The effect of bank-specific dynamics on profitability under changing economic conditions: Evidence from Ghana

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Analysts continue to demand explanations for the continuous flow of depositors’ and investors’ funds to persistently underperforming banks, while universal banking is premised on the ability to outperform the market. This study examines the effect of bank-level factors on the profitability of banks under changing economic conditions, using a dynamic panel system Generalized Method of Moments (GMM) technique for panel data collected from 18 universal banks in Ghana. The data collection period was from 2007 to 2021. The analysis revealed that lagged return on assets, capital adequacy ratio, and deposit to total asset ratio have a positive influence on bank profitability, whereas lagged return on equity, bank size, expenditure, and asset quality negatively impact profitability. While the effect of these variables on profitability is expected considering the literature, the evidence obtained for asset quality is inconsistent with the explanations in the literature as an increase in asset quality is expected to drive an impressive trend in profitability. Furthermore, a negative relationship was found to exist between economic growth and bank performance when economic expansion exerts a deteriorating effect on the returns on bank assets. This can be linked to the dispersion of investors’ and customers’ funds to other investments, which limits the amount of funds available to the banks to grant credits for interest income. Based on the findings, it can be concluded that bank-specific dynamics adapt to changes in economic conditions which can be explained by the normative guidelines of the Adaptive Market Hypothesis.

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    • Table 1. Descriptive statistics
    • Table 2. Correlation matrix
    • Table 3. Determinants of bank profitability under changing economic conditions
    • Conceptualization
      Richard Apau
    • Data curation
      Richard Apau
    • Formal Analysis
      Richard Apau, Athenia Bongani Sibindi
    • Investigation
      Richard Apau
    • Methodology
      Richard Apau
    • Software
      Richard Apau, Athenia Bongani Sibindi
    • Validation
      Richard Apau, Athenia Bongani Sibindi
    • Writing – original draft
      Richard Apau
    • Writing – review & editing
      Richard Apau, Athenia Bongani Sibindi
    • Project administration
      Athenia Bongani Sibindi
    • Resources
      Athenia Bongani Sibindi
    • Supervision
      Athenia Bongani Sibindi