Determinants of Profitability inIran Banking System Emphasizing on Market Structure and Risk Taking Behavior

In most of countries, banks are one of the important parts of the financial system and have a considerable role as fiscal intermediates on getting economic growth and development.Generally, in every country, banks are the main basics of banking system especially in developing countries where capital markets are not developed; hence, evaluating banks’ performance is important. Competition and risk are two important factors that have effect on performance. In Iran, along with entry of private banks, demands for different types of bank services has increased in that banks are looking for more proportion of market share and more profitability.
The goal of the present research is to analyze profitability, as a performance index, of banking system in Iran. This research can be distinguished from former studies in that it uses variables like diversification index of bank operations, capital market development, and manpower productivity. In general, there are three theories that explain the relationship between market structure and performance. These theories are SCP hypothesis, efficient-structure hypothesis, and quiet life hypothesis.
The SCP view represents a positive relationship between profitability and market concentration since banks can collude and get a more profit.
Efficient-structure theory was first coined by Demsetz in 1973. He said that bank profitability is extracted from efficiency. He maintained that more efficient banks have a more ability to increase its market shares and sizes that let them be more concentrated and gain higher profit.
The quiet-life hypothesis predicts a negative relation between concentration and profitability in which the firms with a higher market power tend to be inefficient so that its authorities and managers just charge the monopolistic profit and do not make an considerable effort. This research investigates profitability determinants of banking system in Iran during2003-2014.To this aim, 33 banks were selected. Two softwares, namely, Eviews.7 and Stata.14 were used. According to the Tan model (2015), the equation includes:Where:ROA: return on assets (profitability index)
Liq: liquidity index
Div: diversification index
Com: index of expenditure management
Pro: manpower productivity
Risk: risk index
HHI: concentration index (Herfindahl- Hirschman)
Cmd: development index of capital market Before estimating the model, test of stationarity must be done. The results of four stationarity tests (LLC, IPS, ADF-Fischer and PP-Fischer) shows that all the variables are stationary.
Homogeneity test should be done in the next step.
Considering autocorrelation and heteroskedasticity problems in model, GLS method should be used for estimation.
The results show that all the coefficient are significant, statiscally. The probability of F-statistic represents that the regression is significant, generally. The R-squred statistic indicates 99 percent of dependent variable variations be explained by the regressors. Variables liquidity, diversification and risk have got a negative effect while the rest, have influenced profitability, positively. When the risk increases one unite, profitability would decreases 0.009 unit.With regard to concentration coefficient, it influences profitability,positively. In other words, SCP hypothesis be confirmed in banking system of Iran. The coefficient of HHI shows that if concentration in banking system increase one unit, profitability would increases 0.193. :This research investigated the determinants of banking profitability in Iran with respectto market structure and risk variables. The results gained using fixed effect and GLS procedures showed that both hypotheses were confirmed,and that concentration influenced profitability positively while risk had a negative effect on it.
Considering the results, the following suggestions are made:1.Negative sign of the diversification index shows that it is better that banks focus on traditional activities (giving loans).
2.Concentration influences profitability positively; hence, banks should increase proportions from the market.
3.The sign of risk index shows that banks should pay attention to quality of loans or paying them back will be delayed.
4.The positive coefficient of productivity represents the importance of this factor in that banks should protect their staff through several ways like education, and issueslike peyments and salary so thatit can lead to productivity and finally profitability.