Determinants Of Bank Profitability Research Articles

DETERMINANTS OF BANK PROFITABILITY: THE CASE OF THE REGIONAL DEVELOPMENT BANK (BPD BANK) IN INDONESIA

Introduction: The Regional Development Bank (BPD Bank) is expected to be a strong, highly competitive bank, which will contribute to the growth and even distribution of sustainable regional economies. Background Problem: A review by the Financial Service Authority (OJK) of the BPD Bank’s business growth indicates the low competitiveness of the BPD Bank, relative to other commercial banks. Novelty: Limited prior studies have been conducted on the profitability determinants of the BPD Bank, especially in Indonesia, and previous studies have only focused on the internal determinants of profitability. Hence, this research aims to analyze both the internal and external profitability determinants of the BPD Bank in Indonesia. Research Method: This study analyzes 135 observations in total from all 27 BPD banks in Indonesia for five years, from 2011 to 2015. This research measured bank profitability using ROA and ROE as the dependent variables. The independent variables are the internal and external determinants of bank profitability. The internal determinants of profitability consist of TA, TCORCAP, CAR, NPL, LDR, OE/OI and NIM; whilst the external determinants include TMS, INF and BIRATE. Findings: The findings of this study show that the profitability of the BPD Bank, as measured by its Return on Assets (ROA) and Return on Equity (ROE), is significantly determined internally by the total assets, LDR, OE/OI, and NIM and externally by the BIRATE and inflation. Those variables have positive relationships with profitability, except for OE/OI and inflation, which have negative relationships with profitability. In addition, two hypotheses are only partially supported, in which the total core capital and CAR show negative relationships only with ROE. Conclusion: The findings of this paper provide a deeper insight to help manage the profitability of the BPD Bank, which eventually can promote sustainable economic development.

A look inside banking profitability: Evidence from a dollarized emerging country

We empirically analyze the determinants of private banking profitability in Ecuador for the period 2002−2017. We contribute to the growing literature in four ways. First, we propose a more robust measure to quantify technical efficiency by using a two stages DEA with a Fractional Response Model. Second, we propose to jointly use three competition – market power measures, in line with the new industrial organization approach, to improve the analysis of industry determinants, which has always been done assessing separately every market power measure. Third, we introduce two new factors that may influence banking profitability: regulatory/institutional variables and dollarization derived factors, to test how being a dollarized (with foreign currency) economy may affect banks’ profitability. Finally, to address the weakness coming from the dynamic form of the Generalized Methods of Moments (GMM), we perform an improved version of it by treating the capital as an endogenous variable and several micro-determinants as given. We also perform some robustness checks by using a Bayesian Model Averaging (BMA) in order to identify a robust set of determinants. Our results show that capital ratio, lending rate, labor productivity, size, efficiency and assets composition are micro-stable determinants of banks ‘profitability. In addition, we found that market power is a strong determinant of Ecuadorians’ banks profitability. Regarding macroeconomic factors, we found that the GDP cycle, inflation and spread are determinants of banking profitability while the regulatory variables did not show any relation. Finally, our results show that dollarization derived factors have an effect on private banking profitability.

Determinants of Bank Profitability—Evidence from Vietnam

ABSTRACT This article investigates the determinants of bank profitability in Vietnam covering the period from 2006 to 2014. Employing a number of econometric panel data methods with a unique dataset, the findings of the article indicate that bank size, capital adequacy, risk, expense, and productivity have strong impacts on profitability. We also find that bank industry characteristics and macroeconomic variables affect bank profitability. However, we find that the direction of causality is not uniform across profitability measures.

