An examination of diversification on bank profitability and insolvency risk in 28 financially liberalized markets

Purpose This study aims to test the impacts of risk-taking behaviour, competition and cost efficiency on bank profitability in China. Design/methodology/approach A two-step generalized method of moments system estimator is used to examine the impacts of risk, competition and cost efficiency on profitability of a sample of Chinese commercial banks over the period 2003-2013. Findings The paper finds that credit risk, liquidity risk, capital risk, security risk and insolvency risk significantly influence the profitability of Chinese commercial banks. To be more specific, credit risk is significantly and negatively related to bank profitability; liquidity risk is significantly and positively related to return on assets (ROA) and net interest margin (NIM) but negatively related to return on equity (ROE); capital risk has a significant and negative impact on ROA and NIM but a positive impact on ROE; there is a significant and negative impact of security risk on bank profitability (ROA and NIM). It is found that Chinese commercial banks with higher levels of insolvency risk have higher profitability (ROA and ROE). Finally, higher competition leads to lower profitability in the Chinese banking industry, and Chinese commercial banks with higher levels of cost efficiency have lower ROA. In other words, the structure–conduct–performance paradigm rather than the efficient–structure paradigm holds in the Chinese banking industry. Originality/value This is the first paper to investigate the impact of different types of risk, including credit risk, liquidity risk, capital risk, security risk and insolvency risk, on bank profitability. This is the first study which uses more accurate measurements of efficiency and competition compared to previous Chinese banking profitability literature and which tests their impact on bank profitability. The findings not only provide a general picture on the risk, efficiency and competition conditions in the Chinese banking industry, but also give valuable information to the Chinese Government and to the banking regulatory authorities to make relevant policies.

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Sustainable Banking, Market Power, and Efficiency: Effects on Banks’ Profitability and Risk

Sustainability ◽

10.3390/su13031298 ◽

2021 ◽

Vol 13 (3) ◽

pp. 1298

Author(s):

Begoña Torre Olmo ◽

María Cantero Saiz ◽

Sergio Sanfilippo Azofra

Keyword(s):

Market Power ◽

Banking Sector ◽

Scale Efficiency ◽

New Paradigm ◽

Bank Profitability ◽

Insolvency Risk ◽

Banking Market ◽

Conventional Banks ◽

Efficiency Effects ◽

Term Performance

The financial crisis seriously damaged the reputation of the banking sector, as well as its profitability and risk of insolvency, which led many banks to adopt a sustainable approach aimed at balancing long-term goals with short-term performance pressures. This article analyses how sustainable banking practices affect the profitability and the insolvency risk of banks. Moreover, we examine how sustainable strategies determine the effects of market power and efficiency on bank profitability. We used a two-step System-GMM to analyze an unbalanced panel of 1236 banks from 48 countries over the period 2015–2019. We found that sustainable banking practices increased profitability, and market power was an important determinant of profitability among conventional banks, but not among sustainable banks. Higher levels of cost scale efficiency led to greater profitability for both sustainable and conventional banks. However, there was no significant relationship between sustainable banking and insolvency risk. These results indicate that the traditional determinants of bank profitability are not relevant in explaining the superior profits of sustainable banks, which suggests the emergence of a new paradigm related to sustainability among the drivers of bank profitability.

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Determinants of Islamic Bank Profitability: Evidence from Indonesia

Summer - GATR Journal of Finance and Banking Review ◽

10.35609/jfbr.2020.5.1(1) ◽

2020 ◽

Vol 5 (1) ◽

pp. 1-13

Author(s):

Puji Sucia Sukmaningrum ◽

Kashan Pirzada ◽

Sylva Alif Rusmita ◽

Fatin Fadhilah Hasib ◽

Tika Widiastuti ◽

...

Keyword(s):

Interest Rate ◽

Quality Management ◽

Banking Industry ◽

External Factors ◽

Islamic Banking ◽

Islamic Banks ◽

Return On Assets ◽

Internal Factors ◽

Bank Profitability ◽

Islamic Bank

Objective – Islamic Banks have a distinct advantage that is not only conduct a commercial operation, but to also conduct social operations. Therefore, Islamic Banks plays an important role in developing the Indonesian economy. The aim of this study is to investigate the impact of internal and external factors that affect the profitability of Islamic Banks in Indonesia. Methodology/Technique – The methodology of this research is multiple regression. The object of this research is the Islamic banking industry in Indonesia. Internal factors include size, liquidity, asset quality, management, and efficiency ratio. External factors include interest rate and inflation. Return on Assets is used to measure profitability. The monthly data is collected from the financial reports of Islamic Banks between 2011 to 2016. Findings – The findings show that size, liquidity, assets quality, management ratio, interest rate and inflation lead to a greater Return on Assets (profitability) in Islamic Banks in Indonesia. Efficiency however does not have a significant effect on profitability of Islamic Banks in Indonesia. Novelty – Based on the results of this research, it can be concluded that the Islamic banking industry can use those variables to improve the profitability of Islamic banks in the future. In addition, there are two variables that affect the profitability of Islamic banking industry. For the Islamic banking industry should anticipate the movement of inflation and interest to improve the profitability of Islamic banks. Type of Paper: Empirical paper. Keywords: Islamic Banks; Profitability; Internal Factors; External Factors; Indonesia. Reference to this paper should be made as follows: Sukmaningrum, P.S; Pirzada, K; Rusmita, S.A; Hasib, F.F; Widiastuti, T; Hendratmi, A. 2020. Determinants of Islamic Bank Profitability: Evidence from Indonesia, J. Fin. Bank. Review, 5 (1): pp. 01 – 13 https://doi.org/10.35609/jfbr.2020.5.1(1) JEL Classification: G21, G24.

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