Determinants of bank’s profitability: role of poor asset quality in Asia

Nimesh Salike · Biao Ao

99 citations0/0 files storedChina Finance Review International

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Banking stability, regulation, efficiency Banking Sector Performance and Management Banking Systems and Strategies

Abstract

Purpose The purpose of this paper is to study the determinants of Asian banks’ profitability with particular focus on the role of asset quality. This concern has been particularly important as the Basel III imposed more stringent requirements in banking regulation. Design/methodology/approach The paper uses fixed effect estimation for the panel data of the sample that consists of 947 banks from 12 Asian economies over the period of 2001-2015. Findings The authors find that poor asset quality (measured as impaired loans over gross loans) has a significant negative impact on banks’ profitability. Other bank-specific variables – capital adequacy, income diversification and operating inefficiency – are also important determinants. With regard to macroeconomic factors – real gross domestic product growth has most significant influence on the performance of banks. Research limitations/implications The authors also find that the banks operating in non-advanced economies enjoy higher profit margin than banks operating in advanced economies. Practical implications Although the average asset quality in Asian banks improved over the years, governments could promote more competition, particularly in non-advanced economies. Banks in the region are recommended to diversify their income by avoiding over reliance on interest income. Originality/value Although there are prior studies that looked into asset quality, in particular with regard to the European and US experience, to the best of the authors’ knowledge there is no such study that explores cross-country Asian countries. In addition, the other primary determinants of Asian banks’ profitability are investigated. Further, the authors also looked in depth at the performance of the banks in advanced and non-advanced Asian economies.

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References

2006Bank-specific, industry-specific and macroeconomic determinants of bank profitability 1999Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence 2008Bank Competition and Financial Stability 2010Determinants of Bank Profitability Before and During the Crisis: Evidence from Switzerland 2004The profitability of european banks: a cross‐sectional and dynamic panel analysis 2008The determinants of banks' profits in Greece during the period of EU financial integration 2008How Do Large Banking Organizations Manage Their Capital Ratios?2001Financial Structure and Bank Profitability

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