International Journal of Banking and Financial Law IJBFL

Vol. 1(1), pp. 001-011, June, 2017. www.premierpublishers.org. ISSN: XXXX-XXXX

Research Article

Determinants of Profitability of Commercial Banks in

Bangladesh
Md. Asadul Islam1, Md. Nazirul Islam Sarker2, Mahabub Rahman3, Arifin Sultana4, AZM
Shafiullah Prodhan5
1Department of Finance and Banking, Jahangirnagar University, Bangladesh.
2Schoolof Public Administration, Sichuan University, China.
3Department of Statistics, Jahangirnagar University, Bangladesh.
4Department of Psychology, National University, Bangladesh.
5Department of Horticulture, Bangabandhu Sheikh Mujibur Rahman Agricultural University, Gazipur, Bangladesh.

The paper examined the profitability determinants of private commercial banks of

Bangladesh for the year 2014 and 2015. The study employed annual data for all the 11
private commercial banks of Bangladesh for the year 2014 and 2015. Multiple regression
analyses were run to capture the significant determinants of profitability and to test
hypothesis. The empirical findings from this study suggested that asset size and Net
Interest Margin ratio had no significant effect on the profitability. But the impact of non-
performing loans to total loans (NPL) on profitability was observed as the most significant
among various variables. Furthermore, investment activities, mainly in shares and
debentures of private sectors also have some positive impact on return on equity (ROE).
The findings also suggested that diversified banking activities including the investment
activities made these banks more profitable. Diversified banking activities are welcomed
but if these activities include higher proportion of volatile trading activity rather than low
risk income streams like fees and commission, the risk may become higher. The policy
direction should be directed in such a way which will enhance the resilience and efficiency
of the financial institutions with the aim of intensifying the sturdiness as well as strength
of the banking sector.

Keywords: Determinant, profitability, performance analysis, Bank, Bangladesh.

