The Effect of Credit Risk on Financial Performance of Deposit Banks In Turkey

Abstract

The aim of this paper is to analyze the impact of credit risk on banks performance. The dataset consist of 26 commercial banks operating in Turkey between 2005 - 2017. The secondary data collected from the statistical report of the Banks Association of Turkey. Three panels’ data are considered respectively state-owned banks, privately-owned banks and foreign banks in order to compare banks according to their ownership structure. Return on Asset (ROA) and Return on Equity (ROE) were used as proxies for financial performance indicators while Non-Performing Loans (NPLs) was used as credit risk indicators. The estimation results showed that there is a negative relationship between credit risk and ROA as well as between credit risk and ROE. This result suggest that there is a relationship between credit risk management and profitability of Turkish deposit banks from the period of 2005 to 2017. Accordingly, banks should focus more on credit risk management, especially on the control and monitoring of non-performing loans. In addition, managers should focus more on modern credit risk management techniques.