The determinants of bank profitability and the effects of foreign ownership

Abstract EN

This study aims to study the profitability of banks operating in Lebanon between 1996 and 2007 and examine the effect of micro and macroeconomic variables on it.

Results show that foreign control deteriorates the bank’s return on assets (ROA), and foreign banks (FB) have better profitability than banks with majority domestic ownership (MDO).

The findings also show that the return on equity (ROE) and ROA are determined differently among banks.

For instance, larger MDO generate higher ROE and ROA, unlike banks with majority foreign ownership (MFO) and FB.

The MDO benefit from off-balance sheet (OBS) activities, whereas the FB and the MFO lose from this business.

A negative correlation between the MDO’s and the MFO’s capital and profitability is found, but the opposite for FB.

This suggests that profitable MDO hold lesser capital, whereas better capitalization allows the FB to engage in more profitable (risky) businesses.

Concentration and economic condition of the host market do not influence the FB, whereas the MDO and the MFO seem to be negatively affected by concentration, but benefit from the economic growth of the host market.