The Relative Contribution of Micro and Macroeconomic Determinants of Bank Profitability : Empirical Study on MENA and EU

The objective of this study is to examine the relative importance of bank-specific and macroeconomic factors to bank profitability in the MENA and EU regions. The panel data cover the years 2006-2012 for 945 commercial banks. The discriminant analysis is used for estimating Z-scores that discriminate between below-median and above-median return on equity for banks operating in the MENA and EU. The results indicate that the effects of some variables are consistent across both regions, namely: the net interest margin and the risk provision ratio. Operating Expenses are positively associated with bank profitability in the MENA region while the financial leverage is negatively associated with bank profitability. In the EU region both Bank Equity and the ratio of liabilities to assets are negatively associated with profitability. In the EU region, GDP growth rate is negatively associated with profitability while the unemployment is positively associated with bank profitability. Nevertheless, in the MENA region, all macroeconomic factors are statistically insignificant. These findings provide insights into a collective road map to improve bank profitability in both regions. This study contributes to the literature in terms of being the first study that investigates the relative contribution of bank-specific and macroeconomic factors on bank profitability. The majority of other related studies in the literature examine the effects of bank-specific, or macroeconomic, or both factors on bank profitability without a focus of the relative contribution of each factor