Factors influencing the Bank’s performance: Comparative study between fourth generation and top banks of Bangladesh

Urmi Das, Renhuma Hoque Moutushi, Nuzat Nawar Tofa

Abstract


Abstract:

 

Purpose: To explore the influence of bank-specific accounting variables on the profitability of commercial banks and to investigate some significant differences in Bangladesh’s fourth generation banks and top banks during the period 2013-2018.

 

Methodology: This study used an Ordinary least square (OLS) regression model. Return on asset (ROA) and Return on equity (ROE) were regressed interchangeably with the independent variables: Non-performing loan (NPL), cost to income ratio, loan to deposit ratio, cost of fund, capital adequacy ratio, debt to equity ratio, and market size. For this purpose, regression variables for the year 2013-2018 were collected from the financial statements of the sample banks, Bangladesh Bank website, Dhaka stock exchange website, and Lanka Bangla Financial portal.

 

Findings: The result indicates that, among the explanatory variables considered, the cost of fund has a significant positive relationship and cost to income, debt to equity ratio have a significant negative association with the fourth generation bank’s ROA. ROA of top banks also shows a significant positive relationship with the cost of fund and a negative relationship with only the debt to equity ratio. On the other hand, the ROE of the fourth generation banks is positively impacted by loan to deposit ratio and negatively by cost to income ratio. Conversely, ROE of top banks has a significant positive relationship with the cost of fund and a significant negative relationship with NPL and cost of fund at a 5% significance level.

Originality: The results of this study provide policymakers and regulators with valuable guidance on the effect of fundamental accounting variables on the profitability of a bank. It will be helpful for further policymaking and regulations.

 

Keywords: Bank’s profitability, Loans, Size, Capital, Cost

 

Article Classification: Research Paper

 

JEL Classification Codes: G20, G21, G32

 

 


Full Text:

PDF

References


Abbas, F., Iqbal, S., & Aziz, B. (2019), “The impact of bank capital, bank liquidity and credit risk on profitability in post crisis period:‎ A comparative study of US and Asia”, Cogent Economics & Finance, Vol. 7 No. 1. https://doi.org/10.1080/23322039.2019.1605683

Bashir, A.H.M.. (2003), “Determinants of profitability in Islamic banks: Some evidence from the Middle East”, Islamic Economic Studies, Vol 11 No.1, pp. 31-57. https://www.researchgate.net/publication/228397140_Determinants_of_profitability_in_Islamic_banks_Some_evidence_from_the_Middle_East

Aggarwal, R., & Jacques, K. T. (2001), “The impact of FDICIA and prompt corrective action on bank capital and risk: Estimates using a simultaneous equations model”, Journal of Banking & Finance, Vol. 25, No.6, pp. 1139–1160. https://doi.org/10.1016/S0378-4266(00)00125-4

Ahmed, A.M., & Khababa, N. (1999), “Performance of banking sector in Saudi Arabia”, Journal of Financial Management and Analysis, Vol. 12 No. 2, pp. 30-36. https://www.econbiz.de/Record/performance-of-the-banking-sector-in-saudi-arabia-ahmed-abdulkader-mohamed/10001487452

Akhavein, J. D., Berger, A. N., & Humphrey, D. B. (1997), “The Effects of Megamergers on Efficiency and Prices: Evidence from a Bank Profit Function”, Review of Industrial Organization, Vol. 12 No.1, pp. 95–139. https://doi.org/10.1023/A:1007760924829.

Akhtar, M., Ali, K., & Sadaqat, S. (2011), “Liquidity risk management: a comparative study between conventional and Islamic banks of Pakistan”,Interdisciplinary Journal of Research in Business, Vol. 1(January), pp.35-44. http://joc.hcc.edu.pk/faculty_publications/liquidityriskmanagement.pdf

Al-Homaidi, E. A., Tabash, M. I., Farhan, N. H. S., Almaqtari, F. A., & McMillan, D. (2018), “Bank-specific and macro-economic determinants of profitability of Indian commercial banks: A panel data approach”, Cogent Economics & Finance, Vol. 6 No.1. https://doi.org/10.1080/23322039.2018.1548072

Al-Tamimi, H. A. H. (n.d.). (2010), “Factors Influencing Performance of the UAE Islamic and Conventional National Banks”, Global Journal of Business Research, Vol 4 No. 2. https://www.researchgate.net/publication/228201551

Ariyadasa, C., Selvanathan, E. A., Siddique, M. A. B., & Selvanathan, S. (2017), “On the profitability of commercial banks: the Sri Lankan case”, Applied Economics, Vol. 49, No. 21, pp. 2106–2116. https://doi.org/10.1080/00036846.2016.1231909

Barth, J., Caprio, G. and Levine, R. (2008), “ Rethinking Bank Regulation: Till angles govern”, Cambridge University Press, Cambridge, England. https://www.cambridge.org/core/books/rethinking-bank-regulation/1F17D4B8126212E2E6D5D11875F1FCF0

Batten, J., &Vo, X. V. (2019), “Determinants of Bank Profitability—Evidence from Vietnam”, Emerging Markets Finance and Trade, Vol. 55 No. 6, pp. 1417–1428. https://doi.org/10.1080/1540496X.2018.1524326

