Factors Affecting Banks’ Profitability in Pakistan
Financial sector plays a very important role in the economic development of a country. The strong and healthy banking system is the basic requirement for sustainable economic growth of a country. The purpose of the study is to analyze the factors affecting the profitability of commercial banks in Pakistan for a period of 2004 to 2014. The study is focused only on internal (bank specific) factors. The study used the panel data and the Fixed Effects Model is used to investigate the effect of Assets, Loans, Deposits, Equity, Asset Quality, Management Efficiency and Liquidity on three different profitability indicators Return on Assets (ROA), Return on Equity (ROE) and Net Interest Margin (NIM). The result found that Bank Size (LSIZE) has a negative effect on banks profitability. Total Loans to Total Assets (TLTA) and Asset Quality Ratio (AQR) have also a negative but significant relationship with ROA and ROE but this relationship is positive and significant with NIM. Deposits to Total Assets (DTA) show a negative as well as insignificant relationship with all of the dependent variables ROA, ROE and NIM. Capital Adequacy Ratio (CAR) has a positive but insignificant relationship with the bank’s profitability while measured by ROA and ROE and NIM. Liquidity Ratio (LQR) has also a positive effect on ROA and NIM. However, the impact of LQR is negative on ROE. Management Efficiency (EFF) shows a negative as well as insignificant relationship with ROA and NIM” but it has a positive impact on ROE.