Financial Factors and Profitability in the Large and Medium Ecuadorian Banks, period 2016-2019

Abstract

This study examines the impact of financial indexes on the profitability of Ecuadorian private banks to contribute to the financial management of banking institutions by providing a useful methodology to identify the internal factors that influence the banks’ performance, and thus, the decision making process would be more efficient in the short- and long-term. This research used a multiple linear regression based on the econometric method of Ordinary Least Squares (OLS). Liquidity, non-performing loans, asset quality, and leverage are used as independent variables, while the return on assets (ROA) and the return on equity (ROE) are the dependent variables. The study used 192 observations of the following banking entities: Banco de Guayaquil, Produbanco, Banco Internacional, and Banco Bolivariano from 2016 to 2019. Our study shows (1) a significant negative relationship between liquidity and non-performing loans with the profitability, and (2) a significant positive relationship between the asset quality and leverage with ROA and ROE, which coincides with the findings of previous studies. To sum up, the selected independent variables are relevant to the bank performance, therefore, we suggest monitoring them continuously. This manuscript complements the financial literature by introducing a statistical analysis of the 2016-2019 period, providing prior research to the Covid19 pandemic. It is recommended that future studies carry out an analysis after the health emergency and compare the results of both studies to determine the effects on bank´s profitability caused by the pandemic.