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Dynamics of Profitability in the Turkish Banking Industry

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  • Evrim TURGUTLU

    ()
    (Dokuz Eylul University, Faculty of Business and Administrative Sciences, Department of Economics)

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    Abstract

    Dynamics of profitability have important implications for the market structure and competition in the banking industry. There is a well-established literature on this issue comprising non-banking industries, however research on banking is comparatively small. Moreover, there is a lack of research comprising the dynamics of profitability in the developing banking industries. Hence, this paper focuses on the Turkish banking industry to analyze both the dynamics and determinants of profitability in the Turkish banking industry over the period 2006:4-2012:2. First, two competing hypotheses, persistence of profit and competitive environment hypotheses are tested using a dynamic panel data model. Variables representing bank size, credit risk, managerial efficiency, financial soundness, market competition, monetary policy and economic freedom are also incorporated in this model to investigate the determinants of bank profitability. System Generalized Method of Moments (SGMM) is used to estimate this dynamic model. The evidence from the findings indicate the validity of the persistence of profit hypothesis. Moreover, bank profitability has been mostly affected by the capital ratio which could have further implications through the Basel III period. The results also indicate positive impact of improvement in financial soundness of banks on profitability.

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    Bibliographic Info

    Article provided by Ege University Faculty of Economics and Administrative Sciences in its journal Ege Academic Review.

    Volume (Year): 14 (2014)
    Issue (Month): 1 ()
    Pages: 43-52

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    Handle: RePEc:ege:journl:v:14:y:2014:i:1:p:43-52

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    Web page: http://iibf.ege.edu.tr/ENG/
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    Related research

    Keywords: Profitability; persistence of profits; competitive environment; Turkish banking industry; dynamic panel estimation.;

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    References

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    1. John Goddard & Hong Liu & Phil Molyneux & John O.S. Wilson, 2010. "Do Bank Profits Converge?," Working Papers 10004, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    2. Mohd. Zaini Abd Karim & Chan Sok Gee, 2007. "Off-Balance Sheet Activities and Performance of Commercial Banks in Malaysia," The IUP Journal of Financial Economics, IUP Publications, vol. 0(4), pages 67-80, December.
    3. Panzar, John C & Rosse, James N, 1987. "Testing for "Monopoly" Equilibrium," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 443-56, June.
    4. Adelina Gschwandtner, 2005. "Profit persistence in the 'very' long run: evidence from survivors and exiters," Applied Economics, Taylor & Francis Journals, vol. 37(7), pages 793-806.
    5. Waring, Geoffrey F, 1996. "Industry Differences in the Persistence of Firm-Specific Returns," American Economic Review, American Economic Association, vol. 86(5), pages 1253-65, December.
    6. Mueller,Dennis C., 1986. "Profits in the Long Run," Cambridge Books, Cambridge University Press, number 9780521306935, October.
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