What Drives Bank Profitability? A Panel Data Analysis of Commercial Banks in Bangladesh

Abstract

Bank profitability plays a significant role in the growth and development of an emerging economy. The purpose of the study was to examine the impact of bank characteristics, industry concentration and macroeconomics variables on commercial bank profitability in Bangladesh from 2007-2017. Bank profitability is proxied by return on assets (ROA), return on equity (ROE) and net interest margin (NIM). The study is based on secondary data and Hausman test has been performed using STATA software in favor of fixed effect modeling. Panel regressions shows that cost efficiency has significant negative impact on ROA and NIM. The positive impact of loan to deposit ratio with ROA suggests that efficient fund management including investment and assessed expenditure should be emphasized. Bank size has significant negative impact on all the measures of profitability, which indicates that monopolistic competition will reduce banking profit. Credit risk has significant positive impacts on ROE. Industry concentration measured by CR3 is positively related with ROE and has significant negative relation with bank profitability (ROA). Among macroeconomic variables inflation has significant positive and bank spread has significant negative impact on ROE. The coefficients of all the macroeconomic variables have been found to be significantly related to bank profitability while measured by NIM. Our study recommends further research with other explanatory variables such as, corporate governance, corporate social responsibility (CSR) and deposit insurance to accelerate the model and construct the econometric model by using structural equation modeling, mediation effect modeling etc.

Keywords: {'name': 'Profitability'}, {'name': 'cost efficiency'}, {'name': 'capital adequacy'}, {'name': 'bank spread'}, {'name': 'commercial bank'}

Authors & affiliations

Rana-Al-Mosharrafa
Affiliation not supplied

Md. Shahidul Islam
Affiliation not supplied

Deposited references

Supplied references, not a list of publications citing this article.

Abdullahi, S.R., & Usman, S. (2017). Impact of Bank Specific Variables on the Financial Performance of Nigerian Deposit Money Banks. International Journal of Innovative Research and Advanced Studies, 4(3), 43-48.

DOI: 10.1080/23322039.2018.1548072

DOI: 10.1002/ijfe.1655

Alper, D., & Anbar, A. (2011). Bank Specific and Macroeconomic Determinants of Commercial Bank Profitability: Empirical Evidence from Turkey. Business and Economics Research Journal, 2(2), 139-152.

DOI: 10.1016/S0378-4266(96)00025-8

DOI: 10.2139/ssrn.4163741

BCBS. (2006). Regulatory and Market Differences: Issues and Observations. Basel Committee on Banking Supervision, May 2006.

Becker, G.S. (1957). The economics of discrimination. 2nd ed. Chicago: University of Chicago Press.

DOI: 10.2307/2077876

Boahene, S.H., Dasah, J., & Agyei, S.K. (2012). Credit Risk and Profitability of Selected Banks in Ghana. Research Journal of Finance and Accounting, 3(7), 6-15.

DOI: 10.1016/0378-4266(89)90020-4

DOI: 10.2307/3867330

DOI: 10.1093/wber/13.2.379

DOI: 10.1016/j.intfin.2010.11.002

DOI: 10.1162/003465398557825

DOI: 10.20525/ijfbs.v6i1.627

DOI: 10.1086/260549

DOI: 10.2307/1882015

DOI: 10.5089/9781451871623.001

DOI: 10.1146/annurev.soc.012809.102702

Genchev, E. (2012). Effects of Market Share on the Bank’s Profitability. Review of Applied Socio- Economic Research, 3(1), 87-95

DOI: 10.2307/1992096

DOI: 10.1353/mcb.2005.0015

DOI: 10.32861/ijefr.67.192.200

Islam, M. S., & Nishiyama, S. (2016a). The Determinants of Bank Profitability: Dynamic Panel Evidence from South Asian Countries. Journal of Applied Finance and Banking, 6(3), 1-6.

DOI: 10.1016/j.ribaf.2016.01.024

Kiganda, E.O. (2014). Effect of Macroeconomic Factors on Commercial Banks Profitability in Kenya: Case of Equity Bank Limited. Journal of Economics and Sustainable Development, 5(2), 46-56.

Kosmidou, K., Tanna, S., & Pasiouras, F. (2005). Determinants of Profitability of Domestic UK Commercial Banks: Panel Evidence from the Period 1995-2002. Economics, Finance and Accounting Applied Research Working Paper Series No. RP08-4, Coventry: Coventry University.

DOI: 10.1093/wber/13.2.379

DOI: 10.1016/0378-4266(92)90065-8

Naceur, S.B., & Goaied, M. (2008). The Determinants of Commercial Bank Interest Margin and Profitability: Evidence from Tunisia. Frontiers in Finance and Economics, 5(1), 106-130.

DOI: 10.1016/j.ribaf.2006.03.007

DOI: 10.3329/jbt.v10i1.26904

Ramadan, I., Kilani, Q., & Kaddumi, T. (2011). Determinants of Bank Profitability: Evidence from Jordan. International Journal of Academic Research, 3(4), 180-191.

Rasiah, D., & Tan, T.M. (2010). Theoretical Framework of Profitability As Applied to Commercial Banks in Malaysia. European Journal of Economics, Finance and Administrative Sciences, 23, 149-160.

DOI: 10.1111/j.0033-0124.1974.00399.x

DOI: 10.4172/2167-0234.1000192

Scott, J.W., & Arias, J.C. (2011). Banking Profitability Determinants. Business Intelligence Journal, 4(2), 209-230.

DOI: 10.19030/iber.v3i6.3699

Sufian, F. (2011). Profitability of the Korean Banking Sector: Panel Evidence on Bank Specific and Macroeconomic Determinants. Journal of Economics and Management, 7(1), 43-72.

DOI: 10.3846/1611-1699.2009.10.207-217

DOI: 10.1007/s11459-009-0016-1

Swarnapali, R.M.N.C. (2014). Firm Specific Determinants and Financial Performance of Licensed Commercial Banks in Sri Lanka. In proceedings of 3rd International Conference on Management and Economics.

DOI: 10.5296/ijafr.v4i2.5939

Weersainghe, V.E.I.W., & Perera, T.R. (2013). Determinants of Profitability of Commercial Banks in Sri Lanka. International Journal of Arts and Commerce, 2(20), 141-170.

White, L.J. (1976). Searching for the Critical Industrial Concentration Ratio. In Goldfeld, S. and Richard, E. Q. eds. Studies in Non-Linear Estimation. Cambridge, MA: Bollinger.

DOI: 10.2307/1879375

DOI: 10.3390/ijfs6020053

Zeitun, R. (2012). Determinants of Islamic and Conventional Banks Performance in GCC Countries Using Panel Data Analysis. Global Economy and Finance Journal, 5(1), 53-72.