Khóa luận tốt nghiệp Tài chính ngân hàng: The impact of geopolitical risk on the performance of commercial banks in emerging countries

VIETNAM NATIONAL UNIVERSITYUNIVERSITY OF ECONOMICS AND BUSINESSFACULTY OF FINANCE AND BANKING GRADUATION THESIS THE IMPACT OF GEOPOLITICAL RISK ON THE PERFORMANCE OF COMMERCIAL BANKS IN

VIETNAM NATIONAL UNIVERSITYUNIVERSITY OF ECONOMICS AND BUSINESS

FACULTY OF FINANCE AND BANKING

GRADUATION THESIS

THE IMPACT OF GEOPOLITICAL RISK ON THE PERFORMANCE OF

COMMERCIAL BANKS IN EMERGING COUNTRIES

Instructor : MSc Cu Nguyen Ha TrangStudent : Thai Thi Quynh Nga

Student code : 19050703

Class : QH 2019E TCNH CLC2

Ha Noi, 2023

VIETNAM NATIONAL UNIVERSITYUNIVERSITY OF ECONOMICS AND BUSINESS

FACULTY OF FINANCE AND BANKING

GRADUATION THESIS

THE IMPACT OF GEOPOLITICAL RISK ON THE PERFORMANCE OF

COMMERCIAL BANKS IN EMERGING COUNTRIES

Instructor : MSc Cu Nguyen Ha TrangStudent : Thai Thi Quynh Nga

Student code : 19050703

Class : QH 2019E TCNH CLC2

Ha Noi, 2023

I assure you of the dissertation “The impact of geopolitical risk on the

performance of commercial banks in emerging countries” is my independent

research paper under the guidance of MSc Trang Cu Nguyen Ha

My research theories are quoted and used from some reference sources

that have been cited and captured clearly The data, software and programs in the

lesson are honestly studied and no other products/researches are used in this

thesis without being cited in accordance with the regulations I am completelyresponsible to the Department, Faculty and the school for this guarantee!

Ha Noi, 2023Student

Thai Thi Quynh Nga

TABLE OF CONTENTSACKOWLEDGEMENT

1.3 Research objects and SCOD€ e«csesseseskrsrkrtrrrrrrrrrrrrsirrsrsrrsrsre 3

1.3.1 Research ODjeCtS sssssssssssssesssssssessesenesesasesoeseeessesesssesacrsososeesessseneeeeeeanas 31.3.2 ResearCh SCOPEC sscssssscssssseessessseseseeseeeeeseseeseeeeseneesesseseaeaeeseeeeeeseneeeneneneeeeeseatets 31.4 Research Question cccsssssssesssssssesesseeesesssneeeseeesesseeseseeseseneeeeeeeeneeeneneneeensonnens 31.5 Overview of data and research methodology -.-.-« -« «.e.e.ee 31.6 Contribution Of res€arCH « «5s sssssssesesrsesrsksketrersrsrrsrsrrirrrararsrsrsar 41.7 Structure Of the Study ccccscsssssssessssssssseessseseesseeeseeeeseeseseeeseseeeeseeneeeeseeseeeees 4CHAPTER II LITERATURE REVIEW cieeeeinninininnirninnninnnnnniinnnirsnstisnsee 5

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2.1.2 Bank performance 5-5 SsEvESEEEExEErrrrrrrereiersrsrrarerre 72.1.3 Emerging marKCS «5-5 sssseesesesrsrsEsirErererirrrrsiirrsrsrsirarsie 92.2 LĨteratUF€ T@VÏ€W csessskskkikiriiieeerirrsrsrxEErnrrsrsrsrsriiiirrsre 11

2.2.1 GEOPOlitical TÏSÌK -.e«s«ssceeseesrsrsrrsrstrrrrsrrrrsrrrsrsrsrsrsrsrrrrsrsrsre 112.2.2 BANK PerfOrMance «sctsecrsksrrrrtrrrrrrrrarsrsrarsrarsrtsrsrsarsre 132.2.3 Emerging marKĂS 5- «se skesesesesksksirtrrererrrrirrrrsrsrsiee 19CHAPTER II RESEARCH METHODS ee«cseseerrsrerrsrrrrrrrrrrrrarsrrrsree 22

3.1 The MethodỌOBV csssstehetihinnhnhgghnhinnarrarsrsrsrerrrsrsrsrsisae 223.2 ResearCh SCOPE «se 223.3 Research đafa - «se sskskskHeHHHHHHHHHRHHEREHEESESEEEEEEEErsire 223.4 Research model and hypothi€SÌÏS e-seseseseseseseeeirrrrseire 23

