Determining the Relationship between Credit Risk & Profitability in Iranian Banks

In this paper we analyze the relationship between credit risk & profitability in Iranian banks. The credit risk is measured by non-performing loans ratio &loan loss provision ratio. Also، the profitability has been measured by return on assets &return on equity. The survey data are from fifteen Iranian banks& credit institutes during the time period of 2003 to 2009. Results show that there is a significant negative relationship between credit risk & profitability. In other words، the increase in credit risk results in the increase in the costs of banks and therefore the decrease in their profibility. The results also imply that bank managers need to focus on monitoring and controlling the credit risk in order to maximize their profit.