The internal determinants of bank profitability and stability

PurposeThe purpose of this study is to examine the internal determinants of bank profitability and stability in Pakistan banking sector. Because of specific research objectives, this study excludes the external factors of profitability and stability to find the role of bank internal determinants in achieving high performance.Design/methodology/approachA panel regression analysis is built on a balanced panel data using 24 commercial banks over the sample period of 2007-2015. The authors performed a separate analysis of bank profitability and stability. Both models used a comprehensive set of bank internal determinants.FindingsThe results that were obtained from profitability model indicated that bank size, credit risk, funding risk and stability have statistically significant impacts on profitability, while liquidity risk showed the statistically insignificant impact on profitability. Regression findings from stability model reveal that bank size, liquidity risk, funding risk and profitability have statistically significant impacts on stability, while credit risk had an insignificant effect on stability. However, the effect of the financial crisis is uniform and showed statistically insignificant impact in both models.Practical implicationsOverall, the authors’ findings bring some new but useful insights to the banking literature. Some recommendations may be functional for the sustainable performance of banks.Originality/valueIn view of study results, the authors provide interesting insights into the practices and characteristics of banks in Pakistan. This study also highlights significant bank internal determinants to improve understanding in the existing literature.

Determinants of Bank Profitability: Evidence from Commercial Banks of Bangladesh

This paper attempts to investigate the impact of different bank specific and macroeconomic variables on bank profitability by considering 23 commercial banks of Bangladesh based on data availability during the period 2013-17. These data are collected from the individual banks annual reports, Bangladesh Bureau of Statistics (BBS) and a variety of publications of the Bangladesh Bank. The fixed effect model for panel data has been applied to operate the regression analysis among the variables. In the study, three identical measures of profitability namely Return on Asset (ROA), Return on Equity (ROE) and Net Interest Margin (NIM) are used. In the model for ROA, the result indicated that earning variable (TIN, NII), and asset structure (DPST) have a significant positive relationship with ROA, and asset quality (NPL) has significant negative impact on ROA. For ROE, earning (TIN and NII) and capital strength (CAP) have a significant positive relationship of the entire explanatory variable with ROE. Only asset quality (NPL) has significant negative impact on ROE. For NIM, earning variables (TIN), capital strength (CAP) and liquidity (LTA) have a significant positive relationship with NIM. This study find no significant impact of the macroeconomic factors namely growth rate of GDP and rate inflation and rate of interest included in the models on profitability. For decision making and developing the performance of financial organization in the future the findings of this study can assist the investors, policymakers, management body and other stakeholders.

Determinants of bank profitability: empirical research on Lithuanian market

Determinants of bank profitability: empirical research on Lithuanian market

Determinants of Banks Profitability & Liquidity and the Role of BASEL III in Islamic & Conventional Banking Sector of Pakistan: A Case Study of NBP

This study aimed to examine and compare the performance of Islamic and Conventional banking sector of Pakistan in terms of the impact of BASEL III reforms on the profitability and liquidity of Islamic and conventional banks of Pakistan. For this purpose, National bank of Pakistan has been taken as a unit of analysis and eight year’s financial data has been collected from the official website of NBP. BASEL III standard’s ratios including CAR, CER and LCR have been used as an independent variable while the bank’s profitability and liquidity have been taken as a dependent variable. Descriptive statistics have been performed first to examine and compare the performance of both Islamic and conventional banking sector before and after the induction of BASEL III. After that T-Test has been performed to investigate the differences between the impact of BASEL III on the profitability and liquidity of Islamic and conventional banking sector. The regression analysis has been performed to examine whether BASEL III has a strong relationship with Islamic or conventional banking sector. The results found that BASEL III has a significant positive relationship with the profitability and liquidity of the Islamic sector. Islamic banks are higher in terms of the impact of BASEL III on profitability and liquidity. They are more profitable, more liquid and highly capitalized with BASEL III standards. While Conventional banking sector needs to redesign their policies and make them more compliant with BASEL III to generate more profit and be more liquid as Islamic banks are.

