Effect of the Asset Quality on the Bank Profitability

Abstract

This study investigates whether non-performing loans effect the bank’s profitability in Turkey. The study applies a panel regression method to the quarterly data set including 1809 observation belongs to 55 Banks in Turkey during the period from 1st quarter of 2005 to 3rd quarter of 2016. It is found that there is a significant, negative relationship between non-performing loans and bank profitability which is measured by return on equity and return on asset. The higher non-performing loans, the lower asset quality, leads to the lower return on equity and return on asset, and the lower non-performing loans, the higher asset quality, leads to the higher return on equity and return on asset.