The Determinants of Bank Profitability and the Effects of Foreign Ownership

Awdeh, Ali (2011): The Determinants of Bank Profitability and the Effects of Foreign Ownership. Published in: Journal of Development and Economic Policies , Vol. 13, No. 2 (2011): pp. 27-55.

Abstract

We study the profitability of banks operating in Lebanon between 1996 and 2007 and examine the effect of micro- and macroeconomic variables on it. We find that foreign control deteriorates bank ROA, and foreign banks (FBs) have better profitability than banks with majority domestic ownership (MDO). Our results show that ROE and ROA are determined differently among banks. For instance, larger MDO generate higher ROE and ROA, unlike banks with majority foreign ownership (MFO) and FBs. MDO benefit from OBS activities, whereas FBs and MFO lose from this business. A negative correlation between MDO and MFO bank capital and profitability is found, but the opposite for FBs. This suggests that profitable domestic banks hold lesser capital, whereas better capitalization allows FBs to engage in more profitable (risky) businesses. Concentration and economic condition of the host market do not influence FBs, whereas MDO and MFO seem to be negatively affected by concentration, but benefit from the economic growth of the host market.

• Item Type: MPRA Paper
• Language: English
• Keywords: Bank profitability; Foreign banks.
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms

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