An Empirical Analysis of Commercial Bank Profitability in Financially Liberalized Markets

Chapter 1 of the dissertation investigates the determinants of bank interest margin (NIM) and noninterest income (NII) using a system estimation approach for all commercial banks in a group of 28 financially liberalized countries during the period between 1997 and 2004. The empirical results generally suggest that NIM is directly influenced by operating costs, risk aversion, credit risk, the interaction between interest rate risk and bank risk, bank size, volume of credit, and NII. NIM is negatively related to interest rate risk and capital adequacy. NII is found to correlate positively with NIM, total assets, credit risk, liquidity risk, overhead expenses, and pre-tax profit. The study also finds that NII is inversely related to the level of bank deposits and interest rate risk. The influence of bank concentration on NIM and NII is positive, but generally insignificant. Chapter 2 analyzes the factors that influence two popular bank performance measures: return on equity (ROE) and pre-tax operating income (PTOIAA). Another objective is to test whether the Structure-Conduct-Performance hypothesis holds in a period when banks are increasingly relying on profits from nontraditional activities. Overall, the study finds that both ROE and PTOIAA are positively related to capital adequacy and non-interest income. PTOIAA is directly influenced by non-interest expenses and credit risk. Bank size does not appear to have an impact on ROE and PTOIAA. NII is an increasing function of both ROE and PTOIAA. There appears to be a net gain in overall bank performance associated with banks\u27 increasing involvement in nontraditional activities. Finally, bank market share has no significant impact on ROE or PTOIAA