Asset quality, Interest-Free Income, and Banks Profitability

One of the main activities of banks is providing financial services such as payment of facilities. An important part of the facilities granted by banks in the form of deferred, doubtful receivables, and non-receivables are not paid back to the banking system. In such circumstances, the quality of bank assets is lowered, and this causes problems for the cash flow and liquidity management of the bank. This causes serious problems to the current situation of the banking system. This paper discussed the relationship between asset quality, non-interest income, and profitability of banks listed on the Tehran Stock Exchange. For this purpose,  non-interest income, independent variable, profitability, and risk-adjusted profit were considered as dependent variables for data related to 17 banks from 2011 to 2018 To investigate this, two regressions were used; in the first regression, the effect of ownership type in moving towards non-interest income on profits and adjusted profits at the private and state-run banks, and in the second regression, the effect of bank asset quality in moving towards activities that generate non-interest income were studied. Estimates indicate that high quality of assets has a positive and statistically meaningless effect on the banks’ adjusted profits and profits, and the index of bank income diversity with the profits and banks' adjusted profits shows a negative but significant effect.