Determinants of bank profitability in emerging markets

BIS Working Papers  |  No 686  | 
08 January 2018



This paper asks which are the key factors that affect bank profitability in emerging market economies. In particular, it assesses to which extent bank profits are determined by country-wide and/or by bank specific factors.


The paper contributes to the literature by focusing on banks from emerging markets. Balance sheet data from 534 banks from 19 countries were analysed, both in terms of overall profitability and several of its sub-components (net interest margins, non-interest income and loan loss provisions). The study compares the relative importance of the financial and of the business cycles for bank profitability. Equally, the effects of short-term and of long-term interest rates for bank profitability were analysed separately. The paper also quantifies how sound fiscal balances can improve overall bank profitability by reducing risk premia. The paper discusses several mechanisms that may explain the patterns of EME bank profitability that have been observed between 2000 and 2014.


We find that credit growth is a stronger driver of bank profitability than GDP growth, except during very steep recessions. Further, we find that high long-term interest rates tend to boost profitability while high short-term interest rates reduce it, with the former effect generally dominating the latter. Furthermore, we find that increasing sovereign risk premia tend to reduce overall bank profitability.



We analyse key determinants of bank profitability based on the evolution of balance sheets of 534 banks from 19 emerging market economies. We find that higher long-term interest rates tend to boost profitability, while higher short-term rates reduce profits by raising funding costs. We also find that in normal times credit growth tends to be more important for bank profitability than GDP growth. The financial cycle thus appears to predict bank profitability better than the business cycle. We also show that increases in sovereign risk premia reduce bank profits in a significant way, underscoring the role of credible fiscal frameworks in supporting the overall financial stability.

JEL classification: E32, E43, G21

Keywords: bank profitability, credit, risk premia, emerging markets, interest rates