INTRODUCTION

The private commercial banks are the major parts of
banking sector in terms of market share and profitability
in Bangladesh with high profit growth. Current
Commercial banking is the main character of present
economy as it makes flow of the resource. Finance is
blood of the trade, commerce and they play the role of
vanes in the Circulation of the funds in economy and the
primary growth of any country depends upon the robust
banking system. Commercial banks are the main pillar of
the financial system in Bangladesh as banks provide
different opportunity and services to clients. The
importance of the banking sectors is immense in the
progress and richness of any state. The economic
Determinants of Profitability of Commercial Banks in Bangladesh
development and prosperity comes from the well-rounded
developed and perfect banking system. Strong banking
system plays important role in efficient allocation and
utilization of credit (Haque and Tariq, 2012). Bank is a
backbone of all the industries, because every transaction
where money is involved, the bank is the main pillar of
funding.
*Corresponding Author: Md. Nazirul Islam Sarker,
Interdisciplinary Center for Food Security, Bangladesh
Agricultural University, Mymensingh, Bangladesh. Email
sarker.scu@yahoo.com
Islam et al. 002
Banks attract saving from people. The main role of a
financial system is not only to transfer funds from savers
to investors but also to ensure that funds are being
transferred to the sectors which are most important for an
economy. Economies that have a profitable banking
sector are better able to withstand negative shocks and
contribute to the stability of the financial system
(Athanasoglou, Brissimis and Delis, 2005). On the other
hand, banks insolvencies can result in systemic crisis.
Therefore, it is important to understand the factors which
really affect the banking sectors profitability. The
Financial sector of Bangladesh, like most in developing
countries, is dominated by banking industry. After the
independence of Bangladesh in 1971, all the domestic
banks were merged and grouped into few state owned
commercial banks. The aim of the government was to
channel funds to the public sector and to prioritize credit
to those sectors that sought to reconstruct the war-
affected country mainly industries and agricultural
sectors. However, their performance was not satisfactory
in terms of profitability, customer service and overall
performance. To set up a proper regulatory system that
would diagnose such problems and correct them was
also tough while the government intervention was in
existence everywhere. Therefore, banking concept like
profitability, liquidity and capital adequacy were alien to
bank managers. Some private banks were allowed to
operate in the market in 1980s, they begun to perform
satisfactorily. Later more private commercial banks were
allowed to play in the market. At present private
commercial banks are dominant in respect of market
share and profitability in the banking sector of
Bangladesh.
Banking Sector in Bangladesh
After the independence of Bangladesh, the Government
of Bangladesh declared the Dhaka branch of the State
Bank of Pakistan as the central bank of the country, and
it was renamed as Bangladesh Bank. This was done
through the Presidential Order No. 127of 1972 and the
Bangladesh Bank came into existence with retrospective
effect from 16 December 1971. The Bangladesh
government decided to nationalize all banks except
foreign banks and renamed the various banks in 1972. All
the domestic banks were merged and grouped into six
commercial banks. The aim of the government was to
channel funds to the public sector and to prioritize credit
to those sectors that sought to reconstruct the war-
affected country mainly industries and agricultural
sectors. However, these banks were unable to function
well because of the government control at the wrong
sectors. The situation was worsened by the fact that
loans were provided to the public sector without taking
account of the commercial viability. At that period banks
had poor capital lease, poor customer services and
lacked any market-based monetary instruments. But
Determinants of Profitability of Commercial Banks in Bangladesh
mostly, as credits were given out without commercial
viability, and because it took a long time to call a loan
non-performing, and when it was called so, recovery was
so abjectly expensive under the erstwhile laws, the loan
recovery rate was also extremely poor. To set up a
proper regulatory system that would diagnose such
problems and correct them was also tough while the
government intervention was in existence everywhere.
Therefore, banking concept like profitability, liquidity and
capital adequacy were alien to bank managers.
There were no domestic private commercial banks in
operation until 1982; When the Arab-Bangladesh Bank
Ltd. (currently AB bank Ltd.) started its business as
private commercial bank in the country. To adopt with
more market based system as well as to increase
competition, in early 1980 the government encouraged
some private banks to flourish in the country.
Accordingly, licenses were given to six new private banks
to operate in the country till 1983. With the good
performance of the new private banks and keeping in
view the poor performance of nationalized commercial
banks government privatized two state owned banks
namely the Uttara Bank and the Pubali Bank during
1984-85. Another state owned bank, The Rupali Bank
Limited has also been transferred to the private sector in
1986. More commercial banks were permitted to operate
in the private sector during the mid-1990s.
The number of banks in all now stands at 53 in
Bangladesh. Out of the 53 banks, 4 are Nationalized
Commercial Banks (NCBs), 28 local private commercial
banks, 12 foreign banks, 5 are Development Financial
Institutions (DFIs) and the rest of 4 are other bank among
them Sonali Bank is the largest among the NCBs while
Pubali is leading in the private ones. Among the 12
foreign banks, Standard Chartered has become the
largest in the country. Besides the scheduled banks,
Samabai (Cooperative) Bank, Ansar-VDP Bank,
Karmasansthan (Employment) Bank and Grameen bank
are functioning in the financial sector. The main objective
of the study is to identify the major determinants of the
profitability of Private Commercial Banks in Bangladesh
in recent years.
LITERATURE REVIEW
This study examines some of the theories relating to
capital and profitability as well as bank size and
profitability. The theories include the signaling theory,
expected Bankruptcy cost hypothesis, risk-return
hypothesis, market power and efficiency Structure
hypothesis.
The relationship between capital and profitability is
explained by signaling theory (Berger, 1995; Trujillo-
Ponce, 2012), expected bankruptcy cost hypothesis and
risk-return hypothesis (Athanasoglou, Brissimis and
Delis, 2005; Olweny and Shipho, 2011). The signaling

