The purpose of this study is to examine how bank-specific characteristics and the economic environment affect the performance of Macao’s banking industry for the period from 2004 to 2011. A variety of internal and external factors were used to perform the analysis and a balanced panel data set for a sample of 7 commercial banks was utilized. Results confirm the importance of bank-specific factors such as size of bank, capital adequacy and the quality of asset in explaining profitability of bank. As for external factors, there is no apparent relationship between economic growth and performance of banks. However, inflation affects banks’ profitability positively while market share of banks affects performance negatively. In addition, the impact of above-mentioned factors will vary if external factors are added. This indicates the change of business environment in Macao’s banking sector in recent years. Furthermore, the impact of business diversification to performance of banks is mixed and banks’ profitability seems to depend mainly on the economic circumstance. Finally, asset liquidity and operational efficiency have a significant influence on banks’ profitability.