Nonlinear Effect of Loan to Deposit Ratio on Bank Performance: A Comparison With Pakistan and China

Abstract

The main objective of this study is to empirically study the influence of loan-to-deposit ratio (LTDR) on bank performance measured by return on assets (ROA) over the period 2010–2019. Based on the data of 24 listed Chinese banks and 15 listed Pakistani banks, this study uses the dynamic panel data regression technique (i.e. fixed effects GMM) to examine this relationship. We identify a nonlinear U-shaped relationship between LTDR and ROA for listed Pakistani banks. However, our results for listed Chinese banks indicate a non-linear inverted U-shaped relationship between LTDR and ROA. Our empirical findings suggest that policymakers should pay more attention to LTDR, which has the potential to improve banks’ profitability.