Factors of return on equity in the Hungarian banking sector

Abstract

This research aims to identify and measure the impact of selected internal factors to the
banking profitability measured as the Return on Equity (ROE). In order to investigate the
correlation between the indicators, internal factors of banking profitability were selected
and tested with multilinear regression analysis. The sample of data contains 309 observations for 27 Hungarian commercial banks for ten years period of time, between 2006 and
2016. Empirical results are in line with previous research results; they show 15% average
ROE and stress the correlation between operating cost level, loan to deposit ratio and ROE
ratio for the research period. However, the role of the costs may be overrepresented and
ROE ratio shows high volatility due to the financial crisis. Further analysis may be realized
by using other profitability ratio such as Return on Total Assets (ROA) and extending the
analysis to external factors of banking profitability, like market concentration level, GDP
growth, inflation, or base rate level.