Determinants of Portuguese banks' profitability: an update

Abstract

In this study, we assess the main determinants of banks' profitability in Portugal over the period 2015–2018. We divide the factors that can influence bank profitability into several groups: management quality, credit quality, capital adequacy, liquidity (internal bank factors), and GDP growth (an external factor). The panel dataset is composed of annual report data for the 18 major banks operating in Portugal, representing about 98% of the Portuguese banking product. Profitability has been a persistent challenge for banks since the global financial crisis. Moreover, the Portuguese banking system had been facing several structural problems, which makes this topic particularly relevant. The profitability proxy used is the return on equity (ROE). The empirical strategy followed was pooled OLS. Variables relevant for explaining Portuguese banks' profitability are capital adequacy, liquidity and credit risk. As expected, the results show that capital adequacy (TIER 1) and credit quality (CVCT) have a negative and significant impact on banks' profitability, whereas liquidity (RAL) has a positive impact.

Profitability of Commercial Banks in Portugal and Spain: A Panel Data Analysis Model

“…It can therefore be concluded that the operating efficiency (EFIOP) of Portuguese commercial banks in terms of the ratio of operating expenses to gross income has a significant influence on bank profitability. This result is in agreement with the empirical evidence of the authors Kosmidou, (2008), Dietrich andWanzenried (2011), Trujillo-Ponce, (2013), Barata (2014), Bitar et al, (2018), Rekik and Kalai, (2018), Rossi et al, (2018), Mota et al (2019) and Pires et al, (2021) who concluded the existence of a negative association between the operating efficiency ratio and bank profitability.…”

“…However, the results allow to verify a mixed relationship (positive for the variable RoA and negative for the variable RoE) according to expected signs. This result is convergent with the studies of authors Bourke, (1989) Hoffmann, (2011), Carvalho and Ribeiro (2016) and Rossi et al, (2018) who concluded a negative relationship and with the studies of authors Demirguc-Kunt and Huizinga, (1999), Athanasoglou et al, (2006;2008), Kosmidou, (2008, Trujillo-Ponce, (2013), Bikker and Vervliet, (2018) and Pires et al, (2021) who concluded a positive relationship. Thus, it is also possible to validate hypothesis 5.…”

“…There are several works that relate measures of financial performance of banks, namely, as to the determinants of profitability of credit institutions. Analyzing the literature for the banking market on bank profitability, the works carried out by authors such as Bourke (1989), Athanasoglou et al (2008), Dietrich andWanzenried (2011), Trujillo-Ponce (2013), Carvalho and Ribeiro (2016), Bikker and Vervliet (2018), Mota et al (2019) and Pires et al (2021), use as main indicators to measure the results and benchmark their assessments, the Return on Assets (RoA) and Return on Equity (RoE). To ensure the purposes of the present study, a set of data in different environments from several authors was analyzed.…”

“…In an even more recent study, the authors Pires et al (2021) analyzed the profitability of Portuguese banks for the period 2015-2018. To do this, they used the return on equity indicator measured by RoE as a measure of bank profitability for a sample of 18 banks operating in Portugal.…”

“…The works that evaluate the factors that determine the profitability of banking institutions, such as Trujillo-Ponce ( 2013), Carvalho and Ribeiro (2016), Bikker and Vervliet (2018), Rossi et al (2018), Hamdi and Hakimi (2019), Mota et al (2019), Pires et al (2021) and Chadi and Rasha (2022), use, fundamentally, linear regression models, which allow to describe and evaluate which independent variables have explanatory power on the dependent variables. Thus, to answer the seven hypotheses previously mentioned, the following linear regression models were developed, as shown in…”