Profitability Of Banking Sector Research Articles

The Effect of Board of Directors Characteristics on Risk and Bank Performance: Evidence from Turkey

A bank, particularly in developing countries like Turkey, is one of the most important institutions in the financial sector. Therefore knowing the factors affecting the performance of banks is important for the development of the sector. One of the factors affecting the risk and profitability of banking sector is the internal factors of the banks. The aim of this paper is to investigate the board of directors’ characteristics and its effect on risk level measured by non-performing loans and on bank performance measured by asset profitability using the Generalized Method of Moments (GMM) estimator. Data from nineteen deposit banks for the period 2012–2018 were used. The result of the study determined that the board size, foreign board members and the independent board members have an effect on both non-performing loans and the return on assets.

Possibilities for Financial Technology Sector Development and its Impact on Banking Sector Profitability in Lithuania

Abstract Research purpose. The development of financial technology sector (fintech) poses a challenge for traditional financial institutions. Therefore, it is important to analyze not only how financial technologies can change, but also how the fintech sector affects banks and their profitability. The aim of the paper is to analyze the possibilities for the development of financial technology sector and quantitatively evaluate its impact on the banking sector’s profitability in Lithuania. Design / Methodology / Approach. After the analysis of academic literature and statistical data, the authors used expert evaluation method in order to identify development opportunities of fintech in Lithuania and correlation-regression analysis was applied to evaluate the impact of fintech on the profitability of the Lithuanian banking sector. Findings. According to the results of expert assessment research, Lithuania possesses favorable conditions for fintech enterprises to enter the Lithuanian finance market; it is expected that this sector will continue to rapidly expand mostly in payments and banking business models. Correlation-regression analysis showed that fintech indicators has an effect on the banking sector’s profitability but the effect in not very significant. The significance of the connection is lower because banking sector adapts technologies and is influenced by fintech from inside and outside the environment. Originality / Value / Practical implications. The fintech sector in Lithuania is still new and so far very little researched. The outcomes of this research have expanded the scope of research of the Lithuanian fintech sector. The obtained results would be useful and relevant to (i) the government sector to manage risks and ensure stability in the financial sector; (ii) financial sector entities to monitor possible developments and prepare them accordingly; and (iii) banking sector to analyze the impact of technology and fintech entities on them and take strategic decisions in this regard.

The Banks Profitability and Economic Freedom Quality: Empirical Evidence from Arab Economies

This study empirically examines the impact of economic freedom quality and global financial crisis on the banking sector profitability in the Arab region. The analysis is performed by employing system GMM estimation in panel data comprising of 14 Arab countries over the period 1985–2016. The study constructed an economic freedom index based on the economic freedom indicators. The findings indicate that greater economic freedom has positively influenced the profitability of the Arab banking sector. The results also suggest that the more profitable banks are those that have lower operating expenses against asset and income, better capitalized, more diversified and concentrated at economies having growth in the GDP. Furthermore, the global financial crisis in 2008 negatively impacted the profits of Arab banks.

Internal Determinants of Banks’ Profitability: A Case Study on Commercial Bank of Ethiopia (CBE)

The profitability of banking sector is the most important instrument of financial system for the future of the economy. The objective of this study is to determine by Vector Error correction model (VECM) approach of the bank specific factors that affect the profitability of commercial bank of Ethiopia. The study was conducted to find out the impact internal factors on the profitability of CBE based on Vector Auto Regressive (VAR) model. The study has been conducted on secondary data for a period of thirty six (37) years from 1981-2017. Co-integration and vector error correction model tests are applied to assess the relationship among dependent and independent variables. ROA is used as the performance measure.The internal factors used in this study are Operating Efficiency Ratio, liquidity Risk Ratio, Size of the Bank and asset quality, which are independent variables. A stationary test was carried out using Graphical approach and Augmented Dickey Fuller (ADF) test. Variables have no unit root at first difference at 5% level of significance. The Johnson co-integration test showed that, there was long run co-integrating relationship between the variables. Based on the result operating efficiency ratio and bank size affects Return on Asset of the Bank significantly and negatively, Loan to Asset Ratio has positively and significantly determined commercial bank of Ethiopia profitability. However Liquidity Ratio Risk has not significant in the long run. The study suggests that focusing and reengineering the banks alongside the key internal drivers could enhance the profitability as well as the performance of the commercial bank Ethiopia (CBE). The regression result of VECM reveals that the one lag value of bank size has positive and significant relationship with ROA. The one lag value and the two lag value of operating efficiency have a positive and significant relationship with real ROA. Keywords: Co-integration, Internal Factors, Return on asset, Unit root, VAR DOI : 10.7176/RJFA/10-3-08

