Dynamics of Profitability in the Turkish Banking Industry

Abstract

Dynamics of profitability have important implications for the market structure and competition in the banking industry. There is a well-established literature on this issue comprising non-banking industries, however research on banking is comparatively small. Moreover, there is a lack of research comprising the dynamics of profitability in the developing banking industries. Hence, this paper focuses on the Turkish banking industry to analyze both the dynamics and determinants of profitability in the Turkish banking industry over the period 2006:4-2012:2. First, two competing hypotheses, persistence of profit and competitive environment hypotheses are tested using a dynamic panel data model. Variables representing bank size, credit risk, managerial efficiency, financial soundness, market competition, monetary policy and economic freedom are also incorporated in this model to investigate the determinants of bank profitability. System Generalized Method of Moments (SGMM) is used to estimate this dynamic model. The evidence from the findings indicate the validity of the persistence of profit hypothesis. Moreover, bank profitability has been mostly affected by the capital ratio which could have further implications through the Basel III period. The results also indicate positive impact of improvement in financial soundness of banks on profitability

Keywords

• Profitability, persistence of profits, competitive environment, Turkish banking industry, dynamic panel estimation

Türk Bankacılık Sektöründe Karlılığın Dinamikleri

Abstract

Karlılık dinamiklerinin bankacılık sektöründe piyasa yapısı ve rekabet üzerinde önemli etkileri bulunmaktadır. Bu doğrultuda banka-dışı endüstrileri ele alan kapsamlı bir literatür bulunurken bankacılık endüstrisine ilişkin çalışmalar oldukça sınırlıdır. Dahası, gelişmekte olan bankacılık sektörlerine ilişkin çalışmalar da kısıtlıdır. Bu doğrultuda, bu çalışmanın amacı 2006:4-2012:2 döneminde Türk bankacılık sektöründe karlılığın dinamiklerini ve belirleyenlerini incelemektir. Öncelikle karların kalıcılığı ve rekabetçi çevre hipotezleri bir dinamik panel veri modeli aracılığıyla sınanmaktadır. Banka büyülüğü, kredi riski, yönetimsel etkinlik, finansal sağlamlık, piyasa rekabeti, para politkası ve ekonomik özgürlük değişkenleri aracılığıyla banka karlılığının belirleyenleri araştırılmaktadır. Oluşturulan dinamik panel veri modeli, Sistem Genelleştirilmiş Momentler Yöntemi (SGMY) kullanılarak tahmin edilmektedir. Elde edilen bulgular karların kalıcılığı hipotezinin geçerliliğini desteklemektedir. Bunun yanı sıra banka karlılığının en çok Basel III sürecinde de önemli rol oynayabilecek sermaye oranından etkilendiği görülmektedir. Finansal sağlamlığın banka karlılığı üzerindeki olumlu etkisi de çalışmanın bir diğer önemli bulgusu olarak öne çıkmaktadır

Keywords

• Karlılık, karların kalıcılığı, rekabetçi çevre, Türk bankacılık sektörü, dinamik panel tahmini

References

1. Abreu, M. ve Mendes, V. (2002) “Commercial Bank Interest Margins and Profitability: Evidence from E.U. Countries” Working Paper Series.
2. Agostino, M., Leonida, L. ve Triveri, F. (2005) “Profits Persistence and Ownership: Evidence from the Italian Banking Sector” Applied Economics, 37(14):1615-1621.
3. Anderson, T.W. ve Hsiao, C.(1981) “Estimation of Dynamic Models with Error Components” Journal of the American Statistical Association, 76:598-606.
4. Anderson, T.W. ve Hsiao, C. (1982) “Formulation and Estimation of Dynamic Model Using Panel Data” Journal of Econometrics, 18:47-82.
5. Arellano, M. ve Bover, O. (1995) “Another Look at the Instrumental Variable Estimation of Error-Component Models” Journal of Econometrics, 68: 29–51.
6. Arellano, M. ve Bond, S. (1991) “Some Test of Specification for Panel Data: Monte Carlo Evidence and Application to Employment Equations” Review of Economic Studies, 58:277-297.
7. Bain, J.S.(1951) “Relation of Profit Ratio to Industry Concentration: American Manufacturing 1936-1940” Quarterly Journal of Economics, 65:293-324.
8. Barros, C. P., Ferreira, C. ve Williams, J. (2007) “Analysing the Determinants of Performance of Best and Worst European Banks: A Mixed Logit Approach” Journal of Banking and Finance, 31:2189-2203.

