Determinants of bank net interest margins in southeast asia

Abstract

This paper investigates the determinants of net interest margins (NIM) of banks in four Southeast Asian countries using the dealer model (Ho and Saunders, The Journal of Financial and Quantitative Analysis, 16(4), pp 581–600, ) and by running two-step regressions. Results of the first regression indicate that the region's NIM are partially explained by bank-specific factors namely operating expenses, capital, loan quality, collateral and liquid assets. Second step regression results show that while NIM manifest sensitivity to changes in short-term interest rates, they are still largely explained by the non-competitive structure of the region's banking systems. Furthermore, there is evidence that the NIM declined after 1997 thus reflecting the profit squeeze experienced by the region's banks in the aftermath of the Asian currency and banking crises.