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The effect of financial soundness variables on bank performance: a macro-level analysis in MSCI Emerging Market Index countries

Sabri Burak Arzova (Department of Business Administration, Marmara University, Istanbul, Turkey)
Bertac Sakir Sahin (Department of Business Administration, Yıldız Technical University, Istanbul, Turkey)

Kybernetes

ISSN: 0368-492X

Article publication date: 6 April 2023

Issue publication date: 10 July 2024

375

Abstract

Purpose

The present study investigates the impact of financial soundness variables on bank performance in emerging countries.

Design/methodology/approach

This study uses macro-level panel data from 17 countries from 2011 to 2020. The analysis adopts six models. While four models include bank profitability, the dependent variable of the other models is Bank Z Scores. Regulatory Capital to Risk-Weighted Assets, Liquid Assets to Total Assets, Non-Performing Loans to Total Gross Loans and Non-Interest Expenses to Gross Income are proxies of financial soundness variables.

Findings

The authors estimate fixed and random effects models with the Arellano, Froot and Rogers methods. Empirical results show that Non-Performing Loans to Total Gross Loans harm ROA and ROE. Regulatory Capital to Risk-Weighted Assets negatively affects ROE. Non-Interest Expenses to Gross Income on Bank Z Scores have a significant and negative effect. Moreover, Inflation, Foreign Direct Investment and GDP are macroeconomic variables that increase bank profitability.

Originality/value

This study contributes to the literature in different aspects. The first is the model of the study. The authors contribute to the literature regarding the variables used to measure financial soundness. Secondly, emerging countries are samples in the study. A significant part of the studies on financial soundness has focused on developed countries. Finally, the authors analyze the macro-level data. Bank soundness studies mainly investigate country-level variables. Macro-level analysis may provide an advantage in combating global financial crises.

Keywords

Citation

Arzova, S.B. and Sahin, B.S. (2024), "The effect of financial soundness variables on bank performance: a macro-level analysis in MSCI Emerging Market Index countries", Kybernetes, Vol. 53 No. 8, pp. 2605-2623. https://doi.org/10.1108/K-02-2023-0237

Publisher

:

Emerald Publishing Limited

Copyright © 2023, Emerald Publishing Limited

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