3.4.1 Research variaÌÏlS «-sssskskeseersrkksiriririrrrsrkiiiirarsrsrsrsare 233.4.3 Research hypothesis -.-.-sesrsrkkirkiiiiiiiiiirrsrsiee 273.4.2 Research IOđ€ÌÏ cceesesesiesesiksksiinirirntnsrsinsisisiinsnnisnanrsnsinsrsntrasrsssas

CHAPTER IV RESULTS AND DISCUSSION

4.1 SUMMATLY STATISTICS -c«csssskskksrereereirirkkrirrersrsrsrsrsrrsie 294.2 Correlation MatTÏX series 304.3 RegressỈOn r©SUÏS c.eeseskrsreririrEiieiiiriiiiirrsrsisre 324.4, Model Validation -s«s.skskessrsrskkirreiirrriiriirrsrsiree 33CHAPTER V CONSCLUCIONS e«<5<<sskkekrkskikiEksiriiirksreirinrrrsrsre 37REEERENCES căng RRRTRRRERSESESESERRREREESESESESESSIESESESESiisrt 39

CATEGORIES OF ACRONYMS

EM Emerging market

ETA Equity to total assets

FEM Fixed impact method

GDP Gross domestic product

GPR Geopolitic Risk

GPRC Geopolitical Risk of Country

INF Inflation

LTA Loan to assets

MENA Middle East and North Africa

NIM Net Interest Margin

OCA Operating cost ratio

OLS Ordinary Least Squares

REM Random impact method

ROA Return on total assets

TABLES CATALOGUETable 3.1 Summary of variables

Table 4.1 Summary statistics

Table 4.2 Correlation Matrix

Table 4.3 OLS, FEM, REM regressions

Table 4.4 F-Test of FEM model

Table 4.5 Breusch - Pagan Lagrangian Test

Table 4.6 Hausman Test

CHAPTER 1 INTRODUCTION

1.1 The urgency of the topic

Since the 1990s, while investigating the sources of development

differences between developed and developing countries, attention has beenincreasingly focused on political and institutional factors In the studies toinvestigate the impacts of political variables on the development differencesamong countries, the first variable to be considered was the type of politicalregime In a sense, the most important reason why democracy is used as a variable

or criterion in explaining the development gap is that strong institutions areeffective in economic development and that strong institutions are seen asidentical with democracy However, upon examining the literature, a definitejudgment has not been reached on the relationship between the type of politicalregime and economic performance This situation has revealed the pursuit ofother political variables that may be effective on economic variables As a result,the variable of political instability has begun to be used in the literature.Therefore, the stability of the said regime type has come to the forefront ratherthan the current political regime type Economic units do not only take theireconomic decisions according to the current situation, but also take into account

future conditions and expectations Therefore, the continuity of the economic development process depends on the long-term horizons of the entrepreneurs to

see the future and the high probability of realization of their predictions One ofthe main factors determining this is the stability in the political variables thatdetermine the economic activity and form the institutional framework The

existence of political stability in an economy enables entrepreneurs to enhance

their capabilities of predicting the future So, the continuity of economic stabilityemerges depending on political stability From this point of view, political

instability is closely related to the whole economy and therefore the banking

sector.

Political instability increases the political uncertainty in the country, whichincreases the political risk This situation affects the country's economies by being

effective on both financial and real economic variables In this context, the bankingsector is also exposed to effects from the supply side and the demand side.

Because the rise in the risk increases the interest rates, which increases the costs

of the banks, however, the rise in the interest rates increases the credit costs and

decreases the credit demands of the economic units.

Political uncertainty has direct or indirect effects on economic and social

matters, especially on economic development for instance, when the United

Kingdom considered separating from the European Union A decline followed thispolitical situation in the GDP of the United Kingdom at around 0.6 percent, which

was the lowest GDP of the country for 15 years (Shankleman and Ross, 2018).

Luangaramand Sethapramote (2018) study the effect of political uncertainty inThailand, they state that there has been a dramatic increase in the amount ofpolitical uncertainty from 2006 to 2019 Unsurprisingly, the increasing amount of

uncertainty has led to the fluctuation of the Thailand economy and then negatively

influenced the country’s economic growth rate

By creating political instability, political uncertainty, and risk, this has an

impact on the economies of countries by limiting the future horizons of economic

units And with the role of financial intermediaries and currency circulation, theoperation of the banking system plays a very important role in the increasing theeconomic efficiency of counties And whether geopolitical risks will affect theperformance of the banking system

One of the special political factors, which affects the economy, is the risk ofgeopolitical geopolitical Moreover, banks could increase loan prices in response

to increased asymmetric information between lenders and_ borrowers.

