Determining factors of bank profitability: Analysis of the largest Brazilian banks in the period from 2007 to 2017

Abstract

The objective of this study is to analyze the determinants of the profitability of the Brazilian banking sector, measured by three indicators: ROA (return on assets), ROE (return on equity)and NIM (net interest margin). It has explanatory variables, selected from the literature review, specific factors of the banks and external factors, including macroeconomic variables. The sample consists of semiannual data from a panel of the ten largest banks in Brazil for the period between the first half of 2007 and the second half of 2017. The methodology used to test the five hypotheses formulated consisted in the development of a the econometric model of multiple regression and its estimation using the Least Squares (PLS) method, for fixed effects. The results generally indicate that the profitability of Brazilian banking institutions depends on the evolution of their specific variables but is also influenced to a large extent by macroeconomic determinants whose statistical significance is recurrent. The preponderance of the factors to explain the proxies of profitability (ROA, ROE and NIM) was not uniform. The factors that best explain the ROA are the asset quality and the exogenous variable of the GDP growth, while for the ROE index two internal variables are added: Financial Leverage and Efficiency. When the measure of profitability used is the NIM, the regressions show a higher overall explanatory level and the specific variables, financial leverage, asset quality, liquidity, funding cost and asset structure, show a significant influence on profitability. In addition, the Bank Concentration Index (BCI) was statistically significant, with a significant relationship between the determinants of the NIM and GDP growth, and to a lesser extent with the interest rate and inflation.