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Determinants of bank profitability in emerging markets

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Listed:
  • Emanuel Kohlscheen
  • Andrés Murcia Pabón
  • Juan Contreras

Abstract

We analyse key determinants of bank profitability based on the evolution of balance sheets of 534 banks from 19 emerging market economies. We find that higher long-term interest rates tend to boost profitability, while higher short-term rates reduce profits by raising funding costs. We also find that in normal times credit growth tends to be more important for bank profitability than GDP growth. The financial cycle thus appears to predict bank profitability better than the business cycle. We also show that increases in sovereign risk premia reduce bank profits in a significant way, underscoring the role of credible fiscal frameworks in supporting the overall financial stability.

Suggested Citation

  • Emanuel Kohlscheen & Andrés Murcia Pabón & Juan Contreras, 2018. "Determinants of bank profitability in emerging markets," BIS Working Papers 686, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:686
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    References listed on IDEAS

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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