The internal factors affecting the profitability of the Turkish commercial banks: A panel data analysis of 2005-2016 period

Banks are one of the most important financial institutions in the financial system, which play a crucial role in the collecting of deposits and disbursement of credit among the various sectors of the economy. Banks serve the vital intermediary role in a market-oriented economy and have been seen as the key of investment and growth. This thesis investigates internal factors that influence the profitability of commercial banks in Turkey. The CAMELS variables have identified the major aspect of the profitability of the commercial banks of Turkey by taking into consideration the capital adequacy, asset quality ratio, management quality ratio, earning ability ratio, liquidity ratio and sensitivity to market risk ratios. Return on asset, return on equity and net interest margin have been considered as the profitability measure's factors (independent variables). We also used two control variables (age and asset size) to assess the effect of CAMELS variables on banks' profitability. In this regard, we have analyzed the performance of 23 commercial banks traded in Turkey for the period of 2005-2016 using CAMELS. The study also employs panel data models to analyze the impact of CAMELS variables on ROA, ROE and NIM. The findings show that all profitability indicators influenced by capital adequacy ratio and costs to income ratio. Banks that have strong capital ratio also have higher ROA and ROE. On the other hand, an excessive increase in the leverage can be resulted as a decrease in the profitability of commercial banks. We recommend for the banking industry to have enough capital adequacy ratio to run the business and to boast their profitability. They should also improve their quality of credits and assets and ensure that their assets are more of performing rather than non-performing assets. As well, commercial banks must increase the ability of the management to control the cost and increase incomes for achieving their higher profit targets. Moreover, deficit in the Exchange position has a negative impact on profitability. Therefore, commercial banks must avoid from exchange risk.