9. Bektas, E. (2007) “The Persistence of Profis in the Turkish Banking System” Applied Economics Letters, 14(3):187-190.
10. Berger, A.N., Seth, D.B., Covitz, D.M. ve Hancock, D. (2000) “Why Are Bank Profits So Persistent? The Roles of Product Market Competition, Informational Opacity, and Regional/Macroeconomic Shocks” Journal of Banking and Finance, 24:1203-1235.
11. Blundell, R. ve Bond, S. (1998) “Initial Conditions and Moment Restrictions in Dynamic Panel Data Models” Journal of Econometrics, 87:115-143.
12. Bourlakis, C.A. (1997) “Testing the Competitive Environment and the Persistence of Profits Hypotheses” Review of Industrial Organization, 12:203-218.
13. Boyd, J.H. ve Graham, S.L. (1986) “Risk, Regulation, and Bank Holding Company Expansion into Nonbanking” Federal Reserve Bank of Minneapolis Quarterly Review, 10:2-17.
14. Brissimis, S.N. ve Delis, M.D. (2010) “Bank Heterogeneity and Monetary Policy Transmission” European Central Bank Working Paper Series, No:1233.
15. Brozen, Y. (1970) “The Antitrust Task Force Deconcentration Recommendation” Journal of Law and Economics, 13:279-292.
16. Brozen, Y. (1971a) “Bain’s Concentration and Rates of Return Revisited” Journal of Law and Economics, 14:351-369.
17. Brozen, Y. (1971b) “Concentration and Structural and Market Disequilibria” Antitrust Bulletin, 16:241-248.
18. Cable, J.R. ve Gschwandtner, A. (2008) “On Modelling the Persistence of Profits in the Long Run: A Test of the Standard Model for 156 US Companies, 1950-99” International Journal of the Economics of Business, 15(2):245-263.
19. Demirguc, A. ve Huizinga, H. (1999) “Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence” World Bank Economic Review, 13(2):379-408, May.
20. Demirgüç-Kunt A, Detragiache E, ve Tressel, T. (2006) “Banking on the Principles: Compliance with Basel Core Principles and Bank Soundness” International Monetary Fund Working Paper Series, No:06/242.
21. Demsetz, H. (1974) “Two Systems of Belief About Monopoly,” Goldschmid et al(eds.) Industrial Concentration: The New Learning, Boston, Little, Brown and Co. Elsas, R., Hackethal, A. ve Holzhäuser, M. (2010) “The Anatomy of Bank Diversification” Journal of Banking and Finance, 34:1274-1287.
22. Geroski, P.A. ve Jacquemin, A. (1988) “The Persistence of Profits: A European Comparison” Economic Journal, 98(391):375-89.
23. Glen, J., Lee, K. ve Singh, A. (2001) “Persistence of Profitability and Competition in Emerging Markets: A Time Series Analysis” Economic Letters, 72:247-253.
24. Glen, J., Lee, K. ve Singh, A. (2003) “Corporate Profitability and the Dynamics of Competition in Emerging Markets: A Time Series Analysis” Economic Journal, 113:465-484.
25. Goddard, J.A. ve Wilson, J.O.S. (1996) “Persistence of Profits for UK Manufacturing and Service Sector Firms” Service Industries Journal, 16:105-117.
26. Goddard, J. ve Wilson, J.O.S. (1999) “Persistence of Profit: A New Empirical Interpretation” International Journal of Industrial Organization, 17:663-687.
27. Goddard, J., Liu, H., Molyneux, P. ve Wilson J.O.S. (2004) “The Profitability of European Banks: A Cross Sectional and Dynamic Panel Analysis” The Manchester School, 72:363-381.
28. Goddard, J., Liu, H. ve Molyneux, P. (2010) “Do Bank Profits Converge?” European Financial Management, doi:10.1111/j.1468-06X.2010.00578.x.
