Abstract
The main objective of the paper is to analyze the impact of bank specific and macro-economic factors on the profitability of selected Ethiopian private commercial banks over the period of 2005 to 2014. To meet the objective, both descriptive and random effect panel econometrics method of data analysis has been employed. The study uses both return on asset (ROA) and return on equity (ROE) as a measurement for banks profitability. Private Banks profit after tax gets increasing year after year and their ROA is found to be three percent on average. The deposit share of private commercial banks reached above 30 percent in 2014, while it was only 10 percent in 2000. The panel econometrics result shows that, the variable bank size and GDP growth rate has a positive and significant impact on private commercial banks ROA and ROE. While, interest rate spread has a negative and significant impact. The variable Loan to deposit ratio has negative and significant impact on banks ROA while, it has no effect on their ROE. Inflation also an important variable in explaining ROA at 10% significant level but, it has no effect on ROE. The other important variable in explaining ROE is loan concentration index it has positive and significant impact on banks ROE. But, it does not significantly explain ROA. As a recommendation the significant and positive impact of Bank size can be taken as a good signal for commercial banks to merge and to have scale advantage. The significant impact of macro-economic variables in explaining banks profit is an indicator to designed policies that promote sustainable output growth and controlling inflation to have stable banking sector.
Highlights
Profitability is a bank’s first line of defense against unexpected losses, as it strengthens its capital position and improves future profitability through the investment of retained earnings [6].Whether profitability is measured as returns on assets, returns on equity, or net interest margins Commercial banks appear very profitable in Sub-Saharan Africa (SSA)
Since the major objective of this paper is to assess the effect of Bank specific and macro-economic determinants on the profitability of private commercial banks of Ethiopia, we made panel econometrics investigation on bank specific and macroeconomics variables against banks return on asset (ROA) and (ROE)
The second regression results with Return on asset as the dependent variable presented in Table 3, below shows, the variable bank size, loan to deposit ratio and interest rate spread are significant at 5% level of significance while GDP growth rate and inflation is significant at 10% level of significance
Summary
Whether profitability is measured as returns on assets, returns on equity, or net interest margins Commercial banks appear very profitable in Sub-Saharan Africa (SSA). Bank profits are an important source of equity and it promotes financial stability. If bank profits are reinvested, this should lead to safer banks, and, high profits could promote financial stability [7]. As far as the ownership of commercial banks is considered privately owned banks earn higher returns compared to publicly owned ones. Owned banks may be more profitable than state-owned due to imperfectly designed incentives or because public banks may have objectives other than profit or value maximization. The more profitability of private banks than the public ones a signal to encourage privatization in the banking sector, but only to the extent that reinvestment of the profits can be effectively encouraged [7]
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