Endogenizing Bank Regulation and Supervision

We investigate the welfare implications of endogenizing bank regulation and supervision quality in a dynamic general equilibrium framework. Bank regulation and supervision quality (alpha) affects households through deposit decision, firms through credit pay-back decision, and banks via a fee paid for non-performing loans. Two alternative institutional mechanisms are considered for endogenizing alpha: (i) a regulatory and supervisory agent (BRS) that maximizes lifetime banking sector profitability; (ii) a macroprudential agent (MP) that minimizes lifetime non-performing loans. Under conventional functional form and competitive banking structure assumptions, the BRS scenario welfare-dominates the MP scenario -- although the comparable range of equilibrium solutions corresponds only to a very limited range of high non-performing loan (NPL) ratios where the BRS scenario produces a feasible solution set. In the case of monopolistic banking sector, there is no common range of NPL ratios for which both scenarios are feasible. Under both competitive and monopolistic banking sector assumptions, equilibrium under the MP scenario is obtained for a large range and empirically observable low rates of NPL, associated with much higher welfare levels than the BRS scenario.

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.

Customer Relationship Management Practices in Banking: A Comapartive Study of SBI and ICICI Bank

CRM is one of the emerging business strategies in present scenario that directly effects the growth and profitability of banking sector. It is a customer centric strategy that deals and goes around with the customers. It enables the banking sector to identify their most profitable customers and targeting them to achieve a long term profitable and mutual beneficial relationship with the customers. In Indian banking sector, Customer Relationship Management is still under developing stage. The CRM practices have been implemented in many banks but on a limited scale. In this paper an attempt has been made to figure out the CRM practices in SBI and ICIC bank in Western UP area by concluding some questionnaires from the customers of the respective banks.

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.

The Cost-Efficiency and Productivity Growth of Euro Area Banks

We use an industrial organisation approach to quantify the size of Total Factor Productivity Growth (TFPG) for euro area banks after the crisis and decompose it into its main driving factors. In addition, we disentangle permanent and time-varying inefficiency in the banking sector. This is important because lack of distinction may lead to biased estimates of inefficiency and because the set of policies needed in both cases is different. We focus on 17 euro area countries over the period 2006 to 2017. We find that cost efficiency in the euro area banking sector amounted to around 84% on average over the 2006 to 2017 period. In addition, we observe that Total Factor Productivity growth for the median euro area bank decreased from around 2% in 2007 to around 1% in 2017, with technological progress being the largest contributor, followed by technical efficiency. Given the need to boost productivity and enhance profitability in the euro area banking sector, these findings suggests that bank’s efforts in areas such as rationalisation of branches, digitalisation of business processes and possibly mergers and acquisitions should be intensified. JEL Classification: C23, D24, G21

Banks in the Context of “New Normality” and the Need to Restructure Business Processes

The reduction by the Bank of Russia of the key rate as a tool for quantitative monetary easing leads to stagnation in the banking sector profitability. The purpose of the research was to disclose the importance of the mainstreaming factors of the banking profits formation. It is shown that the reasons that led to the financial result in 2017 had an unstable, temporary nature. It is revealed that the effect of the bank margin reduction under the “new normality” conditions can be overcome only by increased lending. In the situation when the real quality of a bank loan portfolio does not correspond to official data the introduction of risk-oriented business models into practice is essential for the growth of corporate lending. A progressive model of the loan life cycle is described. It is concluded that banks should use the model more extensively in providing loans to corporate borrowers in order to reduce risks, accelerate the loan application procedure and improve the profitability and competitiveness of credit institutions.

