Abstract:

In this paper, we examine the relationship between the loan-to-deposit ratio (LDR) and the profitability of Turkish banks using quarterly data over the period 2002-2015. We employ three different profitability measures as dependent variables; return on asset (ROA), return on equity (ROE) and net interest margin (NIM). Applying the fixed effect GMM technique, we find that there exists a positive and significant relationship between the LDR and all three profitability measures. Estimation results also suggest that the positive impact on profitability declines with the ratio, that is, there are significant non-linearities. Specifically, the effect of the LDR on ROA and ROE increases at a decreasing rate, but the relationship between the LDR and NIM appears to be linear. However, results for the subsample 2002-2009 indicate that the association between the LDR and profitability is positive and linear. These results suggest that after some threshold, increasing the LDR would eventually erode bank profitability. The findings are consistent with the recent developments in the Turkish banking sector.

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