3.2 The relationship between asset quality and bank performance
There is a negative relationship between the ratio of NPL to total loans and ROA, and the significant level was at 10%. However, the results showed there is no significant relationship between the other asset quality ratios (NPL to total assets ratio and loans to total assets ratio) and ROA. In the ROE model, all the asset quality ratios (which are NPL to total assets ratio, NPL to total loans ratio and loans to total assets ratio) were found have no significant relationship with ROE. Low assets quality will affect banks’ profitability, because higher reserves are required for low assets quality and the reserves will be deducted from the banks’ profits. But on the other hand, the low asset quality (high NPL to assets ratio, high NPL to total loan ratio and high loan to asset ratio) may indicate that the banks are trying to expand their loan lending business aggressively. The assets quality of the aggressive loan lending banks may be lower than conservative banks, but the profitability for the aggressive loan lending banks may be higher than conservative banks. For this case, the relationship between assets quality and bank performance is becoming more complicated.