Oil Price Dynamics And The Nigerian Banks Profitability

This study evaluates the impact of oil price shocks on the banking sector profitability of an oil-dependent, bank-based Nigerian economy. The study used a dataset of 12 commercial banks that controls about 76 per cent of the Nigeria banking industry assets for a period between 2006 and 2015 and covering two major price shock events. The study tested the impact of oil price shocks on Nigerian banking system profitability as well as the mechanism of transmission (direct or indirect) using system generalised method of moment (GMM). The study found a significant impact of oil price shocks on the Nigeria bank profitability and indicated that the transmission mechanism is direct unlike previous study on the Middle East and North African (MENA) countries, which indicated that the transmission mechanism is via indirect macroeconomic variables. Oil and gas sector concentration appears to be the key driver of the direct transmission mechanism. The transmission of the impact of oil price shocks to the Nigeria commercial bank is through the Domestic Systemically Important Banks (DSIBs). The study also found the existence of profit persistence phenomenon in the Nigeria banking system. The banking institutions should develop a lending portfolio diversification strategy that will mitigate against portfolio concentration in the oil and gas sector. There is also the need to implement revenue diversification strategy to enhance their non-interest generating income and thereby reducing dependence on interest income from the lending portfolio. Most importantly, financial institutions need to manage the procyclicality of their lending strategy and maintain a strong lending standard in order to minimise adverse selection during the positive oil price shocks so that during the reversal or negative oil price shocks the quality of their portfolio will still be high. This study also provides insights for the Central Bank of Nigeria in articulating macro-prudential policies to address financial fragility and drive financial system stability as banking profitability has been identified as an important predictor of financial crises. Furthermore, the framework on domestic systemically important banks (DSIBs) must be proactively implemented as the study indicates that DSIBs play significant role in channelling the impact of oil price shocks on the overall banking system.

Profitability Determinants of Kuwait Banking Industry: Comparative Analysis between Islamic and Conventional Banks

<p><em>This study is aimed at evaluating the impact bank specific and macroeconomic variables including the global financial crisis upon the performance of Islamic and conventional banks in Kuwait. The data are collected from nine banks operated in Kuwait over the period of 2005 to 2012 with four of them are Islamic banks and five are conventional banks. The ROA and ROE are used to measure profitability while the size, credit risk, bank diversification, efficiency, capital strength, and liquidity were used to measure bank specific variables. There are also three external variables that would be used to measure macroeconomic condition i.e. GDP growth, inflation, and financial crisis. The findings from pooled OLS have shown that credit risk, liquidity and efficiency significantly affecting profitability for both Islamic and conventional banks. For macroeconomic conditions, GDP is positively significantly affecting profitability of Islamic banking sector, while inflation is negatively affecting the profitability of conventional banking sector. The result also evidence that Islamic banking sector is more stable than the conventional banking sector in terms of their performance during and after the crisis period.</em></p>

Internal factors of bank profitability in the Republic of Serbia

For adequate profitability management, it is important to identify all the factors that lead to its rise or fall, as well as to determine the intensity of correlation between relevant factors and profitability. This is to take timely and adequate measures to eliminate deviations arising from the expected profitability and improve it in the future period. The research subject is bank profitability in the Republic of Serbia in the period 2012-2015. The research objective is to outline the possible factors of bank profitability, with particular reference to internal factors of banking sector profitability in the Republic of Serbia. Research results show a high degree of correlation between the ROA and ROE profitability ratios, both statically and dynamically; dynamics of profitability ratios is in inverse correlation with capital adequacy ratio; there is a link between bank size and profitability and a link between the change of bank ownership and profitability, but it does not necessarily mean that foreign banks are more profitable than domestic banks.

