The profitability of banking sectors in the Asia-Pacific region and their contributions to economic growth

Abstract

The banking sector plays an important role in national economies by directing funds from savers to investors who create additional wealth in the economy. Dietrich and Wanzenried (2011) argue that a country’s economic activities cannot run smoothly if its banking sector is not efficient. Athanasoglou, Brissimis, and Delis (2008) argue that a profitable banking sector is necessary to overcome economic shocks. This study focuses on ten countries in the Asia-Pacific region which are at different stages of economic development. These countries are of particular interest because of their institutional and regulatory characteristics. The banks in these countries are all subject to similar regulations. For example, they are required to maintain minimum capital adequacy ratios according to the Basel Accords. Furthermore, banks in most of the countries are required to maintain certain proportions of their deposits as cash reserves that cannot be lent out. Based on their stage of economic development, each of the ten countries is classified as belonging to one of three categories: small emerging economies, large emerging economies and developed economies. Our study focuses on two important aspects of the banking sector. First, we investigate the extent to which profitable banks make a positive contribution to economic growth. Second, we investigate the determinants of bank profitability. The first part of the thesis investigates the relationship between the profitability of banks and economic growth. In order to investigate this relationship, we use data from ten countries in the Asia-Pacific region for the period from 2004 to 2014. In order to address the research questions, we use different econometric techniques such as linear regressions, nonlinear regressions and Granger causality tests. Our results highlight that a profitable banking sector is an important contributor to economic growth. In contrast to our expectations, we find a negative relationship between the size of the banking sector and economic growth. Further, we find that the influence of bank profitability on economic growth decreases when the size of the banking sector increases. The results of our causality tests suggest that causality runs from bank profitability to economic growth but economic growth also has a delayed feedback on bank profitability. The second part of this thesis has four empirical chapters that focus on the factors influencing the profitability of banks. First, we investigate the determinants of the profitability of banks in all countries together. Second, we identify the factors influencing the profitability of Islamic and conventional banks in small emerging economies. Third, we investigate the factors affecting the profitability of banks in large emerging markets, and finally, we investigate the determinants of the profitability of banks in developed economies. We use annual data sets of banks for the period from 2004 to 2014 which was gathered from different sources. We use different econometric techniques such as linear regressions and Wald tests to address the research questions. Overall, our results suggest that credit quality, bank size, capital adequacy ratio and cost management are the key factors influencing the profitability of banks in the Asia-Pacific. Cost-efficient banks with superior credit quality are more profitable than their competitors. We find that the impacts of some of the variables vary across regions and countries.