29. Goddard, J., Liu, H., Molyneux, P. ve Wilson J.O.S. (2011) “The Persistence of Bank Profit” Journal of Banking and Finance 35:2881-2890.
30. Griliches, Z. ve Hausman, J.A. (1986) “Errors in Variables in Panel Data” Journal of Econometrics, 31:93- 118.
31. Gschwandtner, A. (2005) “Profit Persistence in the Very Long Run: Evidence from Survivors and Exiters” Applied Economics, 37(7):793-806.
32. Hassan, M.K. ve Bashir A-H.M. (2003) “Determinants of Islamic Banking Profitability” Paper presented at the Economic Research Forum (ERF) 10th Annual Conference, 16-18 December, Marrakesh, Morocco.
33. Holtz-Eakin, D., Newey, W. ve Rosen, H.S. (1988) “Estimating Vector Autoregressions with Panel Data” Econometrica, 56:1371-1395.
34. Iskenderoglu, O., Aslan, A. ve Ozturk, I. (2011) “Persistence of Profit in Turkish Banking Firms: Evidence from Panel LM tests” Actual Problems of Economics, 10:429-434.
35. Kaplan, M. ve Celik, T. (2008) “The Persistence of Profitability and the Competition in the Turkish Banking Sector” Erciyes Universitesi Iktisadi İdari Bilimler Fakultesi Dergisi, 30: 157-167.
36. Karim, M.Z.A. ve Chan, S.G. (2007) “Off Balance Sheet Activites and Performance of Commercial Banks in Malaysia” 5(4):67-80.
37. Kirkulak-Uludag, B. ve Gokmen, H. (2011) “Türk Bankacılık Sektörünün Karlılığının Dinamik Yaklaşımla Test Edilmesi” İktisat, İşletme ve Finans, 26(208):71-95.
38. Kolapo, T.F., Ayeni, R.K. ve Oke, M.O. (2012) “Credit Risk and Commercial Banks’ Performance in Nigeria: A Panel Model Approach” Australian Journal of Business and Management Research, 2(2):31-38.
39. Levonian, M.E. (1994) “The Persistence of Bank Profits: What the Stock Market Implies” Economic Review, Federal Reserve Bank of San Francisco, 2:3-17.
40. Lozano-Vivas, A. ve Pasiouras, F. (2010) “Bank Productivity Change and Off-Balance-Sheet Activities Across Different Levels of Economic Development” Technical University of Crete, Financial Engineering Laboratory, Working Paper Series No:2010.02.
41. Marayuma, N. ve Odagiri, H. (2002) “Does the Persistence of Profits Persist? A Study of Company Profits in Japan, 1964-1997” International Journal of Industrial Organization, 20: 1513-1533.
42. Mercieca, S., K. Schaeck, ve Wolfe, S. (2007) “Small Banks in Europe: Benefits from Diversification?” Journal of Banking and Finance, 31:1975-98.
43. Mueller, D.C. (1977) “The Persistence of Profits above the Norm” Economica, 44:369-380.
44. Mueller, D.C. (1986) Profits in The Long Run, Cambridge University Press, Cambridge.
45. Naceur, B.S. ve Goaied, M. (2001) “The Determinants of the Tunisian Deposit Banks’ Performance” Applied Financial Economics, 11(3):317-319.
46. Panzar, J. C. ve Rosse, J. N. (1987) “Testing for Monopoly Equilibrium” Journal of Industrial Economics, 35(4):443-456.
47. Schaeck, K. ve Cihak, M. (2008) “How Does Competition Affect Efficiency and Soundness in Banking? New empirical evidence” European Central Bank, Working Paper Series, No: 932.
48. Stiroh, K.J. (2004a) “Do Community Banks Benefit from Diversification?” Journal of Financial Services Research, 25(2/3):135-160.
49. Stiroh, K.J. (2004b) “Diversification in Banking: Is Noninterest Income the Answer” Journal of Money, Credit, and Banking, 36 (5):853-882.
50. Waring, G.F. (1996) “Industry Differences in the Persistence of Firm-Specific Returns” American Economic Review, 86(5):1253-1265.