Profitability determinants : empirical evidence from the banking sector

Abstract

This research study empirically examines a set of carefully chosen profitability determinants for a sample of 50 banks operating in different countries across the EU, America, Asia, Africa and Australia from 2007 to 2021. Two types of data methods were employed; a multiple linear regression model was used to identify the impact of the variables on each bank separately, and then a panel data regression model (two-level random intercept model) was used to provide a conclusion on the determinants and their relationship with bank’s profitability. The outcomes of the multiple linear regression demonstrate a consistent negative relation between bank size and bank profitability in all three instances of profitability assessments. ROAA and NIM have a positive relationship with capital adequacy. However, there is a negative relationship between capital adequacy and ROAE. Management efficiency has a negative relationship with both ROAA and ROAE. Management efficiency, on the other hand, has a positive relationship with NIM, contrary to predictions. Finally, ROAA and NIM have a positive association with liquidity risk, whilst ROAE has a negative relationship with liquidity risk. The panel data regression results, show that there is no correlation between bank size and ROAE, but there is a negative relationship between bank size and ROAA and/or NIM. Capital adequacy has a positive association with ROAA and NIM but has no influence on ROAE. Furthermore, there are no associations between management efficiency and ROAA, ROAE, and/or NIM. Finally, there is no link between liquidity risk and NIM, but there is a negative link between liquidity risk and ROAA and ROAE.