Cuculiza et al (2020) report that geopolitical risk can negatively affect analysts’sentiment and result in inaccurate forecasts This deteriorates informationintermediaries and the information dissemination process in financial markets

However, the possible impact of geopolitical risks on bank performance inseems to have been overlooked in previous studies, which only studied the impact

of geopolitical risks on relevant bank indicators Therefore, we still do not know

how to quantify how geopolitical risks affect the performance of banks We needmore empirical studies to supplement our knowledge on this issue To address

these questions, this study is conducted, focusing on 18 emerging economies in

different continents from 2010 to 2021 in order to examine the impact ofgeopolitical risk on bank performance

1.2 Research objective

— The study assesses the impact of geopolitical risks on the performance of

banks in 17 countries with emerging economies

— The study fills the research gap on geopolitical risks and their impact on

— Time scope: research data is taken from audited financial statements of

listed banks of 17 emerging economies from 2010 to 2021

collected from Refinitiv database of banks listed on 17 countries withemerging economies in the world Besides, the topic also collects other

information through relevant articles, journals, research topics at home

and abroad

— Methods: The study uses descriptive statistics, data processing and

econometric models on Stata software to give objective results.

1.6 Contribution of research

— Filling the research gap by providing empirical evidence on the impact of

geopolitical risk on the performance of banks

— From empirical research, the study makes’ suggestions and

recommendations for listed banks to improve performance of banks

1.7 Structure of the study

The research includes 5 parts:

Chapter 1: IntroductionChapter 2: Literature reviewChapter 3: Research methodsChapter 4: Results and discussionChapter 5: Conclusions

CHAPTER II LITERATURE REVIEW2.1 Theoretical framework

2.1.1 Geopolitical risk

Geopolitical is a multidisciplinary field on the impact of geographical

factors on the behavior of countries and international relations (Caldara andlacovilelo, 2018) Specifically, geopolitical considers factors such as geographicallocation, climate, natural resources, population, culture, religion, military, trade

or terrain affecting the policy the foreign affairs of a country and the position ofthat country in the international system

The term "geopolitical" was created in the early 20th century by RudolfKjellen, a Swedish politician Kjellen believes that the economic, political andmilitary characteristics of a country stemming from the geographical and

environmental factors of that country These geographical factors can promote or

restrain the socio-economic and political development, and contribute to shapingthe identity and history of each country Kjellen pays special attention to theimpact of geographical characteristics such as mountains and oceans on thenation's political life

To measure geopolicial risk and analyzie its impacts on firms andeconomies, the geopolitical risk index is established (Caldara and lacovilelo,2018) The Geopolitic Risk (GPR) index is developed by Caldara and Iacovilelo

(2018) to find out the impact of terrorist attacks, risks of war and other instability

related to geographical and global political environment For different economicvariables, Caldara va Jacoviello construct this index by a measure of adverse

geopolitical events and associated risks based on a tally of newspaper articles covering geopolitical tensions, and examine its evolution and economic effects

since 1900 The GPR index spikes around the two world wars, at the beginning ofthe Korean War, during the Cuban Missile Crisis, and after 9/11 Higher

geopolitical risk foreshadows lower investment, stock prices, and employment.

Higher geopolitical risk is also associated with higher probability of economicdisasters and with larger downside risks to the global economy (Alsagr & Stefan,

2020, Alssagr & Almazor, 2020).

Entrepreneurs, market participants, and central bank officials viewgeopolitical risks as key determinants of investment decisions and stock market

dynamics (Bloom, 2009) The Bank of England includes geopolitical risk, together

with economic and policy uncertainty, among an “uncertainty trinity” that could

have significant adverse economic effects (Carney 2016) In recent years, the

European Central Bank, the International Monetary Fund, and the World Bankhave routinely highlighted and monitored the risks to the outlook posed by

geopolitical tensions In 2017, Gallup’s survey of more than 1,000 investors, 75

percent of respondents expressed worries about the economic impact of thevarious military and diplomatic conflicts happening around the world Changes ingeopolitical risks are associated with heterogeneous effects on firm investment,depending on the industry of operation and on firm-specific risks, the linkbetween geopolitical risk and firm-level activity is significant, economicallymeaningful, and persistent over time (Caldara & Iacoviello, 2018)

