DETERMINANTS OF BANK PROFITABILITY: EVIDENCE FROM US

This paper examines the variables that affect bank profitability. We construct a sample of US banks from 2003 to 2015, and use return on assets (ROA) and return on equity (ROE) to measure bank profitability. We find that banks with higher profitability are the banks that have: (1) a higher deposits to total asset ratio, (2) a higher diversification ratio, and (3) higher operational efficiency. We also find that better-capitalized banks tend to be more profitable only when we use ROA as the measure of profitability. Furthermore, loans have a positive impact on profitability before the financial crisis, but not during the crisis. Size has a positive impact on profitability when the bank is small.