Determinants of bank profitability: evidence from 47 Asian countries

Abstract

PurposeThe paper examines the effect of bank-specific, financial structure and macroeconomic factors on the profitability of banks in Asian economies during 1995–2017.Design/methodology/approachIt uses the data of 2,446 banks across 47 Asian countries between 1995 and 2017 (41,582 year observations). The static and dynamic panel generalized methods of moments (GMM) estimation techniques are applied.FindingsThe results show that banks that are highly dependent on nontraditional activities have lower net interest revenue and net interest margin but higher return on assets, return on equity and profit before tax. Higher opportunity cost, capitalization, demand deposits and market risk result in a better bank profits. Furthermore, banks with higher loan exposure and growth have more profit. However, nonperforming loans have negative and significant impact on bank profitability. Asian banks do not suffer from diseconomies of scale and scope. The author also finds that banks located in countries with high gross domestic product, inflation rates and high rates of interest or in financially developed economies offer better profits. High credit to the private sector reduces the bank profitability. This study finds evidence to support the structure-conduct-performance (SCP) hypothesis. It also provides evidence that the impact of financial turmoil on the profitability of the Asian banking sector is negative and significant and has severely weakened the Asian banking system.Originality/valueAs Asia has become an important economic area and the Asian topic has not earned enough discussions, this paper is the first to examine Asian banks with the latest and a wider range of panel data that cover 2,446 banks at 47 Asian countries over the period 1995–2017. The present study is among the first to address the influence of financial turmoil on bank profitability in this region. It also studies new variables, such as demand deposits, opportunity cost and off-balance sheet activities, which have not been examined in relation to bank profitability. It also applies both static techniques and dynamic panel estimation techniques to analyze the data.

Determinants of Bank Profitability in CEE Countries: Evidence from GMM Panel Data Estimates

“…Regarding the influence of financial market variables on CEE banks' profitability, we notice the significance of these variables for banks' profitability, which is in line with previous findings of Saif-Alyousfi (2020) in the case of Asian banks, Onofrei et al (2018) on CEE countries or Messai et al (2015) for Western European countries. The negative link between CREDIT and all profitability measures suggests that a higher importance of credit to the private sector in these economies was detrimental to their banks' profitability, explained by the higher exposure to credit risk of banks.…”

Determinants of banks’ risk-taking behavior, stability and profitability: evidence from GCC countries

“…Compared to the banks in other regions, the lower profitability of GCC banks raises a question about deciphering the determinants of profitability and the risk of banks in the GCC economies. This has raised concerns about the banking system's stability in the GCC economies following the global financial crisis (Saif-Alyousfi et al, 2020a, 2020b, 2020c.…”

FDI inflows and bank deposits: evidence from 18 MENA economies

“…Following Poghosyan and Hesse (2016), Fidanoski et al (2018), Buallay et al (2020), Saif-Alyousfi (2020a, 2020b, 2020c), and Saif-Alyousfi et al (2018b, 2020a, 2020b), this paper introduces a range of bank-specific control variables: capitalization, liquidity, credit risk, inefficiency, and size. It uses the ratio of equity to total assets as a proxy for bank capitalization, and the ratio of loans to total assets for bank liquidity.…”

“…Unlike the situation in developed countries, where the financial markets as well as the banking system operate in unison to direct savings, the financial markets in developing countries, such as those of the Middle East and North Africa (MENA), are small and sometimes absent. Hence, the responsibility of the banking sector is to bridge the gap between savers and borrowers and to perform all tasks associated with the profitable and safe direction of funds (Saif-Alyousfi, 2019, 2020a, 2020b2020c;Saif-Alyousfi et al, 2018a, 2018b, 2020a, 2020b. This makes studying the deposits of the banking sector in developing economies, such as the MENA region, all the more important.…”