The effect of the credit risk on the profitability of those banks listed on Tehran Stock Exchange

Author Name(s): Reza Ezzati, *Reza Aghajan Nashtaei, Ebrahim Chirani
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Abstract

This study aims to examine the relation between the effects of credit risk on the profitability of the stock exchange-listed banks. The issue of credit risk and non-performing loans is one of the most important and sensitive issues in the banking industry which is named as the main cause of bank failures. In order to investigate the relationship between credit risk in this study ,variable-current loans of doubtful debt provision and the ratio of bad debt provision have been used  and their relation with banks’ profitability variables including return on assets and return on equity have been assessed. The population of this research consists of the all accepted banks in Tehran stock exchange among which 8 banks have been finally selected as samples which were collected during a five-year-period from 2010 to 2014 by NovinRahavard software and then they were analyzed using panel data regression and Eviwes6 software. The results of the research indicated that the hypothesis was accepted. This means that credit risk has significant and negative impact on the profitability of banks. This means that any increase in credit risk would reduce the profitability of banks. According to the results, we recommend investors to take stock banks which have less credit risk because they have a higher performance resulting to higher profitability of their shares.

Introduction

The issue of non-performing loans and the credit risk are so important and sensitive in banking industry that can be considered as the main causes of bank failures. In the recent years, following the economic crisis of 2008 in the United State of America, which originated in increased credit risk, the importance of credit risk has increased. Economic recession together with inflation in Iran’s economy in recent years has left a negative impact on the banking system which has increased non-performing loans level about 16 percent of the loans that can be a serious wake-up call for banking industry. On the other hand, bearing the process of economic firms’ privatization in mind, the issue of corporate governance is very essential to achieve the goals of the country’s economic prospects (Amiri, 2013).

 

Conclusion 

The main objective of this study is to answer the question whether the credit risk has any relation with company profit or not? And if there is a relation, to what extent, it is significant and statistically meaningful?  In this research, in order to investigate the relation of credit risk with the variables of non-performing loans and the ratio of doubtful debts provision are used and their relation with banks’ profitability variable have been assessed. Based on the regression models noted before, Hausman test results show that the fixed effects model is significantly better than the random effects. Hausman test shows a significant result that the fixed effects model is superior to random effects model meaning that the research hypotheses are tested.

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