Do rising interest rates matter for bank profitability? Evidence from Portuguese banks
Article Sidebar
Main Article Content
Abstract
The purpose of this paper is to analyse the profitability determinants of seventeen banks operating in Portugal from 2013 to 2023. The banking market has changed significantly, particularly since 2021, when Euribor grew rapidly to control inflation target. Methodologically, a hypothetical-deductive approach was used based on panel data collected from banks' published accounts. To generate results, grouped ordinary least squares were applied, as the Breusch-Pagan test confirms homoscedasticity, an essential assumption in this regression model. Internal variables considered include credit quality, capital adequacy, management quality, financial margin, and bank size, alongside an external variable, the Euribor. The findings reveal that credit risk, capital adequacy, management capacity, and Euribor are the most statistically significant for both return on equity and return on assets, with Euribor emerging as the greatest statistically significant variable. The analysis of Euribor as an explanatory variable represents the key contribution of this study relative to the existing and reviewed literature.
Keywords:
Downloads
Article Details
References
Adem, M. (2023). The impact of macroprudential policy and political institutions on bank credit risk in Ethiopia: A dynamic ordinary least squares analysis. Cogent Business & Management, 10(1), 1-20. https://doi.org/10.1080/23311975.2023.2257829 DOI: https://doi.org/10.1080/23311975.2023.2257829
Akther, T., Rahman, M., & Rahman, M. M. (2023). Factors influencing commercial bank profitability in Bangladesh: A panel data approach. Future Business Journal, 9(66). https://doi.org/10.1186/s43093-023-00247-8 DOI: https://doi.org/10.1186/s43093-023-00247-8
Banco de Portugal. (2023). Relatório de Estabilidade Financeira. Banco de Portugal. https://bpstat.bportugal.pt/
BCBS. (2013). Basel III: The liquidity coverage ratio and liquidity risk monitoring. BIS.
BCBS. (2014). Basel III: The net stable funding ratio. BIS. https://doi.org/10.5089/9781498346498.001 DOI: https://doi.org/10.5089/9781498346498.001
BCBS. (2017). Basel III: Finalising post-crisis reforms. BIS.
Boto-García, D., Álvarez, A., & Pino, J. F. (2021). The effect of Euribor on banking profitability: Evidence from the Spanish banking system. European Journal of Government and Economics, 10(1), 5-29. https://doi.org/10.17979/ejge.2021.10.1.7083 DOI: https://doi.org/10.17979/ejge.2021.10.1.7083
Breusch, T. S., & Pagan, A. R. (1979). A simple test for heteroscedasticity and random coefficient variation. Econometrica, 47, 1287-1294. https://doi.org/10.2307/1911963 DOI: https://doi.org/10.2307/1911963
Carvalho, J. F., & Ribeiro, A. (2016). Factors explaining the profitability of the banking sector: Empirical evidence in Portugal. Estudos do ISCA, IV(13), 1-11. https://doi.org/10.34624/ei.v0i13.4729
Chukwuogor, C., Anoruo, E., & Ndu, I. (2021). An empirical analysis of the determinants of the U.S. banks' profitability. Banks and Bank Systems, 16(4), 209-217. https://doi.org/10.21511/bbs.16(4).2021.17 DOI: https://doi.org/10.21511/bbs.16(4).2021.17
Dogan, M., & Yildiz, F. (2022). Testing the factors that determine the profitability of banks with a dynamic approach: Evidence from Turkey. Theoretical and Applied Economics, XXIX(1), 215-232. https://doi.org/10.2478/jcbtp-2023-0010 DOI: https://doi.org/10.2478/jcbtp-2023-0010
European Central Bank. (2024). Overview of monetary policy and markets. Monetary policy & markets. https://www.ecb.europa.eu/mopo/html/index.en.html
Fox, J., & Monette, G. (1992). Generalized collinearity diagnostics. Journal of the American Statistical Association, 87, 178-183. https://doi.org/10.1080/01621459.1992.10475190 DOI: https://doi.org/10.1080/01621459.1992.10475190
Haddad, H., Al-Qudah, L., Almansour, B., & Rumman, N. (2019). Bank specific and macroeconomic determinants of commercial bank profitability in Jordan from 2009–2019. Montenegrin Journal of Economics, 18(4), 155-166. https://doi.org/10.14254/1800-5845/2022.18-4.13 DOI: https://doi.org/10.14254/1800-5845/2022.18-4.13
Ho, T. H., Nguyen, D. T., Luu, T. B., Le, T. D., & Ngo, T. D. (2023). Bank performance during the COVID-19 pandemic: Does income diversification help? Journal of Applied Economics, 26(1), 1-22. https://doi.org/10.1080/15140326.2023.2222964 DOI: https://doi.org/10.1080/15140326.2023.2222964
Jadah, H. M., Alghanimi, M. H., Al-Dahaan, N. S., & Al-Husainy, N. H. (2020). Internal and external determinants of Iraqi bank profitability. Banks and Bank Systems, 15(2), 79-93. https://doi.org/10.21511/bbs.15(2).2020.08 DOI: https://doi.org/10.21511/bbs.15(2).2020.08
Jílková, P., & Kotěšovcová, J. (2022). Profitability management: How can macro and microeconomic determinants influence commercial bank profitability in the EU-27? TEM Journal, 11(3), 1300-1307. https://doi.org/10.18421/TEM113-39 DOI: https://doi.org/10.18421/TEM113-39
Kasanaa, E., Chauhanb, K., & Sahoo, B. P. (2023). Policy interest rate and bank profitability—Scheduled commercial banks in India. Financial Markets and Banks, 27(1), 138-149. https://doi.org/10.26794/2587-5671-2023-27-1-138-149 DOI: https://doi.org/10.26794/2587-5671-2023-27-1-138-149
Koenker, R. (1981). A note on studentizing a test for heteroscedasticity. Journal of Econometrics, 17(1), 107-112. https://doi.org/10.1016/0304-4076(81)90062-2 DOI: https://doi.org/10.1016/0304-4076(81)90062-2
Kotte, S., Reddy, I. L., & Bolagani, S. (2022). Influence of bank-specific and macroeconomic factors on the profitability of Indian commercial banks. The IUP Journal of Applied Economics, 21(4), 59-76.
