Bank-Specific and Macroeconomic Determinants of Bank Profitability: Evidence from an Oil-Dependent Economy

Abstract

This study investigated bank-specific and macroeconomic determinants of bank profitability in Azerbaijan, an oil-dependent economy in transition. A huge drop in oil prices, a significant devaluation of the national currency, and the financial distress were the main motivations of the study. We applied Panel Generalized Method of Moments to the data in the framework of dynamic model of the bank profitability. It was found that bank size, capital, and loans, as well as economic cycle, inflation expectation, and oil prices were positively related to the profitability, whereas deposits, liquidity risk, and exchange rate devaluation were negatively associated with it. We further found that the bank profitability demonstrated moderate persistence and ignoring the country-specific features could lead to bias and poor performance in estimations. The conclusions of this research would aid in setting banking policies towards increasing profitability. This may be supplemented by ensuring strong research departments within the banks tasked with analyzing and forecasting the main macroeconomic indicators. The novel features of the study include utilizing recent economic trends, accounting for country-specific features, and for the first time, examining the effects of the economic cycle on the bank profitability in Azerbaijan. In addition, the study featured proper addressing time series properties of the panel data, and performances of robustness checks for consistency of results.