The Relationship between Bank Profitability and Micro Variables with Particular Emphasis on Bank Type: The Case of Northern Cyprus

Given the fact that profitability is vital for sustainability, the main aim of this study was to determine the relationship between bank profitability and micro variables, with particular emphasis on bank type for the banking sector of Northern Cyprus. Cross-tabulation was applied to examine whether different bank types reveal similar levels of profitability. The profitability of the Northern Cyprus banking sector was profitable, even though real growth rates were negative during the periods concerned. However, the profitability of branch banks and foreign-capitalized banks was found to be higher for structural, managerial, technical and economic reasons. The banking sector of Northern Cyprus has stable profitability. Because of their unique characteristics, different bank types naturally have dissimilar profitability structures. Furthermore, equity, personnel expenses, non-performing loans and total deposits are negatively correlated with profitability, while total loans are positively correlated with profitability.

Upravljanje kreditnim rizikom u bankarskom sistemu Republike Srpske u kriznom periodu

Considering the character, development and the current economic conditions of business operations in Republika Srpska (undeveloped capital market, inadequate legal regulations for the realization and collection of collaterals, the dominant participation of loan business operations in the overall banking), the greatest attention in controlling the banking sector is paid to the control of loan, liquidity and foreign exchange risks. This sector has recently recorded a decline in non-performing loans and a slight growth in profitability, as shown by negative correlation coefficients a few years ago. The aim of this paper is to focus attention on the NPLs and the possibility of their growth, as well as the discovery of new models for controlling them. In this paper, the method of analysis shows indicators of banking sector's profitability, total loans and non-performing loans from the onset of the crisis to date. Hypothesis set in this paper is that the participation of non-performing loans in the banking sector of Republika Srpska is too great and threatens loan activities and successful business operation. After a bad experience with two banks and serious problems that depositors have been facing, as they have not received their money and it is questionable whether they will ever get it, it is necessary to more thoroughly monitor business operations of each bank as well as the overall banking sector in order to react in time to prevent major problems.

The Dynamics, Challenges and Transition of Banking Sector Development in Zimbabwe

Zimbabwe financial sector went through different phases of transformation during the past four decades (RBZ, 2014). This paper analysed the historical developments and structure of the Zimbabwe's banking sector. Challenges encountered by Zimbabwe banks and the determinants of Zimbabwe banking sector success were also assessed from an empirical literature and case study based approaches. This paper deviates from previous studies on banking sector development in Zimbabwe in that (1) it focuses on developments, critical success factors, challenges and determinants of Zimbabwe banking sector all in one study, (2) It uses both case study and empirical study approaches in one paper and (3) there is no study on Zimbabwe the author is aware of which investigated the determinants of Zimbabwe banking sector development using macroeconomic variables. The case study approach found out that poor savings culture, high lending rates, systemic risk and absence of lender of last resort were the major challenges faced by Zimbabwe's banking sector. Moreover, an empirical literature review prognosis showed that inflation, reserve ratio requirement, lending and deposit rates, output and economic growth played an influential role in determining Zimbabwe's banking sector profitability. Unlike previous studies which focused on banking sector profitability, the current study explored the macroeconomic determinants of Zimbabwe's banking sector development using the ordinary least squares (OLS) multiple regression model with data ranging from 1984 to 2014. Economic growth, deposit interest rates, savings and foreign direct investment (FDI) were found to have had a positive and significant impact on banking sector development of Zimbabwe in line with theory and empirical literature. The study therefore urges the Zimbabwean authorities to design and implement policies that grows the economy, ensure that depositors receive better interest rates, increase savings mobilization and FDI inflow attraction efforts in order to promote banking sector development. Inflation and trade openness had a negative but non-significant impact on Zimbabwe's banking sector development. The Zimbabwean authorities should therefore keep both inflation and trade openness at lower levels in order to deepen the banking sector.

