Bank-specific & Macroeconomic Determinants of Profitability: Empirical Evidence from Bangladeshi Private Commercial Banks

Abstract

This paper tries to investigate the determinants of profitability for Bangladeshi private commercial banks. The return on assets (ROA) and return on equity (ROE) are two important variables that have been used in this study to indicate profitability. The study considered a set of independent variables such as bank-specific factors that comprise bank size, capital adequacy, asset quality, liquidity, deposits, asset management, operational efficiency; and macroeconomic factors such as GDP growth rate, inflation rate, interest rate and exchange rate. The data for 25 private commercial banks from Bangladesh over the period of 2012 to 2019 have been analyzed. Overall, the findings are satisfactory. The capital adequacy ratio, asset management ratio and GDP growth rate are found to have significant positive impact on ROA and ROE of the private commercial banks in Bangladesh. The asset quality, liquidity and deposit ratios also have a significant positive impact on ROE; and an insignificant positive impact on ROA. The cost to income ratio and bank size both have a negative association with ROA and ROE. These imply some sort of scale inefficiencies and problems in minimizing costs associated with increasing equity. The conclusion prioritizes that the financial sector authority in Bangladesh should continue their current role towards having a sustainable banking industry and thus having the economic growth, welfare and prosperity of the nation.