The Bank Sector Performance and Macroeconomics Environment: Empirical Evidence in Togo

Abstract

This article investigates short-run and long-run relationship between three main macroeconomic indicators (gross domestic product growth, real effective exchange rate, and inflation) and banking sector profitability (measured by return on assets and return on equity) in Togo, from 2006 to 2015, by using Pool Mean Group estimator. Results show that, in the short-run, banks’ return on assets and return on equity are not related to macroeconomic variables. But banks’ return on assets is determined positively by bank capital to assets ratio and bank size while banks’ return on equity is affected negatively by bank capital to assets ratio. However, in the long-run, real gross domestic product growth and real effective exchange rate affect negatively and statistically significant banks’ return on assets, while inflation rate has no effect. Concerning bank’s return on equity, in the long-run, results suggest that real gross domestic product growth, real effective exchange rate, and inflation affect negatively bank’s return on equity. These results imply that to stabilize bank profitability and make Togolese banking sector more resilient, policymakers and banking sector managers must, among others, try to improve real gross domestic product growth, real effective exchange rate, and inflation volatility anticipation.