Beck, Thorsten; Demirguc-Kunt, Asli; Laeven, Luc; Levine, Ross. (2008), “Finance, Firm Size, and Growth”, Journal of Money, Credit & Banking (Blackwell), Vol. 40 No. 7, pp. 1379-1405.

https://ideas.repec.org/a/mcb/jmoncb/v40y2008i7p1379-1405.html

Ben, N. S., & Goaied, M. (2008), “The determinants of commercial bank interest margin and profitability: Evidence from Tunisia”, Frontiers in Finance and Economics, Vol. 5 No. 1, pp. 106-130. https://ssrn.com/abstract=1538810

Berger, A. N. (1995), “The Relationship between Capital and Earnings in Banking”, Journal of Money, Credit and Banking, Vol. 27 No. 2, pp. 432. https://doi.org/10.2307/2077877

Berger, A. N., & Bouwman, C. H. (2013), “ How does capital affect bank performance during financial crises?”, Journal of Financial Economics, Vol. 109 No. 1, pp. 146–176.

https://doi.org/10.1016/j.jfineco.2013.02.008

Bikker, J.A. & Hu, H. (2002), “Cyclical Patterns in Profits, Provisioning and Lending of Banks and Procyclicality of the New Basel Capital Requirements”, BNL Quarterly Review, Vol. 55 No. 221, pp. 143-175. https://ideas.repec.org/a/psl/bnlqrr/200222.html

Bollard, A., Hunt, C., & Hodgetts, B. (2011, August), “The role of banks in the economy-improving the performance of the New Zealand banking system after the global financial”, New Zealand Shareholders Association Annual Meeting. https://www.bis.org/review/r110810b.pdf

Bourke. P. (1989), “Concentration and other determinants of bank profitability in Europe, North America and Australia”, Journal of Banking and Finance, Vol. 13 No. 1, pp. 65-79. https://doi.org/10.1016/0378-4266(89)90020-4

Duca, J. V., & McLaughlin, M. M. (1990), “Developments affecting the profitability of commercial banks”, Federal Reserve Bulletin, (Jul), pp. 477–499. https://ideas.repec.org/a/fip/fedgrb/y1990ijulp477-499nv.76no.7.html

Eichengreen, B., & Gibson, H. D. (2001), “Greek Banking at the Dawn of the New Millennium”, C.E.P.R. Discussion Papers 2791. https://www.researchgate.net/publication/4839180

Goddard, J. A., Molyneux, P., & Wilson, J. O. S. (2004), “Dynamics of Growth and Profitability in Banking”, Journal of Money, Credit, and Banking, Vol. 36 No. 6, pp. 1069–1090.

https://econpapers.repec.org/article/mcbjmoncb/v_3a36_3ay_3a2004_3ai_3a6_3ap_3a1069-90.htm

Guru, B. K., Staunton, J., &Balashanmugam, B. (2002), “Determinants of Commercial Bank Profitability in Malaysia”, working paper, Multimedia University. http://web.usm.my/aamj/5.2.2000/5-2-1.pdf

Haile, A., Getacher, T., &Tesfay, H. (2015), “Financial Performance Analysis of Selected Commercial Banks in Ethiopia”, Ethiopian Journal of Business and Economics, Vol. 4 No. 2, pp. 251.

https://www.ajol.info//index.php/ejbe/article/view/120626

Halkos, G. E., & Salamouris, D. S. (2004), “Efficiency measurement of the Greek commercial banks with the use of financial ratios: A data development analysis approach”, Management Accounting Research, Vol. 15 No. 2, pp. 201–224. https://doi.org/10.1016/j.mar.2004.02.001

Islam, Md. Shahidul & Nishiyama, Shin-Ichi (2016), "The determinants of bank net interest margins: A panel evidence from South Asian countries", Research in International Business and Finance, Elsevier, Vol. 37 No. C, pp. 501-514. http://doi.org/10.1016/j.ribaf.2016.01.024

Jackson, P., Furfine, C., Yoneyama, M., & Hancock, D. (1999), “Capital Requirements and Bank Behaviour: The Impact of The Basle Accord”, Basel Committee 0n Banking Supervision Working Papers, Vol 1. https://www.bis.org/publ/bcbs_wp1.pdf

Kalpana, B., & Rao, T. V. (2007), “ Role of Commercial Banks in the Economic Development of Pakistan”, International Journal of Management and Applied Science, Vol. 3 No.c, pp. 2–5. http://www.iraj.in/journal/journal_file/journal_pdf/14-358-14982087631-4.pdf

Kim, Mihwa; Kim, I. (1997),“The Structure-Profit Relationship of Commercial Banks in South Korea and the United States: A Comparative Study”, Multinational Business Review, Vol. 5 No. 2, pp. 81-94. https://www.questia.com/library/journal/1P3-16999250/the-structure-profit-relationship-of-commercial-banks

