DETERMINANTS OF THE PROFITABILITY OF FINANCIAL INSTITUTIONS IN BRAZIL

Abstract

The aim of this paper is to analyze the major determinants of the recent performance of the Brazilian banking sector by empirically modeling of two measures of profitability, represented by Return on Equity (ROE) and Return on Assets (ROA). Among the covariates are characteristics of financial institutions and of the banking sector and macroeconomic conditions of the country. The dynamic estimations are conducted for a panel data with quarterly observations of 71 banks during the period from 2000 to 2008. Among the major results are the persistence of the profitability level, identification of the profile of the most profitable institutions, the negative impact of mergers or acquisitions and the relevance of the macroeconomic conditions for the bank profitability. Furthermore, the country monetary policy favors investments of financial institutions in treasure operations due to the high interest rate and low risk level of the government bonds.