Abstract
The aim of this study was to analyze the impact of bank-specific, industry-specific and macroeconomic variables on the profitability of banks in Pakistan. This study applied the two-step generalized method of momentum (GMM) system estimator on an unbalanced dynamic panel of 28 banks over the latest period 2007–2016. The robust results reveal that the bank’s profitability in Pakistan is explained by size, higher solvency, financial structure, operating cost, labor productivity, market power, and economic growth. We also found an inverted U-shape relationship between banks size and profitability. Herfindahl–Hirschman Index (HHI) was applied to evaluate the impact of market power and found results in support of Structure Conduct Hypothesis. On the other hand, credit quality, operational efficiency, banking sector development, inflation, and industry concentration are found to be negatively and significantly related to the profitability of banks. Further, this study found lower profitability of banks during the government transition. The Mean comparison of profitability indicates that specialized banks (SB) in Pakistan are generating higher net interest margin (NIM) than all commercial banks (ACB). However, the empirical results of this study are robust and consistent with previous literature.
Highlights
There are many studies about bank profitability around the world including in developed and emerging markets
An unbalanced dynamic panel of 28 banks over the period 2007–2016 was used to analyze the impact of bank-specific, industry-specific and macroeconomic variables on return on assets, return on equity, net interest margin, and profit margin of banks in Pakistan
We applied only bank-specific variables alone and applied all independent variables combined in a single equation for the robustness to analyze the joint impact of all variable used in the study on all profitability indicators
Summary
There are many studies about bank profitability around the world including in developed and emerging markets. Similar to other Asian emerging economies, including China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan and Thailand, Pakistan has gained its status back of “emerging market”, which was lost in late 2008.1 The tremendous performance of Pakistan’s energy, oil and gas, cement, fertilizers and most important the banking industry contributed to bringing Pakistan into one of the renowned stock markets around the globe. Pakistan’s KSE1002 index achieved 46% growth in 2016 and emerged as top-performing and most profitable Asian stock market. Levine and Zervos (1998) earlier suggested that both sound banking system and stock market liquidity have a positive impact on capital accumulation, economic growth, and productivity, even after controlling for political and economic factors
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