Besides that, Belkhir et al (2019) determined the negative impact betweenthe main risk treatment and bank operating indicators Research results of Alsagr

and Stefan (2020) also given see significant negative impacts of geopolitical risks

to the bank's profitability Phan et al (2021) pointed out when the instability led

to an increaselt is difficult for lenders to distinguish good borrowers and badborrowers, and thus reduce the size of lending,investment and economicefficiency

Compared to the index of economic policy (Baker et al., 2016) and the stockmarket fluctuation index (Bloom, 2009), the GPR index reflects more accuratelythe fluctuations of geopolitical events Related, for example, the killing of Crimea,

or instability related to terrorist attacks (Demir et al., 2019) Since its inception,

this index has received the attention of many researchers because it has a strong

impact on economic variables at both macro and micro levels A number of

domestic and foreign studies have focused on geopolitical risks to stock prices

(Alsagr & Almazor, 2020), Cash holding policy (Kotcharin & Maneenop, 2020;Wang et al., 2021)

2.1.2 Bank performance

Commercial banks have formed, existed and developed for hundreds ofyears, has a very important impact on the development of the commodityeconomy Commercial banks are an important intermediary financial institution

in the market economy, transferring capital from the leftover place to the shortage(Rose, 2014)

In the market economy, the business performance of commercial banks isalways a top concern, a target to evaluate the sustainable development and animportant goal, determine the existence and play Bank's development is placed

in the context of increasingly deeper international financial integration, the issue

of improving business efficiency of commercial banks is even more important,helping to strengthen the strength and competitiveness of the economy of thatcountries.

There are many views on business performance of commercial banks.According to Farrell (1957), this performance commonly is used to evaluate thecapabilities of a unit in maximizing the output revenue under the condition ofgiven input costs, or in other words effectively It is the benefits of specificactivities The performance is the ability to combine the optimal input elements

to create an output unit And as mentioned at first, with the nature of the business,the evaluation of banking performance is also based on the theoretical foundationsuch as evaluating the business efficiency of a business, and considering moreconcentrated properties of commercial banks

In a narrow sense, the bank's business efficiency is the ability to makeprofits, while ensuring safety for the bank's activities in a certain trajectory,limiting risks In a broad sense, business efficiency is not only interested in profitbut also profit from the debt and property structure is reasonable, the trend of

stable profit growth, and the performance of the operations of the Taiwan

commercial banks (Chang et al., 2010) also stated that the effectiveness shows theability to manage to control costs and use resources to create output Hung

Nguyen Viet (2008) given that the performance of the bank can be understood in

two aspects: The first aspect is the ability to convert inputs into outputs or

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profitability or minimize costs to increase competitiveness with other financialinstitutions; the second is safe operating probability for the bank and1 in this

study, the performance of the bank was measured by the profit results brought by

the bank operations in a certain period of time

Harward and Upton (1961) stated that "profitability is the ability of acertain investment that can make a profit." The profitability shows the

effectiveness of the management of available resources on the market to make

profits However, a bank with high profitability is not necessarily good, in order

to have such a profitability, this bank may have accepted a high -risk asset

structure.According to Nguyen Thi Thu Hien (2017), profitability is one of the

important measurements to assess the financial results of commercial banks,considered on the basis of combining business results and resources Theprofitability is an important foundation to help innovation, diversify products,from which business effectively When assessing the bank's profits, it is necessary

to consider profits in relationships with capital, assets, costs of cost and losses aswell as the ability to preserve and develop capital In order to be profitable, banksmust create increasing income for themselves, to save operating costs to areasonable level, and to limit risks and losses through policies and measures.manage and create reasonable capital and assets structure

The profitability is a decisive condition for increasing the bank

performance.From the perspective of banks, a highly profitability bank will

facilitate accumulation, increase and diversify capital sources, as a basis for thecreation of profitable assets In addition, improving profitability is a condition forbanks to preserve capital, expand lending markets, invest in technologicalinnovation to attract customers.- From the perspective of investors: The depositor

will decide to trade when seeing that bank operate effectively For listed banks,

profitability is one of the important information for investors to consider whenholding bank shares Therefore, the bank with high profitability will attractinvestors, making it easier for the bank to raise capital, while improving thereputation of the bank in the eyes of domestic and international investors.- For

the economy: The bank is an important component of the economy, the

profitability of the bank is the driving force and leverage of the social economy