Determinants of Bank Profitability: Empirical Research on Lithuania Market

The goal of the current paper is to identify which general services provided by commercial banks are vital for banks' profitability. In the present research, profitability is expressed by return on assets and return on equity. The following general determinants that are analysed in the context of general information of banking sector, influencing profitability were examined: number of branches, number of automated teller machines (ATMs), number of internet banking users, number of mobile banking users, and number of debit cards, number of credit cards, the total number of payment cards, and number of point-of-sale (POS) terminals. The results of the research showed that the number of POS does not influence the profitability of commercial banks, while other independent variables affect at least one profitability measure.

Breaking the Bank? A Probabilistic Assessment of Euro Area Bank Profitability

This paper explores the determinants of profitability across large euro area banks using a novel approach based on conditional profitability distributions. Real GDP growth and the NPL ratio are shown to be the most reliable determinants of bank profitability. However, the estimated conditional distributions reveal that, while higher growth would raise profits on average, a large swath of banks would most likely continue to struggle even amid a strong economic recovery. Therefore, for some banks, a determined reduction in NPLs combined with cost efficiency improvements and customized changes to their business models appears to be the most promising strategy for durably raising profitability.

Determinants of bank profitability: Islamic versus conventional banks

This research analyzes the determinants of bank profitability by investigating the internal factors that affect the profitability of Islamic banks and conventional banks. It then compares the results from the two types in order to understand how they differ from each other. As previous researchers focus on either Islamic or conventional banks, this research will analyze both by comparing how they are each influenced by profitability factors. Few researches have attempted to compare the profitability of Islamic and conventional banks using a relatively small sample. This research uses a fixed effect panel data analysis on a large sample of 68 banks (42 Islamic and 26 conventional banks) from 13 MENA countries, covering the period of 2006 until 2016. Using several variables, including bank size, equities to assets, loans to assets, deposits to assets, cash to assets and securities to assets, the results show that bank size, equities to assets and deposits to assets have a significant positive effect on Islamic banks’ profitability, while they have a significant negative effect on conventional banks’ profitability; loans to assets and cash to assets have no effect on bank profitability for either Islamic or conventional banks; and securities to assets has a significant negative effect on Islamic banks’ profitability, while it has a significant positive effect on conventional banks’ profitability. The results also show that bank size, equities to assets, deposits to assets and cash to assets contribute more to Islamic banks’ profitability compared to conventional banks, while loans to assets and securities to assets contribute more to conventional banks’ profitability compared to Islamic banks.

Bank-Specific and Macroeconomic Determinants of Bank Profitability: Evidence from an Oil-Dependent Economy

This study investigated bank-specific and macroeconomic determinants of bank profitability in Azerbaijan, an oil-dependent economy in transition. A huge drop in oil prices, a significant devaluation of the national currency, and the financial distress were the main motivations of the study. We applied Panel Generalized Method of Moments to the data in the framework of dynamic model of the bank profitability. It was found that bank size, capital, and loans, as well as economic cycle, inflation expectation, and oil prices were positively related to the profitability, whereas deposits, liquidity risk, and exchange rate devaluation were negatively associated with it. We further found that the bank profitability demonstrated moderate persistence and ignoring the country-specific features could lead to bias and poor performance in estimations. The conclusions of this research would aid in setting banking policies towards increasing profitability. This may be supplemented by ensuring strong research departments within the banks tasked with analyzing and forecasting the main macroeconomic indicators. The novel features of the study include utilizing recent economic trends, accounting for country-specific features, and for the first time, examining the effects of the economic cycle on the bank profitability in Azerbaijan. In addition, the study featured proper addressing time series properties of the panel data, and performances of robustness checks for consistency of results.

