The Impact of Macroeconomic Factors on Profitability of Commercial Bank in the UK

Abstract

Due to the vast contribution of commercial banks to the economic development in UK, this study examined the effect of macroeconomic variables on profitability of Commercial Banks listed at the London Stock Exchange (LSE) for years 2015 to 2019. The objective was to determine the effect of macroeconomic factors on the profitability. Panel data for the 23 listed banks in the LSE was utilized. Panel data regression analysis with random effects was utilized on the data to examine the effects of these five macroeconomic variables which included: Gross Domestic Product (GDP), Real interest rate, Inflation rate, unemployment rate, and Exchange rate on Return on Asset (ROA) and Return on Equity (ROE) which proxies’ profitability. The study findings indicated that real GDP growth rate had negative significant effect on profitability of commercial banks as measured through Return on Assets (ROA) and Return on Equity (ROE). While rest of the macro-indicators do not have a significant impact on profitability measured by ROA and ROE. It is therefore indicating that internal factors are impacting the profitability of banks in the UK rather than external factors.