Kosmidou, K. (2008), “The determinants of banks’ profits in Greece during the period of EU financial integration”, Managerial Finance, Vol. 34 No. 3, pp. 146–159. https://www.emerald.com/insight/content/doi/10.1108/03074350810848036/full/html

Lacewell, S. K. (2003), “Do efficient institutions score well using ratio analysis? An examination of commercial banks in the 1990s”, Journal of Commercial Banking & Finance,Vol. 2, pp. 17-33. https://search.proquest.com/openview/edd4a6d162e1716befd205ab54157fc6/1?pq-origsite=gscholar&cbl=39596

Naceur, S. B., & Goaied, M. (2001), “The determinants of the Tunisian deposit banks’ performance”, Applied Financial Economics, Vol. 11 No. 3, pp. 317–319. https://doi.org/10.1080/096031001300138717

Molyneux,P.,Thornton, J. (1992), “The determinants of European bank profitability”, Journal of Banking and Finance, Vol. 16 No. 6, pp. 1173-1178. http://doi.org/10.1016/0378-4266(92)90065-8

Molyneux, P. (1993), Structure and Performance in European Bank (Doctoral Dissertation, University of Wales, Bangor, United kingdom). http://e.bangor.ac.uk/4203/2/DX175795_1_0001.pdf

Olweny, T. (2011), “Effects of banking sectoral factors on the profitability of commercial banks in Kenya”, Economics and Finance Review, Vol. 1, pp. 1-30. https://www.researchgate.net/publication/263542674

Ozili, P. K. (2015), “Determinants of Bank Profitability and Basel Capital Regulation: Empirical Evidence from Nigeria”, Research Journal of Finance and Accounting, Vol. 6 No. 2, pp. 124-131.

https://www.researchgate.net/publication/271327403

Ozili, P. K. (2017), “Bank Profitability and Capital Regulation: Evidence from Listed and non-Listed Banks in Africa”, Journal of African Business, Vol. 18 No. 2, pp. 143–168. https://www.tandfonline.com/doi/full/10.1080/15228916.2017.1247329

Ramlall, I. (2009), “Bank-Specific, Industry-Specific and Macroeconomic Determinants of Profitability in Taiwanese Banking System: Under Panel Data Estimation”, International Research Journal of Finance and Economics, Vol. 34, pp. 160-167. https://www.researchgate.net/publication/255648655

Siddiqui, A. (2008), “Financial contracts, risk and performance of Islamic banking”, Managerial Finance, Vol. 34 No. 10, pp. 680-694. https://www.researchgate.net/publication/242342124

Sinkey, Jr. J. F.( 2002), Commercial Bank Financial Management (6th ed.), Prentice-Hall, Upper Saddle River, New Jersey, United States.

Spathis, C., Kosmidou, K., & Doumpos, M. (2002), “Assessing Profitability Factors in the Greek Banking System: A Multicriteria Methodology”, International Transactions in Operational Research, Vol 9 No. 5, pp. 517–530. https://www.researchgate.net/publication/227644945

Sufian, F. (2012), “Determinants of bank profitability in developing economies: Empirical evidence from the South Asian banking sectors”, Contemporary South Asia, Vol. 20 No. 3, pp. 375–399.

https://www.tandfonline.com/doi/abs/10.1080/09584935.2012.696089

Sufian, F., & Habibullah, M. S. (2009a), “Determinants of bank profitability in a developing economy: Empirical evidence from Bangladesh”, Journal of Business Economics and Management, Vol. 10 No. 3, pp. 207–217.

https://journals.vgtu.lt/index.php/JBEM/article/view/6233

Sufian, F., & Habibullah, M. S. (2009b), “Bank specific and macroeconomic determinants of bank profitability: Empirical evidence from the China banking sector”, Frontiers of Economics in China, Vol. 4 No. 2, pp. 274–291. https://brill.com/view/journals/fecc/4/2/article-p274_8.xml

Sufian, F., & Parman, S. (2009), “Specialization and other determinants of non-commercial bank financial institutions’ profitability: Empirical evidence from Malaysia”, Studies in Economics and Finance, Vol. 26 No. 2, pp. 113–128. https:// doi/10.1108/10867370910963046/full/html

Ta Ho, Chien and Shun Wu (2006), “Benchmarking Performance Indicators for Banks”, Benchmarking: An International Journal, Vol. 13 No. 1/2, pp. 147-159. https://doi.org/10.1108/14635770610644646

Williams, B. (2003), “Domestic and international determinants of bank profits: Foreign banks in Australia”, Journal of Banking and Finance, Vol. 27 No. 6, pp. 1185 - 1210.

https://research.monash.edu/en/publications/domestic-and-international-determinants-of-bank-profits-foreign-b

Yeh, Q.-J. (1996), “The Application of Data Envelopment Analysis in Conjunction with Financial Ratios for Bank Performance Evaluation”, The Journal of the Operational Research Society, Vol. 47 No. 8, pp. 980. https://doi.org/10.2307/3010406




Copyright (c) 2020 European Journal of Applied Business and Management

ISSN: 2183-5594 

Indexing: GOOGLE SCHOLAR - LATINDEX - DRJI - ICI JOURNALS MASTER - REDIB