The influence of solvency and liquidity ratios on profitability of Tunisian banks: the moderating effect of asset quality

Purpose The objective of this research is to determine the influence of solvency and liquidity on the profitability [return on assets (ROA)] of Tunisian banks from Q2-2020 to Q3-2022 by considering asset quality as a moderating variable. Design/methodology/approach This study uses data on liquidity, solvency, ROA and asset quality for 12 banks. It also considers bank size, gross domestic product (GDP) growth and inflation as control variables. The methodology is based on panel data with generalized least squares (GLS) estimation to assess the moderate influence of the asset quality on solvency, liquidity and ROA. Also, the generalized method of moments (GMM) estimation is used as a robustness test. Findings The results of the GLS model estimation indicated a negatively significant moderating correlation between the liquidity and the solvency. The data from the GMM model indicate that the liquidity variable predicted by the liquidity has a positively significant influence on a bank's ROA as well as for the solvency variable, which is predicted by the capital capacity. Therefore, we conclude that these two variables had a positively significant impact on the ROA. Research limitations/implications The studies have many implications for banks and their management in addition to the industry regulators. The results of this study will enable political decision-makers to determine the banks' profits based on their liquidity and solvency. Originality/value This analysis provides financial explanations and recommendations for stakeholders in Tunisian banks. Furthermore, these banks must also be able to maintain their liquidity and solvency to ensure their profits in times of COVID-19.