Banking Sector Profitability, Before, During and After Global Financial Crisis: Evidence from a Developing Economy

<p>This study grants empirical support to the fact that profitability of the Pakistani banking sector was reduced during 2008-2009 and among other factors this reduction was attributed to the global financial crisis and resulting increased investments portfolio in total assets. We have used panel data of all Pakistani scheduled banks during 2005-2012. We proved theoretically and empirically that fixed effects model is appropriate for this study. <em>Second </em>stage analysis confirms the above results and shows that the profitability of Pakistani banking sector was higher in pre and post crisis years than, in financial crisis period. Profitability was relatively lower in the after crisis years then in before crisis years because of the residual effects of the global financial crisis. In <em>third stage</em> analysis we found that private and foreign banks were more affected by financial crisis than public sector, specialized and Islamic banks. Our results are robust to alternate measures of profitability. In context of developing countries this study will help bank managers and the regulators to stay better prepared to face any financial crisis in future. </p>

What Determines Banks’ Profitability? Evidence from Emerging Markets—the Case of the UAE Banking Sector

The primary objective of this study is to examine the variables that impact the profitability of UAE banks. The current study provides evidence of important bank-specific, macroeconomic, and industry-specific variables that have affected UAE banks’ profitability by analyzing balanced panel data for 2006 to 2013. Both Islamic and non-Islamic, domestic commercial banks are considered for the purposes of this study. This paper puts into relief the determinants of the profitability of the domestic commercial banking sector of the UAE. The sample comprises 19 UAE domestic banks. The paper examines internal variables (company-level indicators), which include size, liquidity, and capital adequacy, as well as external variables, which include macroeconomic and industry-specific variables. Panel data regression analysis is used for the analysis. Based on the empirical analysis, the cost efficiency, nontraditional revenue sources, and high asset quality are the most significant bank-specific variables, and bank managers can use them to make future policy decisions. The GDP, a macroeconomic variable, is found to be relevant to the return on assets and return on equity. The model generated in the study can explain a greater than 75% change in the total variance of various measures of profitability. This paper adds to the body of knowledge by empirically highlighting the most recent and extensive panel data for the entire domestic banking sector of the UAE, undoubtedly one of the most important banking sectors in the Middle East. The paper uses a range of independent variables for the internal, macroeconomic, and industry-specific variables.

Profitability of banking sector in Western Balkans countries

Banking performances reflect the size, value, success and efficiency of their operations. Indicators of banks are a mirror of their business activities and consequently, the banks have to improve them so that can operate and survive in the financial markets in terms of market competition. Precisely in this way, banks will be able to achieve positive results in business, ie. profit and thus create conditions for their long-term growth and development. The aim of the paper is to show the performance of banking sector in Serbia, Bosnia and Herzegovina, Croatia and Montenegro through fundamental indicators of profitability. The subject of the paper is theoretical framework focused on the bank performance and determining their characteristics from the point of profitability. After that, a review of the banking sector in selected countries is reflected through a detailed analysis of return on assets (ROA) and return on equity (ROE) as two main indicators of profitability of the banking sector in Serbia, Bosnia and Herzegovina, Croatia and Montenegro. Results showed that there is a decrease in the value of indicators ROA and ROE in the observed countries, especially in Montenegro where the average negative rate was 0.6% and 6.54%. Looking 2015, the highest decline was recorded in Croatia where ROA and ROE were at -1.1% and -7.8%, while other countries recorded positive values of ROE in interval of 0.1% - 0.5% and ROE in interval 1.1% - 3.4%.

Intellectual capital efficiency and financial performance in Indian banking sector

The present study empirically examines the relationship between intellectual capital components (human, structural and physical capital) and financial performance measures (profitability and market valuation) of Indian banking sector. The value added intellectual coefficient (VAICTM) model has been employed to measure the intellectual capital efficiency. The correlation and panel regression models have been used in order to analyze the relationship. The results found that IC has a significant effect on profitability but not showing any association with market valuation. The study also evinced that individually, human capital, a major constituent of IC does not have any significant role in increasing the market valuation of the banks. The structural and physical capital significantly influences profitability of banks. The top level managers should give much emphasis to human resources for increasing the profitability and market valuation of the banks.