hypothesis suggested that a higher capital was a positive
signal to the market of the value of a bank (Ommeren,
2011). As Berger (1995) and Trujillo-Ponce (2012)
observed that, under the signaling theory, bank
management signaled private information that the future
prospects are good by increasing capital. Thus, a lower
leverage indicates that banks perform better than their
competitors who cannot raise their equity without further
deteriorating the profitability (Ommeren, 2011). On the
other hand, bankruptcy hypothesis argued that in a case
where bankruptcy costs were unexpectedly high, a bank
holds more equity to avoid period of distress (Berger,
1995). As the literature review pointed out, the signaling
hypothesis and bankruptcy cost hypothesis supported a
positive relationship between capital and profitability.
However, the risk-return hypothesis suggested that
increasing risks, by increasing leverage of the firm, leads
to higher expected returns. Therefore, if a bank expects
increased returns (profitability) and takes up more risks,
by increasing leverage, the equity to asset ratio
(represented by capital) will be reduced. Thus, risk-return
hypothesis predicts a negative relationship between
capital and profitability (Dietrich and Wanzenrid, 2009;
Ommeren, 2011; Saona, 2011; Sharma and Gounder,
2012).
Consequently, the Market Power (MP) and Efficiency
Structure (ES) theories explained the relationship
between the bank size and profitability. Olweny and
Shipho (2011) observed that the market power posits that
performance of banks was influenced by the market
structure of the industry and that the Efficiency Structure
(ES) hypothesis maintains that banks earn high profits
because they were more efficient than the others.
Concluding on the MP and ES theories, Olweny and
Shipho (2011) argued that MP theory assumed that the
profitability of a bank is a function of external market
factors, while the ES assume that bank profitability is
influenced by internal efficiencies.
The empirical review of the study was done by identifying
similarities and differences across the various economies
studied by previous researchers. The factors affecting
banks profitability have been empirically examined by
many authors, especially in the developed countries.
Demirg-Kunt and Huizinga (1999), using bank level
data for 80 countries in the 1988-1995 periods, showed
that differences in interest margins and banks profitability
reflect a variety of determinants: the characteristics of the
bank, macroeconomic conditions, explicit and implicit
bank taxation, deposit insurance regulation, overall
financial structure, and several underlying legal and
institutional indicators. Athanasoglou et al. (2005) studied
the effect of bank-specific, industry-specific and
macroeconomic determinants of bank profitability, using
an empirical framework that incorporates the traditional
Structure-Conduct-Performance (SCP) hypothesis. The
results indicated that all bank-specific determinants, with
the exception of size, affect bank profitability significantly
Determinants of Profitability of Commercial Banks in Bangladesh
Int. J. Bank. Finan. Law 003
in the anticipated way. Saona (2011) examined the
determinants of the profitability of the US banks during
the period 1995-2007. The empirical analysis was
combined bank specific (endogenous) and
macroeconomic (exogenous) variables through the GMM
system estimator. He found a negative link between the
capital ratio and the profitability, which supports the
notion that banks were operating over-cautiously and
ignoring potentially profitable trading opportunities. Scott
and Arias (2011) also investigated the primary
determinants of profitability of the top five bank holding
companies in the United States. Profitability determinants
for the banking industry include capital to asset ratio,
annual percentage changes in the external per capita
income and internal factor of size (as measured by an
organizations total assets). Staikouras and Wood (2004)
constructed the OLS and fixed effect models to examine
the determinants of European bank profitability from 1994
to 1998. The profitability of European banks is influenced
not only by factors related to their management decisions
but also to changes in the external macroeconomic
environment.
Khrawish (2011) accessed the Jordanian commercial
bank profitability from 2000 through 2010, and
categorized the factors affecting profitability into internal
and external factors. The author found that there was
significant and positive relationship between return on
asset (ROA) and the bank size, total liabilities/ total
assets, total equity/ total assets, net interest margin and
exchange rate of the commercial banks and that there
was significant and negative relationship between ROA of
the commercial banks and annual growth rate for gross
domestic product and inflation rate. Dietrich and
Wanzenrid (2009) analyzed the profitability of commercial
banks in Switzerland over the period 1999 to 2006. Their
findings revealed that the most important factors are the
GDP growth variable, which affects the bank profitability
positively, and the effective tax rate and the market
concentration rate, which both had a significantly
negative impact on bank profitability. The bank specific
and macroeconomic determinants of profitability in
participation banks for Turkish banking sector using ROA
and ROE. The bank specific determinants of profitability,
the ratio of non-performing loans to total loans had a
significant negative effect on profitability. The result was
consistent with the study by Davydenko (2010) in the
Ukraine. Flamini, McDonald and Schumacher (2009)
investigated the determinants of bank profitability in 41
Sub-Saharan African (SSA) countries, using a sample of
389 banks. The study proved that apart from credit risk,
higher returns on assets were associated with larger
bank size, activity diversification, and private ownership.
The results also indicated that bank returns were affected
by macroeconomic variables, suggesting that
macroeconomic policies that promote low inflation and
stable output growth do boost credit expansion. Sharma