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The bank's stability and development is the basis for ensuring the stability andgrowth of the economy Therefore, when banks operate effectively, high

profitability will ensure the stability of the financial market and the growth of the

economy High profitability will be a factor that makes the financial sector healthy,contributing to stabilizing the currency market, curbing inflation In theinternational competitive environment, improving the profitability of the bank is

the best way to help the bank develop sustainably, thereby promoting the national

economic development, increasing national reputation

2.1.3 Emerging markets

The emerging markets are widely defined as countries in the process ofrapid growth and industrialization These markets are often determined based onattributes such as sustainable market access, progress in achieving averageincome and higher global economic suitability In statistics of IMF (InternationalMonetary Fund), to identify an emerging market, they looked at systemic

presence, market access and income level with different weights of the variables

and classifies 20 emerging markets Meanwhile, Morgan Stanley CapitalInternational classifies 24 national as emerging markets However, income is not

the only feature of an emerging market Most of them are economies with strong

growth and sustainable stability, which can produce goods with higher addedvalue and similar to more advanced economies not only in income but also in theability to participate in global trade and financial market integration

Countries ranked as emerging market economy are countries with some(but not all) characteristics of a developed market (Kearney, C., 2012) As theemerging market economy develops more often into the global economy,

expressed by increasing the liquidity of the capital market and the domestic debt

market, increasing trade and investment volume and investment Directly foreign,and the development of modern financial and legal institutions in the country Themost special thing of an emerging market economy is that it is moving from a pre-

development, underdeveloped, low-income economy to a modern industrial

economy with a higher living standard

Chris Govaerts, an economist at Ñagelmackers (Belgium), emphasized thatemerging markets are incomplete economies of financial infrastructure, but have

the opportunity and strong growth association Typically, emerging markets do

not have regulating organizations and market management to reach the same

level of development as in developed countries Market efficiency and strict

accounting standards and securities in emerging markets in general are not equal

to advanced economies (such as America, Europe and Japan), these markets still have financial infrastructure includes banks, securities trading floors and unified

currencies in the country Another aspect of emerging market economies is thatthey gradually apply reforms and institutions like modern developed countries,promoting economic growth These emerging markets now also tend to graduallyreduce the exploitation of natural resources and agriculture, focusing onindustrial and production activities, pursuing intentional industrial andcommercial strategies for aiming for economic growth and industrialization

According to Rupa and Ceyla (2021), emerging markets have maderemarkable progress in strengthening their macroeconomic policies since the

turn of the century, which helped them more than double per capita incomes on

average Monetary policies in 65 percent of the emerging markets follow looking inflation-targeting regimes, and inflation has fallen and stabilizied in

forward-most.

The extensive and diverse emerging market literature that hasmushroomed in the past decade and a half provides ample opportunity forperiodic assessment of where the various research agendas are heading, and theliterature has been reviewed by others (Khilji, 2003; Bekaert and Harvey, 2003;Fan et al., 2011) Notable examples include Fifield et al (1999) who examined the

criteria defining emerging markets and summarised the previous two decades’

work, focussing mostly on equity markets Bekaert and Harvey (1997, 2003)

reviewed research on finance in emerging markets, focussing mainly on the 20

countries with the longest available spans of data on the International FinanceCorporation's (IFC) emerging market database They split their periods of analysis

into the pre-1990 and post-1990 periods because of the clustering of market

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liberalisations that occurred at that time, and their analysis focused largely onmarket liberalisation and integration.

In addition to suggesting areas such as formal modelling of liberalisationand reform processes; agency, corporate governance, management and the legalenvironment; infrastructure, demographics and politics; and microstructure inless-than-ideal environments; previous research articles pinpointed the fact that

most emerging countries research up until then tended to concentrate on

country-level aggregate indices, and that a future focus on firm-country-level analysis would befruitful

Numerous studies have examined the effect of terror attacks on financialmarkets (Salisu et al.,2022, Bouras et al., 2019, ) In sum, researchers find that

not only domestic terror attacks but also attacks on major financial markets tend

to affect both stock returns and volatility Regarding stock market, PwC's GlobalInvestor Survey (2018) reports that geopolitical risk (GPR) is one of the keydeterminants of investment decisions made by market participants For example,two hours after the London bombings in July 2005, the FTSE 100 index fell 200points Much of the relevant literature also demonstrates the impact of GPR onfinancial markets (Liang et al., 2021; Li et al., 2022; Ma etal., 2022; Salisu et al.,2022; Lee, 2023) Salisu et al (2022) examine the connection between GPR andstock market volatility in emerging economies, using time series data and find thatemerging market volatility responds positively to GPR Besides, Bouras et al

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(2019) analyze the role of country-specific GPR and global GPR on the volatility of

