The role of oil prices, growth and inflation in bank profitability

Abstract

The present study investigates the long-run equilibrium relationship between banking sector's profitability and its internal and external determinants such as inflation, growth and oil prices in Turkey. The study adopts two separate models in order to differentiate the direct and indirect effects of oil price changes on bank profitability. Results of the study provide evidence that oil price changes significantly affect the Turkish banking sector's profitability indirectly through the channels of inflation. Moreover, it is found that bank profitability is affected by oil prices directly and negatively because of the decreased oil-related business lending. The causality test results indicate that there are unidirectional relationships running from oil prices to inflation and from inflation to banking sector's profitability. It is believed that findings of the study can be generalized for oil importing and developing countries in order to initiate precautions against oil price changes.