and Gounder (2012) investigated the profitability
Islam et al. 004
determinants of deposittaking institutions in Fiji, over the
20002010 periods. The study used panel data
techniques of fixed effects estimation and generalized
method of moments (GMM). The authors discovered that
market power (measured by the Lerner Index) was a key
determinant of profitability. Thus, institutions were
allowed to pass on to their clients the interest costs of
raising deposit liabilities and the overall cost of
operations. Naceur and Goaied (2008) observed a
positive relationship between capital and net interest
margin or profitability in Tunisia, but determined that the
bank size impacts negatively on profitability, which
implied that Tunisia banks are operating above their
optimal level. Olweny and Shipho (2011) evaluated the
effects of banking sectoral-factors on the profitability of
commercial banks in Kenya, using panel data from 2002
to 2008 of 38 commercial banks. The authors concluded
that the bank-specific factors were more significant
factors influencing the profitability of commercial banks in
Kenya than market factors. The study revealed that
profitable commercial banks were those that strive to
improve their capital bases, reduce operational costs,
improves assets quality by reducing the rate of non-
performing loans, employs revenue diversification
strategies as opposed to focused strategies and kept the
right amount of liquid assets. Aburime (2008) investigated
the determinants of bank profitability in Nigeria, using a
panel data from 1980-2006. He found that real interest
rates, monetary policy, and exchange rate regime were
significant macroeconomic determinants of bank
profitability in Nigeria, while banking sector development,
stock market development, and financial structure were
insignificant. Also, Oladele, Sulaimon and Akeke (2012)
found that operating expense; relationship between cost
and income, and equity to total assets significantly
affected the performance of banks in Nigeria. Ani et al.
(2012) established that capital and asset composition
positively affect bank profitability, while bank size had
negative effect on profitability in Nigeria.
Sufian and Habibullah (2009) examined the determinants
of commercial bank profitability in Bangladesh using the
data of 37 banks over the period 1997-2004. The result of
the study indicated that loans intensity, credit risk and
cost were the bank specific factors that had positive and
significant impact on the profitability of Bangladeshi
commercial banks. However, the finding of the study was
inconclusive with regard to the impact of size on
profitability. While size was found to have positive and
significant impact on ROAA and NIM, its impact on ROAE
is negative and significant. As far as the external factors
were concerned, the study indicated that such factors
had no significant impact on the profitability of
commercial banks in Bangladesh. Jahangir et al. (2007)
examined the profitability in the context of Bangladeshi
banking industry. The study was carried out on the data
from the year 2000 to 2005 of only the listed commercial
banks in DSE (Dhaka Stock Exchange). It was found that
there was a strong and significant relationship between
Determinants of Profitability of Commercial Banks in Bangladesh
market size and bank's return on equity. It seemed that
capital adequacy was an important factor for a bank to be
profitable.
The above literature showed the consistency of some of
the internal (bank-specific) factors like capital, size and
credit risks in determining bank profitability across
different economies of the world. The external
(macroeconomic) factors of gross domestic product
growth rate and interest rate had also been prominent in
the determination of bank profitability. Consequently, the
review showed that return on assets (ROA) and return on
equity (ROE) were the most common criteria employed
as measures of profitability by most researchers.
In principle, ROA reflects the ability of a banks
management to generate profits from the banks assets,
although it may be misleading due to off-balance-sheet
activities. Thus, Return on Asset (ROA) is primarily an
indicator of managerial efficiency. Return on Equity
(ROE) indicates the return to shareholders on their
equity. Thus, it is a measure of the rate of return flowing
to shareholders. As such it approximates the net benefit
that the shareholders received from investing their capital
in the financial institution. Moreover, ROE equals ROA
times the total assets-to-equity ratio. The latter is often
referred to as the banks equity multiplier and measures
financial leverage. Essentially the ROE ROA
relationship clearly illustrates the fundamental trade-off
banks face between risk and return, whereas the equity
multiplier reflects the leverage or financing policies, i.e.
the sources (debt or equity) chosen to fund the bank.
Banks with lower leverage, and thus higher equity,
generally report higher ROA, but lower ROE.
Athanassoglou, (2005) argued that an analysis based on
ROE disregards the risks associated with leverage, often
a consequence of regulation. On the other hand,
Goddard et al (2004) employed ROE as an appropriate
profitability measure, arguing that for many European
banks the off-balance-sheet business makes a significant
contribution to total profit. The earnings generated from
these activities were excluded from the denominator of
ROA. In our analysis ROE has been used as the key ratio
for the evaluation of bank profitability, akin to the
approach followed by Goddard et al (2004).
RESEARCH METHODOLOGY
This study employed annual data for all the 11 second
generation private commercial banks of Bangladesh for
the year 2015 and 2014. The total sample consisted of 22
(11 2) bank-year observations. The main source of data
was the annual report of each bank. It is worth noting
here that all the 11 private commercial banks are listed in
the Dhaka Stock Exchange. To capture the recent years
profitability determinants less emphasis has been given
to the time series analysis. On the other hand no
sampling has been made to select the banks. As the
profitability of private commercial banks seemed to be at