Determinants of Profitability in the Banking Sector: An Analysis of Post-Soviet Countries

The purpose of this paper is to identify the determinants of bank profitability in 13 post-Soviet countries. Within this scope, annual data between 1996 and 2016 is analyzed by using fixed effects panel regression and the Generalized Method of Moments (GMM). It is concluded that loan amount, non-interest income and economic growth are significant indicators of profitability. Moreover, the 2008 global mortgage crisis has a negative influence on bank profitability in post-Soviet countries. According to the estimation results, there is a positive relationship between non-interest income and economic growth with profitability. This result shows that when non-interest income of the banks increases, such as credit card fees and commission, it affects the financial performance of the banks, positively, and contributes to bank profitability. Another result of this study is that economic growth positively influences bank profitability. This result allows us to conclude that higher GDP comes with higher bank profitability for post-Soviet countries. Lastly, there is a negative relationship between loan-to-GDP ratio and profitability of the banks in post-Soviet countries. This means that when the ratio of total loans to GDP increases, it affects financial performance of the banks in a negative way. While considering this result, it is recommended that banks in post-Soviet countries should focus on ways to increase their non-interest income. Additionally, it is also significant for these banks to be careful and risk averse when lending to their customers.

What does affect profitability of banks in Croatia?

PurposeThe paper aims to determine the impact of bank-specific, industry-specific and macro-specific determinants on the profitability indicators – return on assets (ROA) and ratio net-interest margin (RNIM).Design/methodology/approachThis research sample includes selected Croatian banks, and the empirical analysis covers the period 2007-2014. Based on the reliable and robust econometric tests, dynamic estimation technique (DOLS) was run to estimate the profitability models, by using of ROA and RNIM as dependent variables, which also include lagged dependent variables to capture the speed of mean reversion in terms of profitability, respectively.FindingsThe results proved the crucial positive impact of assets size (economies of scale), loan portfolio and GDP growth on the banks’ profitability. Further, the negative impacts on profitability have risks and administrative costs. This paper shows the positive impact of capital adequacy ratio (CAR) and leverage on ROA and RNIM, as well as the correlation between market concentration and banks’ profitability.Practical implicationsBasically, Croatian banks should improve operative efficiency and risk management practice to increase their profitability. In addition, banks should carefully balance between capital base and risk exposure on the one hand and take advantage of using relative cheaper deposits and borrowed funds instead of using more expensive equity. This conclusion is reasonable, keeping in mind that the Croatian financial market does not punish banks for an extra risk exposure caused by market imperfections. Finally, the regulatory authority in Croatia should impose some additional antitrust measures to increase competition in the banking market.Originality/valueAlthough a bunch of existing studies explain the determinants of bank profitability from different perspectives, this paper conducts a specific empirical analysis about the determinants of bank profitability in Croatia. In addition, this paper provides a good synthesis of the relevant empirical and theoretical studies from this domain.

Determinants of banks’ profitability and efficiency: Empirical evidence from a sample of Banking Systems

The aim of this study is to analyze the determinants of the bank profitability and efficiency in conventional banks. This study compares accounting-based and economic-based measures of efficiency and profitability of conventional banks in fourteen countries. Accounting variables help explain cost and profit efficiency, but cost efficiency has little impact on profitability and profit efficiency. In fact, the study of profitability is crucial in assessing the health of organizations. However, profitability of the banking sector is particularly important as the soundness of the sector is closely related to the soundness of the entire economy. In this paper, banks’ profitability and its determinants in Tunisia as well as in 13 different countries were investigated. The determinants of bank profitability are analyzed with the data from 110 banks over the period 1999–2012 using the panel data method generalized method of moments. Our results suggest that researchers should probably focus more on profit efficiency than cost efficiency. Almost all banks are below the optimal size.

Profitability Determinants of Savings and Loans Companies in Ghana: Evidence on Bank Specific and Macroeconomic Determinants

The paper analyzes how bank specific and macroeconomic variables affect the profitability of savings and loans (S&L) companies in Ghana. The bank specific (internal) determinants data was collected from the financial statements of the S&L companies from 2011 to 2016 whereas the macroeconomic (external) determinants were sourced from the central bank of Ghana. The bank specific variables chosen for the study were capital adequacy ratio, non-performing loan ratio, loans and advances to deposit ratio and size of bank. The macroeconomic variables included were annual GDP growth rate and CPI-inflation rate. Data were analyzed using SPSS software and multiple regression model was used to find out the relationship between profitability and the internal and external determinants. Capital Adequacy, Non-performing Loans, Bank size, Inflation and GDP growth rate all negatively influenced profitability of savings and loans companies in Ghana. The only variable found to positively influence S&Ls profitability was Loans and Advances. Researchers have made different findings with regard to profitability determinants of banks which makes the findings inconclusive. We therefore recommend further research on profitability determinants banks especially, in the Savings and Loans sub banking sector.