18 emerging markets and the results show that global GPR can significantly

impact stock market volatility Wang and Young (2020) demonstrate that GPR

from terrorist attacks is a key driver of strong volatility and declining returns of

stock markets; in it, Wang and Young (2020) found that an increase in one

standard deviation in GPR, resulted in a $75.09 million decline in equity inflows

and a $56.81 million increase for the government bond fund In contrast, based

on the bias-corrected LSDV estimator, Zhang et al (2022) explore the effect of GPR

on volatility using dynamic panel data including 32 countries and regionscovering Asia, Europe, the Americas, Australia, Africa, and the Middle East Thisstudy includes the stock market return, jump component, CBOE Volatility Index(VIX), and CBOE Crude Oil Volatility Index (OVX) as control variables The resultsshow additionally that GPR has a greater impact on stock market volatility foremerging economies, crude oil exporting countries, and countries at peace

To turn to the impact of political risk on commercial banks, Yalcinkaya et

al (2016) studied in Turkey indicate that banks are adversely affected by politicalrisk Similarly, Sanlisoy et al (2017) also show the negative impact of the politicalrisk on the bank profitability Cuculiza et al (2020) provides empirical evidence

that analysts offer a more inaccurate and pessimistic financial forecast in high GPR

areas Some other studies show that banks in areas with high GPR tend to reducelending scale (Hu & Gong, 2019) The reason is that geopolitical risk causes capital

flows to decrease, thereby affecting domestic credit supply (Zhou et al., 2020) In

addition, Lee and Lee (2019) find a negative correlation between political risk andbanks’ returns Likewise, Belkhir et al (2019) conclude the negative impact

between political risk and banking activity indicators Another study by Ghosh

(2016) of 12 MENA Countries using regression analysis for ROA, NIM, Loan Rate,Funding Cost, Size, Equity, Liquidity, Political Conflict, showed the adverse impact

of political uncertainty on bank performance

Prior literature find that rising geopolitical risks and uncertainty about theeconomy may affect customers’ demand for credit, negatively influencing bank'sprofitability (Alsagr and Stefan, 2020) Phan et al (2021) shows that wheninstability leads to an increase in information asymmetry, it makes it difficult forlenders to distinguish between good and bad borrowers, and thus reduces loan

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size, investment and economic efficiency Geopolitical risk is a form of uncertaintybecause it measures the likelihood of terrorist acts, wars, and tensions between

states.

Studying about emreging countries, Tuan Anh Doan (2018) find that the

increasing volatility of political events in general and political uncertainties from

elections in particular tend to negative impact on the efficiency of the bank's costmanagement However, Demir & Danisman (2021) conclude that economic

uncertainty leads to a significant decline in overall bank credit growth, whereas

no significant impact of GPR is found

Furthermore, GPRs is found to influence other economic activies(Antonakakis et al., 2017; Cheng and Chu, 2018; Wang and Young, 2020) Forinstance, examining BRICS Countries, Lee & Lee (2020) show that causality runsfrom the economic condition of the markets and risk exposure to GPRs toinsurance activities at different quantiles in Brazil and South Africa However,insurance activities and geopolitical events or uncertainty provide insufficientincentives to affect economic activities In addition, Cheng and Chiu (2018) showsconsistent evidence that global geopolitical risk shocks lead to a 13 to 22 percentreduction in GDP in 38 emerging countries while Antonakakis et al (2017) findaconflicting relationship between GPR and oil profitability and price fluctuations.Likewise, Akadiri et al (2019) found that GPR negatively affects economic growthboth in the short and long term, as evidenced by the significant decline in real GDP

during periods of high uncertainty.

2.2.2 Bank performance

There is rich literature on the determinants of bank performance and theseprevious research studies shows that bank profitability is usually expressedthrough internal and external variables (Bourke, 1989; Pasiouras and Kosmidou,2007; Athanasoglou and al., 2008; Nimer et al., 2013; Ferrouhi, 2017) Internaldeterminants can be defined as those factors that are specific to each bank, whileexternal variables include factors relating profitability to the industry structure,and to the macroeconomic environment that affects the operation and

performance of the banking system.

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Bourke (1989) examined the performance of banks in twelve countries inEurope, North America and Australia during the period 1972-1981 The author

find that concentration, liquidity, inflation and size affect the bank performance

and profitability positively Likewise, the study of Molyneux and Thornton (1992)

reproduces the methodology of Bourke (1989) They studied the determinants of

banking performance in eighteen European countries between 1986 and 1989

The results confirmed Bourke’s findings.