the highest point in the recent years, our approach is
assumed to be very much logical to explain the high
profitability of these banks. In our model, we presented
one dependent and nine explanatory variables that
influenced the profitability of a bank. Our objective of
choosing the proxies was to capture the significant
determinants of profitability. Multiple regression analyses
were run for the year 2015 and 2014 to explain the
relationship between ROE and independent variables.
Variables
To analyze the determinants of the profitability of private
commercial banks 10 variables included in this study, one
of them was the dependent and the others were as
explanatory or independent variables.
Dependent Variables
In most of the literature, banks profitability, usually
measured by return on asset (ROA) and return on equity
(ROE). In this study, Return on Equity (ROE) was used
as measures of banks profitability. ROE was determined
as net profit divided by total equity and was expressed in
percent. ROE showed the profit earned per dollar of
equity and most importantly
Independent Variables
By reviewing several literatures, it was found that several
researchers identified some common factors which
influence profitability of a bank. Summarizing the results
from numerous studies, bank specific financial ratios
representing capital adequacy, cost efficiency, income
expenditure mix, asset quality, and size are mostly used
internal variables. So we included the following bank
specific variables to capture the determinants of
profitability:
Asset Size
In many finance literature, total assets of the banks were
used as to capture the possible effect of banks size on
profitability. Generally natural logarithm of total asset (log
A) was used to represent bank size. The effect of bank
size on profitability is generally expected to be positive
(Smirlock, 1985). Eichengreen and Gibson (2001)
suggested that the effect of a growing banks size on
profitability might be positive up to a certain limit. Beyond
this point the effect of size could be negative due to
bureaucratic and other reasons. Hence, the size
profitability relationship might be expected to be non-
linear.
Capital Adequacy
The ratio of equity to total assets (CA) was generally
used to represent the basic ratios for capital strength. It
Determinants of Profitability of Commercial Banks in Bangladesh
Int. J. Bank. Finan. Law 005
was likely that the higher this ratio, the lower the need for
external funding and thus leads to the higher profitability
of the bank. Equity to total assets ratio was expected to
have positive relation with performance that well-
capitalized banks face lower costs of going bankrupt
which reduced their costs of funding and risks (Berger,
1995; Bourke, 1989; Hassan and Bashir, 2003).
Asset Quality
To address the asset quality two ratios were used in this
study: loans to total assets (LA) and non-performing
loans to total loans (NPL). As loans was one of the main
source of income of a bank, the ratio loans to total assets
was expected to affect profitability positively unless an
unacceptable level of risk is taken by a bank. Non-
performing loans (loans which are considered not to
generate earnings) to total loans ratio measures the
asset quality of bank. In other words, it reflected the
health of banks loan portfolio that affects performance of
bank negatively. The higher the NPL ratio the poorer the
quality of loan portfolio and therefore it leaded to lower
profitability.
Deposits
Deposits were considered as banks main source of
funding and are the lowest cost of funds. The more
deposits were transformed into loans, the higher the
interest margin and profit. Hence, deposits generally had
positive impact on profitability of the banks. But if a bank
could not transform its deposits into loans efficiently it
might bring negative impact on profitability also.
Investment Activities
Banks are not engaged in the deposit and lending
activities only they also invest significant amount of their
assets in Government securities, shares and debentures.
To capture the influence of investment activities on
profitability two ratios were used in this study: investment
in government securities to total assets (IGSEC) and
other investment to total assets (OI). Investment in
government securities mainly includes government
treasury bills, bonds, debenture etc. To maintain the
statutory liquidity requirement of central bank commercial
banks, need to investment certain percentage of their
assets to government securities. This investment is
always considered to be a safe investment, but it may or
may not have positive influence on profitability as the
return from government securities is not always
competitive with the market. On the other hand, all the
investment other than the government securities is
included in the Other Investment category. Other
investment of a bank mainly includes investment in
quoted and unquoted shares and debentures of private
sectors. Besides shares and debentures investment in
subsidiaries and miscellaneous investment are also
Islam et al. 006

