Determinants of profitability in the Portuguese banking sector

: panel evidence from the period 2015-2023

Abstract

The present Dissertation revisits the main determinants of bank profitability in the context of the Portuguese banking sector. For this purpose, the research engages a balanced panel dataset comprising half-yearly observations of the six largest Portuguese commercial banks covering the period 2015-2023. Bank-specific, industry-specific, and macroeconomic variables were selected after critically reviewing the existing academic literature. All data were retrieved from publicly available sources, namely the banks consolidated financial reports, Bpstat, and Instituto Nacional de Estatística. The first difference technique is applied across the whole panel to ensure stationary dependent and independent variables. After the Hausman specification test deemed the Random Effects approach as efficient, three econometric regressions - one for each dependent variable: ROAE, ROAA, and PBT - were estimated using the PANEL EGLS estimator with cluster-robust standard errors. The baseline findings for bank-specific predictors are generally in line with the existing empirical research: (i) the Equity-to-Assets ratio (capitalization) and Size are positively correlated with bank performance, whereas (ii) the Loan Loss Provisions (credit risk) and Cost-to-income ratio (operating efficiency) have the opposite effect on profitability. The control variables have weak to no effect on the dependent variables. Once the baseline findings are obtained, further three robustness checks are performed to corroborate the overall stability of the baseline findings, namely for: (i) the Random Effects model; (ii) a different solvency-related independent variable; and (iii) the pre-pandemic subsample.

Date of Award	17 Oct 2024
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Diptes Bhimjee (Supervisor)