Determinants of Banks Profitability: A Case Study of Afghan Commercial Banks

Determinants of Banks Profitability: A Case Study of Afghan Commercial Banks

Determinants of Bank Profitability in the Euro Area: What Has Changed During the Recent Financial Crisis?

During the recent financial crisis, bank profitability has become an element of strong concern for regulators and policymakers; in fact both self-financing strategies and capital increases – necessary to provide higher level of capitalization – rely on the ability of a bank to generate profits. However, the determinants of bank profitability, that seemed to be unequivocally identified by previous literature, appear to have changed under the effect of regulatory and competitive dynamics. We test this hypothesis on commercial, cooperative and saving banks, employing a random effect panel regression on a dataset comprising bank-level data and macroeconomic information (covering the period 2006-2013) for 9 countries of the Euro area. Our findings suggest that, after a period of “irrational exuberance” in which credit growth and high leverage were seen as proper and fast ways to boost profitability, a sound financial structure and a wiser and objective credit portfolio management have become the main drivers to ensure higher returns.

Determinants of bank profitability before, during, and after the financial crisis

PurposeThe purpose of this paper is to report the results of an investigation into the relationship between bank-specific, macroeconomic factors and bank profitability before (1999-2006), during (2007-2009), and after (2010-2013) the financial crisis.Design/methodology/approachUsing the Economic Community of West African States’ bank panel data from 1999 to 2013, the paper used fixed effect models. The panel model includes bank-specific determinants (size, cost management, and liquidity), industry level, and macroeconomic variables.FindingsPanel data analyses results show that there is a significant relationship between bank-specific determinants (size, cost management, and liquidity) and bank profitability (ROA) before, during, and after the financial crisis. However, the relationships between other bank-specific (capital strength, credit risk, and market power), macroeconomic (gross domestic product and inflation) determinants are sensitive to both periods of analysis (before, during, and after financial crisis) and bank profitability measure used (ROA or NIM).Originality/valueOverall, these results suggest that the financial crisis did not affect the relationships between some bank-specific determinants and bank profitability.

What Determines the Profitability of Vietnam Commercial Banks?

Kunt and Detragiache (1999) said that the profitability of the banking system was a good indication in signaling financial crisis. Therefore, studying determinants of bank profitability is necessary for better understanding of the current condition of the banking sector, and then, for launching new policies. The research explored determinants of Vietnamese commercial banks’ profitability. Using Regression Analysis for Panel Data set of 13 Vietnamese commercial banks over the period from 2006 to 2015, the study found that foreign ownership, cost to income and the level of credit risk, negatively influenced on the profitability of Vietnamese banks, whereas state ownership, size of assets, and macroeconomic factors (GDP and inflation) did not indicated statistically significant relations to the profitability and the relationships between capital structure, liquidity risk and the profitability were mixed.

The Determinants of Bank Profitability: Does Liquidity Creation Matter?

Using a panel data set of 4995 banks across 11 developed and emerging countries during the period (2011-2015), this report analyses the amount of liquidity created by banks, how liquidity creation, bank-specific and the macroeconomic factors affecting bank profitability. The results show evidence of increased creation of liquidity over the period. By applying the panel data fixed effect technique, banks that create more liquidity, are set up to have lower profitability. As well as Asset management, bank size and capital ratio are positively correlated with bank profitability. While credit quality and operating efficiency affect bank’s profits negatively. Additionally, macroeconomic factors have different impact on profitability indicators in each market. Our findings may help decision makers inside and outside bank to determine important factors affecting bank profitability.