Bank Profitability Essay

1800 Words8 Pages
2.1 Introduction
The rate of return earned by a financial institution is affected by numerous factors. These factors include elements internal to each financial institution and several important external forces shaping earnings performance. This paper reviews the literature on bank profitability determinants and wealth maximization of shareholders.
The two major functions of a commercial bank are the mobilization of deposits and the extension of credits Adekanye, 1986). As financial intermediary, bank collect deposits and paying interest on them, making loans and advances and charging the borrowers higher rates of interest. In rending this service to borrowers and depositors, banks have an expectation of achieving targeted rates of returns.
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Among those that concentrated on a single country are; Berger Hanweck and Humphrey (1987), Berger (1995), Angbazo (1997), Neely and Wheelock (1997), Afanasieff, Lhacer and Nakane (2002), Mamatzakis and Remoundos (2003), Ben (2003), Athanasoglou, Brissimis and Delis (2005), Ben and Goaied (2008), Heffernan and Fu (2008), Dietrich and Wanzenried (2011), Lui and Wilson, (2010), Deger and Adem (2011), Ameur and Mhiri (2013).
The list of those that concentrated their studies on specific or individual country’s banking system include; Haslem (1968), Bourke (1989), Molyneux and Thornton (1992), Demirguc-Kunt and Huizinga (1999), Abreu and Mendes (2002), Hassan and Bashir (2003), Stakouras and Wood (2004), Athanasoglou, Delis and Stakouras (2006), Pasiouras and Kosmidou (2007). Berger, Hanweck and Hunphrey (1987) investigated the relationship between size and profitability using USA Banking industry. They suggest that only small cost saving can be achieved by increasing the size of a banking firm. This means that size expansion will not significantly reduce the cost of banking
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The study centered on the effect of managerial and scale efficiency on concentration and profit. The finding suggest that increased managerial and scale efficiency will increase market share and hence increase concentration and profit. Berger (1995) investigates the relationship between the return on equity and the capital asset ratio for a sample of US banks for a the 1983-1992 time period and find positive relationship between two variables.

Angbazo (1997) examines net interest margin for a sample of US banks for the 1989-2003 time period and find that management efficiency, default risk, opportunity cost of non-interest bearing reserves and leverage are positively associated with bank interest margin. Angbazo (1997) investigated the determinants of bank profitability using a sample of banks in USA with data from 1989-2003 time periods. He concluded that opportunity cost of non-interest bearing reserves, leverage, management efficiency and default risk are positively related to bank interest
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