The internal determinants of bank profitability and stability

Abstract

PurposeThe purpose of this study is to examine the internal determinants of bank profitability and stability in Pakistan banking sector. Because of specific research objectives, this study excludes the external factors of profitability and stability to find the role of bank internal determinants in achieving high performance.Design/methodology/approachA panel regression analysis is built on a balanced panel data using 24 commercial banks over the sample period of 2007-2015. The authors performed a separate analysis of bank profitability and stability. Both models used a comprehensive set of bank internal determinants.FindingsThe results that were obtained from profitability model indicated that bank size, credit risk, funding risk and stability have statistically significant impacts on profitability, while liquidity risk showed the statistically insignificant impact on profitability. Regression findings from stability model reveal that bank size, liquidity risk, funding risk and profitability have statistically significant impacts on stability, while credit risk had an insignificant effect on stability. However, the effect of the financial crisis is uniform and showed statistically insignificant impact in both models.Practical implicationsOverall, the authors’ findings bring some new but useful insights to the banking literature. Some recommendations may be functional for the sustainable performance of banks.Originality/valueIn view of study results, the authors provide interesting insights into the practices and characteristics of banks in Pakistan. This study also highlights significant bank internal determinants to improve understanding in the existing literature.