The effect of retail loans on bank profitability a comparative empirical analysis

Abstract

Retail credits became an important instrument of banking as of 1960s. The effect of retail credits, in which mortgage and consumer credits have a great share, in the profitability of banks have not been analyzed in detail so far. The main items of retail credits, like mortgage and consumer credits, contribute greatly to the risk management of banks with their characteristics like having regular cash flow in banks. Due to the structure of the guarantee and mortgage credits, which provide low risk weight, it is important to determine the capital needs of banks. However, due to relatively long maturity structure, mortgage credits also feed the maturity mismatch risk, which is the basic problem of banking system. Such credits, with which low costs are provided in favor of the clients, play determinant roles in the profitability of banks. Consumer credits, on the other hand, are provided to the clients in shorter maturity periods and with costs that are in more favor of banks. In the scope of this study, the effects of retail credits on conventional banks and participation banks, which are active in Turkey, have been investigated over mortgage and consumer credits. The findings of the study show that retail credit types have strong negative effects on Net Interest Margin (NIM), which has been selected as the profitability indicator for conventional banks in the scope of the study. For Participation Banks, on the other hand, unlike conventional banks, retail credit types have stronger and more positive influences on Net Profit Share Margin (NPSM). The findings of the present study are important for further studies that will be conducted on retail banking and for comparative studies on performance assessments.