The effect of covid-19 on the profitability of commercial banks: evidence from South Asian region

Abstract

This study aims to examine the effects of COVID-19 on the profitability of commercial banks in the South Asian region. This study investigates and evaluates licensed commercial banks' financial performance in Sri Lanka, Bangladesh, and Pakistan. The data were drawn from quarterly financial statements over 15 quarters from 2018 Q1 to 2021 Q3. Twelve commercial banks in Sri Lanka and Bangladesh and ten commercial banks in Pakistan have been taken as the sample for this study. Capital adequacy ratio, Loan to deposit ratio, Non-performing loan ratio, and COVID-19 are the independent variables. Return on assets and Return on equity are the profitability proxies, and bank size and bank ownership are the control variables. Panel regression was used to analyze the data. The findings revealed that the COVID-19 pandemic significantly impacts the profitability of commercial banks in Sri Lanka. And on the contrary, the COVID-19 pandemic significantly negatively impacts the profitability of commercial banks in Pakistan. Furthermore, Pakistan's banking sector was found as the primarily affected banking sector in the South Asian region in terms of profitability during the pandemic. The outcomes of this study suggest that banks should frame more into risk management strategies and Basel III requirements. In addition, irrespective of the size of the banks, the managers should not underplay the importance of capital adequacy. Hence consistent evaluation of the CAR is vital. And also, this study recommends that bank managers should focus more on credit risk management, particularly in turbulent conditions.