Indicators influencing performance and stability in GCC banking sector

Abstract

The main objective of this study is to identify the factors that can impact on the profitability and stability of GCC banks, using data from the period 2005-2014, to achieve GCC Vision 2030. The profitability indicators are: return on assets (ROA), return on equity (ROE), and net interest margin (NIM). In terms of stability, this can be presented through z-score and capital ratio. The statistical regressions in this study are generalised least squares (GLS) and generalised method of moments (GMM). Using both statistical indicators (GLS and GMM) is highly limited in previous studies. The main results for profitability show that stable banks are typically more profitable than instable banks. Moreover, there is a significant and positive correlation between capital ratio and profits – larger banks obtained higher returns. To achieve GCC Vision 2030, GCC banks may benefit from concentrating on lending services. Furthermore, attracting foreign direct investments can enhance banks’ profits. In contrast, outflow remittances badly affect ROA and ROE. As for the findings of stability, z-score and capital ratio impacted each other significantly and positively. Additionally, larger banks were found to be more risky when compared to smaller banks, and lending services support stability with lower insolvency risks. Finally, ROA significantly and strongly affects both stability indicators (z-score and capital ratio). Using the foreign direct investment (FDI) as an independent variable is a contribution to the performance and stability studies in banking. The result indicates that more FDI leads to better profitability in banking sector. In addition, examining the effects of outflow remittances on performance and stability adds to the knowledge. The outflow remittances decreased ROA and ROE but improve NIM significantly. In general, Islamic banks could achieve more profits (with higher insolvency risks) than conventional banks, and are found to be well-capitalised compared to conventional banks