Determinants of Bank Profitability: Bank-Specific Dynamics and Macroeconomic Effects

This study examines the determinants of profitability in the Turkish banking sector using monthly sector-level data for the period 2010M01–2025M11. Return on assets (ROA) and return on equity (ROE) are employed as dependent variables representing bank profitability. The explanatory variables consist of bank-specific factors, including operational efficiency, bank size, reserve requirement ratio, net interest margin, loan portfolio size, capital adequacy ratio, and non-performing loans ratio, as well as macroeconomic factors such as industrial production, money supply growth, inflation, exchange rate, and country risk premium. To control for the effects of the pandemic, a COVID dummy variable covering the period 2020M03–2021M06 is included in the models. Since the variables exhibit mixed orders of integration, the ARDL bounds testing approach is employed; after confirming the long-run relationship, long-run coefficients and short-run dynamics are estimated within an error correction model (ECM) framework. The findings indicate that both ROA and ROE are negatively affected by operational inefficiency and the non-performing loans ratio, while net interest margin, bank size, and capital adequacy ratio have positive effects in both the short and long run. On the macroeconomic side, industrial production increases profitability, whereas inflation, exchange rate depreciation, and rising CDS premiums reduce profitability. The COVID period also has a significant and negative effect on both profitability indicators. The main contribution of this study is to jointly examine bank-specific and macroeconomic determinants using monthly data for the Turkish banking sector and to analyze the short- and long-run effects on both ROA and ROE within the same framework.