Determinants of Profitability: Empirical Evidence from the Largest Global Banks

This paper examines the factors determining the profitability of the top sixteen global banks according to market capitalization. Using panel data spanning the period 1980 to 2015, this study estimates several specifications to examine the impact of bank-level and country-level variables on profitability. Fixed effects and GMM results show that bank characteristics, industry structure and macroeconomics variables are important in explaining global banks’ profitability. Bank capital and productivity increase a bank’s profitability whereas credit risk and operating efficiency reduce it. With respect to the macroeconomic indicators, higher economic growth and inflation spur banks’ profitability. The study also provides evidence on the positive impact of the business cycle on global banks’ profitability. In sum, this study concludes that bank-level factors are the most significant determinant of bank profitability. The result should be that bank managers focus greater on adjusting internal factors while adapting to external factors.