Exchange rate fluctuations and inflation represent two of the most significant sources of macroeconomic instability in Iran. This study aims to analyze the dynamic response of profitability among banks listed on the Tehran Stock Exchange to exchange rate and inflation shocks, while controlling for the effects of bank-specific variables, including bank size, loan-to-assets ratio, and liquidity risk. Applied in purpose and descriptive-analytical in nature, the research utilizes annual data from listed banks covering the period 2006–2017. A panel vector autoregression model was employed to examine the dynamic interrelationships among variables, with empirical analyses grounded in stationarity tests, cointegration analysis, impulse response functions, and forecast error variance decomposition. The model estimation results indicate that the exchange rate exerts a positive and statistically significant effect on return on assets, with an estimated coefficient of 0.365. The impulse response analysis reveals that profitability responds positively, gradually, and with relative persistence to an exchange rate shock. Furthermore, the forecast error variance decomposition indicates that after ten periods, exchange rate shocks account for approximately 24.149% of the forecast error variance in bank profitability, establishing them as the most prominent external driver of ROA fluctuations. Nevertheless, as the explanatory share of exchange rate movements remains below 50%, bank performance is ultimately determined by the interplay between macroeconomic conditions and bank-specific characteristics. These findings underscore the critical need for enhanced foreign exchange risk management, effective inflation control, rigorous asset quality supervision, and greater alignment between monetary and exchange rate policies and banks’ asset-liability management frameworks.