Banking on strength: unveiling financial dynamics through PCA in Turkey's banking sector

Abstract

In this study, principal component analysis method is used to analyze the financial indicators of net interest income, fee and commission income, interest income on marketable securities portfolio, return on assets and return on equity of private, public and foreign-owned deposit banks operating in Turkey for the period covering 2010-2022. Since important financial indicators such as net interest income, fee and commission income, interest income on marketable securities portfolio, return on assets and return on equity have high correlations with each other, the aim of the study is to classify and dimensionally reduce these variables through principal component analysis. In addition, a financial strength index consisting of net interest income, fee and commission income and interest income on marketable securities portfolio and a profitability index based on return on assets and equity have been developed. The profitability index and financial strength index are classified according to their dimensions. According to the findings, since the financial strength index of foreign-owned deposit banks is generally low, the profitability index is also low.