Factors explaining the profitability of the banking sector: empirical evidence in Portugal

Abstract

The current economic situation in which the financial system has been showing divergent returns in recent years has led to the development of themes related to the study of factors explaining the profitability of the banking sector. Thus, the main objective was to analyze and determine the explanatory variables in the profitability of financial institutions operating in Portugal, as provided by the profitability of their assets. In the empirical study it was used a sample of 29 Portuguese banks and the estimated results were obtained by using the econometric method OLS and were related to the period from 2002 to 2012. Results suggest that the variables concentration, capital ratio, debt ratio and credit and accrued interest proved to be statistically significant in the banking profitability explanation. Therefore, there seems to be a positive relationship between the degree of concentration of the Portuguese banking system and its profitability. In turn, there is an inverse relationship between the capital ratio of banks, debt ratio and credit and accrued interest and their profitability. However macroeconomic variables, inflation and gross national product, as well as the solvency ratio did not show statistically significant in explaining bank profitability in Portugal.