Factors affecting US Financial Institutions profitability: Empirical Evidence

Abstract

The aim of this study is to assess the major financial factors that affect bank's profitability. To achieve our objective, we used a dataset of more than 2,000 bank-year observations over a six year period. Empirical results using multivariate regression analysis showed that eight financial variables explain bank's profitability. Among the factors that affect positively bank's profitability are net interest margin and capital adequacy ratio (CAR) and amid the factors that affect inversely bank's profitability are the bank's inability to control its operating expenses and the higher riskiness the bank undertakes through increased interest expenses. Overall, these results should be of great importance to bank management, regulators and to the other major stakeholders since by understanding the determinants of the bank's profitability, it will be easier to make better decisions.