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

Abstract

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.

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

“…In addition, lower capital ratios in banking imply higher leverage and risk due to the greater need to go for external funding, which in turn increases their borrowing costs and lowers their profit. Thus, the relatively better capitalized banks should exhibit higher profitability level (Rekik and Kalai, 2018).…”

Cost Efficiency Determinants: Evidence from the Canadian Banking Industry

“…However, while some of these studies (e.g., Batir, Volkman, & Gungor, 2017;Gunes & Yildirim, 2016;Daley, Mathews & Zhang, 2013) present evidence that show improvement in cost efficiency over time, others (e.g., Hassan & Jreisat, 2016;Feng & Serletis, 2009;Kalluru & Bhat, 2009) point to deterioration. Similarly, cross-country SFA (e.g., Rekik & Kalai, 2018;Spulbar & Nitoi, 2014;Perera, Skully, & Wickramanayake, 2007) and DEA (e.g., Belas, Kocisova, & Gavurova, 2019;Banya & Biekpe, 2018;Kacisova, 2014;Casu and Giradone, 2006) studies indicate cost inefficiency and variations among the sample of countries examined. As studies differ on findings, there is shift in focus from assessing the cost efficiency and trends over time to understanding the factors that influence it.…”

“…Interestingly, studies have examined banking industry efficiency through the lens of technical efficiency (e.g., Horvatova, 2018;Saha, Ahmad, & Dash, 2015;Moradi-Motlagh & Saleh, 2014;Banker, Chang & Lee, 2010;Casu & Giradone, 2006), and cost and allocative efficiencies (e.g., Kasman & Carvallo, 2013;Akeem & Moses, 2014;Kumar, 2013;Feng & Serletis, 2009;Hartman, Storbeck, Byrnes, 2001). In addition, the industry has been examined in single country studies (e.g., Ding & Sickles, 2018;Hassan & Jreisat, 2016, Vu & Turnell, 2011, cross-country studies (e.g., Rekik & Kalai, 2018;Banerjee, 2013;Kasman & Carvallo, 2013), and under approaches that include ratio analysis (e.g., Klaassen, & van Eeghen, 2015;Kumbirai & Webb, 2010) and frontier analysis (e.g., Moradi-Motlagh, Valadkhani, & Saleh, 2015;Weill, 2004;Berger & Humphrey, 1997). Typically, ratio analysis studies assess profitability, liquidity, solvency, and leverage ratios, declaring improvements in these ratios over time as indicative of good performance (Kumbirai & Webb, 2010).…”

Determinants of Bank Performance in the Context of Crisis: A Panel Data Analysis for Portugal

“…There are several studies that analyze banking performance, which consider the return on assets (ROA) and the return on equity (ROE) as the key variables for measuring that performance. This literature typically classifies the explanatory variables of performance as internal determinants, which include the specific factors of banks related to their management such as, capital, liquidity, asset quality, diversification, operational costs and size, and external determinants, which are linked to a set of macroeconomic factors that affect the banks performance (Dermiguc Kunt and Huizinga, 1999;Thalassinos and Thalassinos, 2018;Abreu and Mendes, 2002;Goddard et al, 2004;Ben Naceur and Goaeid, 2008;Kosmidou et al, 2005;Athanasoglou et al, 2008;Anbar and Alper, 2011;Rekik and Kalai, 2018;Hughes et al, 2019;Rupeika-Apoga et al, 2018;). Berger (1995) studied the impact of capital on the performance of American banks, from 1983 to 1989, and concluded that banks with high capital levels have lower ROE, as the risk on equity and the expected return by investors is smaller.…”