Bank Profitability and its Determinants in Pakistan: A Panel Data Analysis after Financial Crisis

Abstract

This study seeks to investigate the internal and external determinants of the Pakistani banking sector, specifically after the recent financial crisis of 2008. The sample data comprises total 26 banks, which include 17 conventional, 5 Islamic and 4 public banks. The selected sample covers the period of five years from 2009 to 2013. A balanced panel data regression model has been used and considered return on assets (ROA) and return on equity (ROE) as an alternative of bank's profitability. The results of the study suggest that bank's profitability is significantly affected by its internal determinants while external determinants are insignificant. The study found that operating efficiency, liquidity, non-performing loans to total assets and real GDP have a negative impact, whereas financial risk, gearing ratio, asset management, bank size, deposits, loans to total assets and inflation show positive impact on the asset side . On the other side, operating efficiency, gearing ratio, asset management, liquidity, deposits and real GDP have a positive impact, while financial risk, bank size, asset quality and inflation exert negative impact on the equity side. During the study period, our findings suggest that the Pakistan banking industry has managed well to avoid significant impact of external factors like inflation and GDP over profitability, however, efficient management is required to improve internal factors to be more profitable.

Factors That Affect Profitability of Banks Comparative Study between Indonesian and Hong Kong

“…Profitability has been the main concern in banking sector, along with various internal and external factors that influence profitability of bank (Ali, 2016).…”

“…The more liquid the asset, the less the liquidity risk is (Ali, 2016). Other risk that a bank may face is loans given to debtors, which source is taken from creditors/ customer.…”

“…Almazari (2014), Gunes (2014), as well as Rivard and Thomas (1997) state that there is significant positive influence between liquidity risk and profitability of bank measured through ROA. Whereas Ali (2016) points out that there is significant negative influence between liquidity risk and profitability of bank. Based on several statements above, hypotheses are formulated as follow: H 1 : There is influence in liquidity risk towards the profitability of bank.…”

“…Almazari (2014), Ali (2016), Sufian (2011), Rivard and Thomas (1997), and Gunes (2014) state that there is significant positive influence between net credit facilities to total assets ratio and the profitability of bank. Meanwhile, Osuagwu (2014) states that there is significant negative influence between net credit facilities to total assets ratio and the profitability of bank.…”

“…Good banking sector can contribute to the stability of financial system and economic development of a country. Not only making contribution to economic development, bank also provides opportunity to society, particularly investors, to invest (Ali, 2016).…”