Macroeconomic, industry-specific and bank-specific determinants of the profitability of Brazilian banks: dynamic panel evidence

Abstract

This paper seeks to identify the effect of macroeconomic, industry-specific and bank-specific determinants on the profitability of the Brazilian banking sector. Profitability is measured by return on assets (ROA), return on equity (ROE) and economic value added (EVA). We incorporate in the analysis-independent variables of this sector that have not been considered in previous studies. To address profit persistence, we apply a dynamic panel data model and the GMM technique described by Arellano and Bover (1995) over the quarterly period from 2009Q1 to 2019Q4. The main results show that the macroeconomic variables of credit, activity and interest rate contribute to understanding the determining factors of bank profitability in Brazil. Regarding industry-specific and bank-specific determinants, the total operating expenses to total assets ratio and net interest margin are important determinants of the bank profitability, respectively. Thus, these new macroeconomic variables and industry-specific and bank-specific variables are important drivers to understand banking profitability in Brazil, as well as indicators to be monitored by the monetary authority to ensure the financial health of the banking system.