Determinants of Bank Profits and Net Interest Margins in East Asia and Latin America

Abstract

This paper identifies the determinants of bank profits and net interest margins using a balanced panel of 167 banks for the period of 2003-2008. Of the 167 banks, 78 banks represent East Asia, while the balance of 89 banks represents Latin America. Our fixed effects regression model strongly indicates that gross domestic product, bank concentration and inflation have weak influence on bank profitability while bank size, capital adequacy, liquidity ratio, cost-income ratio and loan loss reserves are statistically significant. Bank-unique characteristics rather than macroeconomic variables seem to explain a substantial part of within-country variation in bank profits and net interest margins.

Keywords: bank profits, East Asia, Latin America, bank-unique factors, macroeconomic factors, net interest margins, return on assets, concentration ratio

JEL Classification: G21, D21