Analysis of factors influencing bank profitability and bank capital adequacy ratio: Evidence from the West African Economic and Monetary Union banking sector

Banks as the most important financial intermediary play a vital role in a country's economy. This dissertation investigates the factors that influence bank profitability, bank capital adequacy ratios (CAR). Using static and dynamic panel data techniques, a sample of 86 banks from eight countries that compose the West African Economic and Monetary Union (WAEMU) over the period 2006-2014 is utilized. In the static framework, the size effect is investigated for both determinants of profitability and CAR models, while the time effect is incorporated in the dynamic framework. In regards to the determinants of bank profitability, the results show evidence of significant effects of bank-specific factors, as well as bank-industry and macroeconomic factors on profitability in WAEMU except two bank-specific factors (ratios of liquid asset to total deposit and nonperforming asset ), which are insignificant. Also, due to less competition in the banking sector, the results point to a significant persistence of profit from year to year. Furthermore, the analysis of the bank size effect confirms evidence of significant economies and discectomies of scale in the banking sector. The dynamic model shows more consistent, significant variables, and strong effect than the static model. Concerning the determinants of bank capital adequacy ratio, the results present evidence of statistically significant effects of profitability, capital, liquidity, efficiency, and quality of asset variables on bank capital except the return on equity, net interest margin, and risk-weighted asset ratios, which are insignificant. Also, there is evidence of significant persistence of bank capital from year to year in WAEMU. The analysis of size effect on CAR reveals the consistency and significance of the diseconomies of scale, while the economies of scale remain insignificant. The static model results are almost the same as the dynamic model's, but the latter shows the strongest magnitudes.