Similarly with this study, Ferrouhi (2017) conducted a study to analyze thelong-term determinants of performance of eight biggest Moroccan commercialbanks, for the period 2005-2015, using the Johansen cointegration test Threemeasures of performance were used in this study These were: the net noninterestmargin (NIM), returns on assets (ROA), and returns on equity (ROE) The resultsindicated that the significance of bank specific variables (size of the bank, short-term, long-term and funding liquidity, deposits, and foreign direct investments)are long-term determinants of the performance of Moroccan commercial banks

Likewise, Dietrich and Wanzenried (2009) have focused on researchingthe business performance of 453 banks in Switzerland in the period from 1999 to

2006 The author used both ROAA and ROAE variables to measure profitability of

the bank In particular, the author measures the level of affecting the profitability

of the bank on all three factors: internal factors, macroeconomic factors andindustry factors The group of intrinsic variables used by the author in their

research includes: the ratio of equity to total assets, the percentage of expenses to

income and bad debt on total outstanding loans, credit growth rate use andincome from interest on total income The author also uses additional macro

variable groups to explain such as effective tax rates, annual population changes, GDP growth rate, 6-month Libor interest rate, stock market capitalization and

concentration rate of the bank Research results show that bank profits arecorrelated with the market capitalization ratio, credit growth rate is higher than

the growth rate of the industry, the ratio of income outside the interest/total

income Research results in macro variables show that, although the impact oftaxes and bank concentration rates are negative on the business efficiency of thebank, GDP and the stock market capitalization are the product pole As for the

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annual population change speed and the 6-month Libor interest rate, there is noinfluence.

In line with the study, Alterera and Anbar (2011) have studied the

influence of intrinsic factors and macro factors that affect the business

performance of 10 commercial banks listed at the Istanbul Exchange Stock

Exchange in Turkey in the period from 2002 to 2010 The author uses the panel

data method with Fixed Effect Model The dependent variables that are selected

to represent the business efficiency is ROA and ROE Independent variables are

divided into two groups including internal factors: total assets, capital safety,asset quality, liquidity, deposit and income structure and macro factors factors:GDP growth rate, inflation rate, real interest rate Research results show that ROAhas a correlation with the size of total assets and non-interest income index;correlation inversely with the bank's loan ROE is correlated with the bank sizeand is correlated with the actual interest rate

Furthermore, Nicole et al (2015) have studied the effects of 03 factors:internal banks, industry factors and macro factors affecting bank profits for 1098banks from 27 EU countries in the period from 2004 to 2011 In this study, thegroup of authorities used the dependent variables were the average indicators:

ROAA and ROEA to better reflect the bank's operational results Research results

show that liquidity risks, credit risks, management efficiency, incomediversification, industry/competition concentration rate and GDP have an impact

on bank profitability, including ROAA and ROAE variable In particular, aninteresting discovery of the positive influence of competition in the bankingindustry to profit The bank size does not affect ROAE and weakly affect ROAA

In addition, by using return on average assets (ROAA) to evaluate bank’s performance, Pasiouras and Kosmidou (2007) examined the profitability of 584

commercial domestic and foreign banks operating in the 15 European Unioncountries over the period 1995-2001 Results obtained show that profitability of

both domestic and foreign banks in the European Union is affected by the bank’s

specific characteristics (size, capital adequacy, efficiency of the management),financial market structure (concentration), and macroeconomic conditions(inflation and the real gross domestic product (GDP) growth) Moreover,Athanasoglou and al (2008) performed a study to examine the effect of bank-

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specific, industry-specific and macroeconomic determinants of Greek banks’profitability, covering the period from 1985 to 2001 The estimation results

indicated that, with the exception of bank size, all bankspecific determinants

significantly affected bank profitability The results also reported that the impact

of concentration and ownership on bank profitability is insignificantly related.

In line with this study, Trujillo-Ponce (2013) analysed the factors that

determine the profitability of Spanish banks for the period of 1999-2009 Firstly,

the empirical finding reveals differences in the performance of commercial andsavings banks Secondly, the results indicated a strong positive relationship ofasset quality, capitalization, concentration, inflation, economic growth and realinterest rate with ROA and ROE Finally, concerning the effect of bank size onprofitability, the results showed an insignificant impact of size on the twoprofitability indicators

Opposite, Bahyaoui (2017) underwent a research to identify theidiosyncratic determinants of banking performance in Morocco for the periodbetween 2004 and 2015 The author used the Global Banking Margin (GBM) aratio that is adopted by Moroccan central bank and is very similar to NIM, as anindependent variable measuring profitability The findings indicate that banks

with a majority of private capital (whether Moroccan or foreign) and unlisted

banks are banks that perform well The estimated results indicated that mostbank-specific determinants (capitalization, financing costs, operational efficiency,

and credit quality) significantly affected bank profitability This research

conducted by Bahyaoui confirmed that the bank size impacted on profitabilitynegatively

