The Dynamics Shaping Profitability in the Turkish Banking Sector: An Empirical Assessment

Abstract

This study empirically examines the key determinants of bank profitability in the Turkish banking sector from
2001 to 2023. Recognizing the sector’s pivotal role in macroeconomic stability and financial intermediation, the
analysis employs second-generation panel econometric techniques to explore both the long-run and short-run
dynamics influencing profitability. Drawing on a comprehensive dataset covering 25 banks, the study utilizes
return on assets (ROA) as the dependent variable. It considers capital adequacy, deposit-to-asset ratio, loan-to
asset ratio, and non-interest income as core explanatory variables. The findings reveal robust and statistically
significant long-run relationships between all explanatory variables and bank profitability. Capital adequacy
emerges as the most influential determinant, underscoring the strategic importance of robust capitalization in
ensuring resilience and sustained performance. In the short term, while non-interest income continues to exert
a positive impact, deposit mobilization exhibits a temporary adverse effect reflecting the complexities of funding
costs in Türkiye’s inflationary environment. The use of both Pooled Mean Group (PMG) estimation and Fully
Modified OLS (FMOLS) enhances the credibility and robustness of the results. These findings underscore the
importance of maintaining strong capital buffers, managing deposit structures effectively, supporting sustainable
credit growth, and fostering income diversification through digital and non-traditional banking services. The study
provides valuable insights for bank managers, regulators, and policymakers seeking to enhance the profitability
and resilience of the Turkish banking system in the face of evolving macroeconomic and structural challenges.