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

Nimesh Salike () and Biao Ao

China Finance Review International, 2017, vol. 8, issue 2, 216-231

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.

Keywords: Asia; Bank’s profitability; Panel data; Asset quality; Impaired loan; G21; G32; C33; E44 (search for similar items in EconPapers)
Date: 2017
References: Add references at CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:cfripp:cfri-10-2016-0118

DOI: 10.1108/CFRI-10-2016-0118

Access Statistics for this article

China Finance Review International is currently edited by Professor Chongfeng Wu and Professor Haitao Li

More articles in China Finance Review International from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().