Likewise, Bashir (2000) studied the factors affecting bank profitability

(ROA, ROE, NIM) in eight countries in the Middle East region between 1993 and

1998 The results showed that the ratio of equity and the ratio of outstandingloans to total assets had a statistically significant impact on profitability On the

other hand, in the study, Bashir (2000) included a variable level of bank

development reflecting the level of development (in terms of depositmobilization) of banks when adjusted for macroeconomic factors but did not find

a statistically significant impact

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To turn to the impact ofcorporate governance on bank performance, Liangand al (2013) analysed board characteristic impacts on bank performance and

bank asset quality in China By using a panel data of 50 largest Chinese banks

during the period of2003- 2010, they found that the board size has a significantly

negative impact on bank performance while the proportion of independent

directors and the number of board meetings have significantly positive impact onboth bank performance and asset quality Similarly, De Andres and Vallelado

(2008) used a sample of 69 boards of large commercial banks from Canada,

France, the UK, Italy, Spain, and the US from 1995 to 2005 They found that bankperformance has a significantly positive relation with board meetings and aninverted U-shaped relation with board size and the proportion of outsidedirectors

In addition, Staikouras and al (2007) examined the relationship betweentwo of the most pertinent corporate governance factors -that is, the size of theboard of directors and the proportion of non-executive directors- and firmperformance on a sample of 58 large European banks over the period 2002-2004.The results reveal that bank profitability is negatively related to the size of theboard of directors, while the impact of board composition, although positive in all

models, is, in most cases, insignificant On the other hand, concerning the impact

of corporate governance structure on the performance of Moroccan banks, Sbaiand Meghouar (2017) used data from 6 Moroccan commercial banks listed on

Casablanca Stock Exchange for a period of 7 years from 2009 to 2015 The

empirical results of this study indicated that the presence of a nomination andremuneration committee has a positive impact on the performance of Moroccan

banks The size of the board of directors and the presence of foreign administrators positively influence bank performance.

Besides that, Ong Tze San and Teh Boon Heng, (2013) conducted a study

on 20 domestic and foreign commercial banks operating in the banking sector inMaylaysia (including 9 domestic banks and 11 foreign banks) between 2003 and

2009 The dependent variable is profitability as measured by ROA, ROE, and NIM.The independent variables are divided into two groups Group 1 is the variablesderived from within the bank, including: capital adequacy ratio, asset quality,management efficiency, liquidity quality and bank size Group 2 is macro variables

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including economic growth rate and inflation rate The authors use the Anova testtechnique to test the model, and the results show that all models of the three

dependent variables ROA, ROE and NIM are good models for measuring a bank's

profitability The research paper gives the following results: equity ratio directional impact), credit risk provision ratio (adverse impact), operatingexpense ratio to total operating income (adverse impact), liquidity ratio (same-way impact) that affects the profitability (ROA) of the bank Meanwhile,profitability (ROE) is affected by the provision ratio for credit risks (adverseimpact), the ratio of operating expenses to total operating income (adverseimpact) and bank size (adverse impact) The group of macro variables is economicgrowth rate and inflation that have no impact on the ability of Malaysiancommercial banks to generate profits Through this, it can be seen that the profitgeneration of Malaysian commercial banks is mainly influenced by factorsoriginating from within the bank while macro factors do not have a significantimpact

(co-On the other hand, Mansouri and Afroukh (2009) examined the bankingprofitability determinants in Morocco for the period between 1993 and 2006 Theempirical results of the study showed that, except the volume of loans distributed

that affect positively the return on assets, all other managerial determinants have

a significant and negative impact on commercial banks’ profitability in Morocco.The other significant determinants are macro-financial conditions (banking

industry concentration and development of the capital market) and

macroeconomic conditions (inflation and GDP per capita growth), both of whichpositively impact on bank profits

Moreover, Nimer et al (2013) found a statistically significant adverseeffect of liquidity ratios on profitability (ROA) at 15 Jordanian banks between

2005 and 2011 Likewise, Alkhazaleh & Almsafir (2014), when studying data of

14 banks in Jordan between 1999 and 2013, suggested that a bank's profitability

(ROA) is negatively affected by its equity ratio and bank size Similarly, Dawood

(2014) studied the factors affecting the rate of return (ROA) of 23 commercialbanks in Pakistan between 2009 and 2012 The results showed that operatingexpense ratios and liquidity ratios had an adverse impact on bank profitability.Meanwhile, the equity ratio affects bank profitability in the same direction

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