The impact of non-performing loans on bank profitability: A review with panel data analysis

This study analyses the intertwined dynamics between non-performing loans (NPLs) and bank profitability in the Turkish banking sector, an issue of great importance for understanding the financial health and operational efficiency of banks in emerging markets. The main objective is to empirically investigate the impact of NPLs on Return on Assets (ROA), an important measure of bank profitability, controlling for both macroeconomic and bank-specific determinants. Using a reliable panel data analysis method, this study analyses data from a significant cross-section of both domestic and foreign Turkish banks over a given period. The analysis combines a number of variables, including macroeconomic indicators such as GDP growth and unemployment rates, as well as bank-specific factors such as capital adequacy and liquidity ratios, to examine the multifaceted effects on NPLs. The results show a mixed picture: while some traditional determinants such as interest rates and macroeconomic conditions maintain their expected impact on NPLs and profitability, the study reveals an inverse positive correlation between NPLs and return on equity in some banking segments. This effect is particularly pronounced for foreign banks operating in Turkey, suggesting the existence of key strategic or operational factors that mediate this relationship. This study contributes to the broader discourse on financial stability and risk management in banking by highlighting the complexity of the interaction between credit risk and profitability. It highlights the need for tailored risk management strategies that take into account the specific characteristics and operating environments of different types of banks. It also identifies areas for future research, particularly in exploring the qualitative aspects of bank management and the potential impact of regulatory and economic changes on the NPL-profitability nexus.