Kozak, S., & Wierzbowska, A. (2022). Did the COVID-19 pandemic amplify the positive impact of income diversification on the profitability of European banks? Equilibrium - Quarterly Journal of Economics and Economic Policy, 17(1), 11-29. https://doi.org/10.24136/eq.2022.001 DOI: https://doi.org/10.24136/eq.2022.001
Lamothe, P., Delgado, E., Solano, M. A., & Fernández, S. M. (2024). A global analysis of bank profitability factors. Humanities & Social Sciences Communications, 11(124), 1-12. https://doi.org/10.1057/s41599-023-02545-6 DOI: https://doi.org/10.1057/s41599-023-02545-6
Lekpek, A., & Šabotić, Z. (2023). The impact of economic trends on bank profitability: The case of Serbia and Croatia. TEME, XLVII(2), 317-336. https://doi.org/10.22190/TEME210614021L DOI: https://doi.org/10.22190/TEME210614021L
Martinho, R., Oliveira, J., & Oliveira, V. (2024). Bank profitability and macroeconomic factors. Banco de Portugal. https://www.bportugal.pt/en/paper/bank-profitability-and-macroeconomic-factors
Mashamba, T., & Chikutuma, C. N. (2023). Determinants of bank profitability: Evidence from the emerging economy. Corporate & Business Strategy Review, 4(4), 310-323. https://doi.org/10.22495/cbsrv4i4siart12 DOI: https://doi.org/10.22495/cbsrv4i4siart12
Mota, C., Silva, E. S., & Silva, B. (2019). Determinantes da rentabilidade bancária: Evidências para os maiores bancos portugueses. European Journal of Applied Business Management, 5(2), 78-96. https://doi.org/10.58869/EJABM DOI: https://doi.org/10.58869/EJABM
Neves, M. E., Proença, C., & Dias, A. (2020). Bank profitability and efficiency in Portugal and Spain: A non-linearity approach. Journal of Risk and Financial Management, 13(284), 1-19. https://doi.org/10.3390/jrfm13110284 DOI: https://doi.org/10.3390/jrfm13110284
Nunes, P. (2021). The determinants of bank profitability: Evidence from Portugal [Master’s thesis, Universidade Católica Portuguesa].
Petria, N. C. (2015). Determinants of banks' profitability: Evidence from E.U. 27 banking systems. Procedia Economics and Finance, 20, 518-524. https://doi.org/10.1016/S2212-5671(15)00104-5 DOI: https://doi.org/10.1016/S2212-5671(15)00104-5
Pires, C., Basílio, M., & Borralho, C. (2021). Determinants of Portuguese banks' profitability: An update. Tourism & Management Studies, 17(3), 63-70. https://doi.org/10.18089/tms.2021.170305 DOI: https://doi.org/10.18089/tms.2021.170305
Puci, J., Draci, P., Demi, A., & Merja, Z. (2023). An assessment of bank profitability: Evidence from Albania. International Journal of Applied Economics, Finance and Accounting, 16(1), 86-96. https://doi.org/10.33094/ijaefa.v16i1.924 DOI: https://doi.org/10.33094/ijaefa.v16i1.924
Qehaja-Keka, V., Ahmeti, S., & Aliu, M. (2023). Bank profitability determinants: Evidence from Kosovo and Albania. Journal of Liberty and International Affairs, 9(2), 85-97. https://doi.org/10.47305/JLIA2392370qk DOI: https://doi.org/10.47305/JLIA2392370qk
Shahin, R., Khalil, M., & Sallam, H. (2022). The nexus between interest rate and bank profitability: Does bank prudential capital matter? Banks and Bank Systems, 17(2), 113-123. https://doi.org/10.21511/bbs.17(2).2022.10 DOI: https://doi.org/10.21511/bbs.17(2).2022.10
Son, N. N. (2024). Analyze the impact of factors on Vietnam banks' net interest margin: A panel data approach. Journal of Infrastructure, Policy and Development, 8(3), 1-18. https://doi.org/10.24294/jipd.v8i3.2796 DOI: https://doi.org/10.24294/jipd.v8i3.2796
Yuan, D., Gazi, M. A., Harymawan, I., Dhar, B. K., & Hossain, A. I. (2022). Profitability determining factors of banking sector: Panel data analysis of commercial banks in South Asian countries. Frontiers in Psychology, 13, 1-17. https://doi.org/10.3389/fpsyg.2022.1000412 DOI: https://doi.org/10.3389/fpsyg.2022.1000412