Analysis of the Impact of Credit Quality, Economic Conditions, Bank Size, and Financing Structure on the Profitability of Iranian Banks

Abstract

Bank profitability, as one of the most important indicators for evaluating the performance of the banking system, plays a decisive role in financial stability, competitive strength, and economic development. Identifying the factors influencing bank profitability—particularly internal factors that are largely under managerial control—can serve as an important tool for policymaking and performance improvement. The present study aims to analyze the impact of internal bank-specific factors, including the non-performing loans ratio (NPL), bank size (BS), equity-to-assets ratio (EAR), loans-to-deposits ratio (LDR/DAL), and capital adequacy ratio (CAR), on bank profitability indicators, namely return on assets (ROA) and return on equity (ROE). The research method is applied in nature and adopts a causal–ex post facto approach. Data related to Iranian banks over the study period were extracted and analyzed using panel data regression with fixed effects in EViews. Diagnostic tests, including the F-Limer test, Hausman test, unit root tests, and multicollinearity assessment, were conducted. The results indicated that although some internal variables exert effects on profitability, the main hypothesis regarding the statistically significant impact of the set of examined factors was not supported. However, a negative effect of NPL and a positive effect of bank size were observed in some models.