The Effect of Credit Risk on Profitability and Liquidity in Tehran Stock Exchange Banking Industry

Abstract

Considering that profitability is one of the important functions of the bank as a financial intermediary, and since a profitable bank has more potential to deal with the negative markets, attention to credit risk and liquidity as indicators affecting the profitability of banks and the importance of their role in decisions on how to equip resources, finance, and how to allocate resources as well is essential. The main objective of this research is to investigate the relationship between credit risk and liquidity and profitability in banks listed in Tehran Stock Exchange. The statistical sample includes 17 banks and the research period was from 2010 to 2014. The dependent variables include the profitability criteria (return on assets, return on owners’ equity, net interest margin) and liquidity criteria (stock turnover rate and relative price gap). Independent variable is the credit risk of banks and the control variable is the bank size. The method of data collection in the theoretical basis section was derived from the library method and the data gathering method in the hypothesis testing section have been extracted from the financial statements and Tehran Stock Exchange website. The data analysis method is also a multiple correlation and regression test.

The results of the research show that increasing credit risk reduces the profitability and liquidity of banks' shares.

Keywords: Credit Risk, Profitability, Liquidity, Return on Assets Rate, Relative Price Gap