERMINATION OF THE RELATIONSHIP BETWEEN NON-PERFORMING LOANS AND PROFITABILITY IN THE TURKISH BANKING SYSTEM WITH PANEL REGRESSION ANALYSIS

Abstract

Purpose - The purpose of this study is to determine the effect of non-performing loans on profitability for public and private banks in the Turkish banking system with the help of panel regression analysis. Methodology - In this study, the effect of Non-Performing Loans/Total Loans and Loan/Deposit Ratio on the Return on Assets for the period 2010.Q1-2020.Q4 for 3 public, 8 private, and 16 foreign capital banks in the banking system was determined by panel regression analysis. For the first-order stationary data, the Fixed Effects Model was found to be suitable as a result of the Hausman test, and the Greene heteroscedasticity test and the Wooldridge autocorrelation test were analyzed to provide the assumptions. Findings - As a result of the analysis, a statistically significant relationship was determined in the direction of decreasing the Non-Performing Loans/Total Loans ratio by 23% in the Return on Assets. On the other hand, the Loan/Deposit Ratio is statistically significantly correlated with the Return on Assets by 11.5%. In this study, it has been revealed that the profitability of a bank with increasing non-performing loans will decrease. Conclusion - Return on assets is an important indicator that shows how much profit the bank management can generate with current assets and how effectively the assets are used. One of the important factors reducing profitability is the increase in non-performing loans. For this reason, for banks to increase their market share, they must collect more effectively and make more accurate decisions while giving loans. It is obvious that banks and regulatory and rule-making institutions must act in accordance with these results when determining their strategy. Since it is important in terms of showing the solvency of borrowers in an economy, the risk level, and the asset quality of banks, there is a need for estimations on the subject of non-performing loans analyzed with different methods in the literature.

Keywords

• Non-performing loans
• profitability
• Turkish banking system
• panel regression analysis

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