The effects of micro and macro variables on profitability in the banking sector: An application on The Turkish banking sector

Turkish banks are an integral part of the national economy. They constitute an important factor in terms of economic stability with the changes they effect in macroeconomic factors, with the profitability of the banking sector, their balance sheets and equities and their financial performances. The aim of this study is to investigate the effects of macro economic and bank-based factors on the profitability of the groups in the banking sector. Moreover, the model included how the increased expenses on advertisement, driven by a more and more competitive industry, affected profitability. In line with abovementioned goals, while we are investigating financial indicators underlined by BASEL Regulations and advertisement expenses as micro variables whereas GNP (gross national product), inflation, exchange rates, CDS (credit default swap) premiums and selected monetary policy indicators are included into the model as macro variables. The effects of bank-based variables and macro- data from quarterly balance sheets of Turkish banks, as declared by the Public Disclosure Platform (KAP) on on Return on Assets (ROA) and Return on Equity (ROE) were analyzed. Beside the banking sector as a whole, depository banks, state owned banks, foreign owned banks and participation banks have been studied as a comparative study within the panel data set which includes quarterly data belong to years between 2010-2017. Initially, the stationary unit test was performed on the panel data to determine cross-sectional dependence and stability. Problems identified were resolved by employing the regression analysis of Feasible Generalized Least Squares (FGLS). Main findings of the study indicate the effect of increasing advertisement costs partially due to mounting competition on profit and the important role of the macro economic variables. Additionally the findings point out the expected consequences of the financial indicators emphaised by BASEL framework on banking profitability. Our comprehensive work has brief policy recommendations: increasing the effectiveness of advertisement policies for Turkish banking sector including different sub groups; developing policies taking Central Bank policies and macro economic variables on Turkish economy into account while following strategies in line with BASEL framework. Another important finding of our study is that interaction among banks should not be neglected and econometric models which take cross sectional dependence into consideration rather than traditional panel data regression methods should be preferred for banking sector studies.