The Determinants of Bank Profitability: A Study of the Turkish Banking Sector

This study examines the influence of both bank-specific and macroeconomic factors on bank profitability, focusing on the Istanbul Stock Exchange (BIST) banking sector from 2005 to 2023. Consistent with the established literature, it explores various potential determinants of bank profitability at both sectoral and macroeconomic levels. The analysis employs two primary measurements of bank profitability: Return on Assets (ROA) and Return on Equity (ROE). Additionally, it considers macroeconomic factors such as interest rates, GDP, and inflation, along with sectoral control variables including loans, capital adequacy, and bank size. The research incorporates diagnostic tests for unit roots across each series in the panel, as well as for cross-dependence and cointegration. Various methodologies are utilized, including Ordinary Least Squares (OLS), fixed and random effects, and year dummies for enhanced precision. To achieve robust results, this study encompasses one of the broadest time spans in the field and systematically addresses issues related to stationarity, collinearity, and year and sector fixed effects. Given the presence of cross-dependency and non-stationarity in the models, a second-generation Autoregressive Distributed Lag (ARDL) model was employed. Consequently, the study utilizes the Common Correlated Effects Mean Group (CCEMG) and the Augmented Mean Group (AMG) estimator. The findings yield valuable insights that align with existing literature regarding the relationship between bank profitability and its short- and long-term determinants. The analysis reveals that the long-term outcomes concerning the relationship between micro and macro determinants of bank profitability are somewhat constrained. However, in the short term, significant factors influencing bank profitability include capital adequacy, bank size, and GDP, regardless of whether performance is assessed through ROA or ROE. To the best of our knowledge, this study represents one of the longest time spans in the field, rigorously accounting for stationarity, collinearity, and both year and sector fixed effects. A limitation of this study is the restricted availability of data for specific banks.