Determinants of bank profitability in Portugal: Insights from a period of sectoral transformation

This study aimed to analyze the determinants of banking profitability in Portugal within the context of a transforming financial sector marked by the sovereign debt crisis, the Troika, and the COVID-19 pandemic. The primary objective was to identify the internal and external factors influencing bank profitability and provide recommendations for improving the sector's performance. Methodologically, panel data covering 16 Portuguese banks between 2009 and 2023 were used, enabling a dynamic analysis of the relationship between microeconomic and macroeconomic variables. The empirical approach was based on the generalized method of moments (GMM), ensuring robustness in the estimates by addressing endogeneity and unobserved heterogeneity. The variables analyzed included internal indicators such as operational efficiency, asset quality, and asset management, as well as macroeconomic factors like GDP growth, inflation, and unemployment. The results highlight that operational efficiency and unemployment negatively impact banking profitability, while asset quality and branch reduction have positive effects. Moreover, the sovereign debt crisis showed a significant adverse effect, contrasting with the pandemic crisis's absence of a statistically significant impact. This study contributes to the literature by deepening the understanding of the determinants of banking profitability in peripheral economies of the Eurozone. Practically, it provides insights for investors, policymakers, and banking managers in formulating strategies to strengthen the sector's resilience.