Determinants of Banking Sector Profitability: Empirical Evidence from Palestine

The objective of this study is to examine the impact of bank-specific and major macroeconomic factors on the profitability of banking sector of Palestine by using the aggregate bank balance sheet data over the time period 1995-2015. This paper employs the Ordinary Least Square method to investigate the effect of bank’s asset size, capital, loans, deposits, economic growth and inflation on key bank profitability indicators, i.e., return on assets (ROA), return on equity (ROE) and net interest margin (NIM), separately. The main findings show that size has positive impact on ROE. Capital is positively related to ROA. Loans are positively correlated with both ROA and ROE. Deposits are negatively related to both ROA and ROE. Also, it is found that neither internal nor external factors have significant impact on NIM, despite the fact that overall internal and external factors have a significant effect as denoted by F-statistics value. Moreover, banking sector has not benefited significantly from both the inflationary environment and economic growth. These findings are of value to both academicians and policy makers