Table 1. Variables of profitability analysis and their measurement

Variable Measure Notation

Dependent variable Profitability Return on Equity (ROE)=Net ROE
Profit/Total Equity
Independent Variables Asset Size Natural Logarithm of Total logA
Assets
Capital Adequacy Equity/ Total Assets CA
Asset Quality Loans / Total Assets LA
Non-Performing Loans
/ Total Loans NPL
Deposit Deposits/Total Assets DP
Income-Expenditure Net Interest Margin = Net NIM
Structure Interest Income/ Total
Assets

Non-Interest Income =Non- NII

Interest Income /Total
Assets
Investment Investment in Govt. IGSEC
Activities securities/Total
Assets
Other Investment/ Total
Assets OI
So, our profitability model would be as follows:
ROE = 0 + 1LogA + 2CA + 3LA + 4NPL + 5DP + 6NIM + 7NII + 8IGSEC+
9OI +

Table 2. Descriptive statistics of the variables

Minimum Maximum Mean Standard

Deviation
ROE 0.08 0.18 0.1176 0.02990
Log A 5.05 5.45 5.2541 0.12382
CA 0.06 0.12 0.0860 0.01707
LA 0.5 0.73 0.6423 0.05726
NPL 0.02 0.09 0.0573 0.01884
DP 0.76 0.85 0.8027 0.02453
NIM 0.01 0.04 0.0211 0.01200
NII 00 0.04 0.0211 0.012
IGSEC 0.08 0.30 0.1686 0.06001
OI 00 0.05 0.0205 0.01386

included in this category. Other investment was expected
to have a positive impact on the profitability but it was not
unusual to have a negative impact on the profitability
when there was a downturn in the economy.
ANALYSIS OF THE BANKS PROFITABILITY
In this section we will try to analyze the data and present
the result in various segments such as descriptive
statistics correlation matrix among the variables and
finally we will fit a regression model which will give us the
appropriate result about the research
Descriptive Statistics
The Descriptive statistics of the variables are given in the
Determinants of Profitability of Commercial Banks in Bangladesh
above table 2. For each variable shows minimum,
maximum, mean and standard deviation of eleven
commercial banks in Bangladesh. On an average those
bank has ROE is about 11.76% the ROE does not vary
greatly across the bank because the standard deviation is
about 2.99% whose minimum value is about 8% and
maximum value is about 18%. Asset size is determined
by the natural logarithm of total asset the mean of the
asset size is 5.25 and minimum and maximum value are
5.05 and 5.45 respectively and standard deviation is
0.12. Average of capital adequacy ratio is 8.6% and
minimum and maximum values area 6% and 12%
respectively and standard deviation is 1.7%. The average
loan amount 64.23% and minimum and maximum values
are 5% and 73% respectively and standard deviation is
5.72%. The average value of nonperforming loan is
5.73% and minimum and maximum values are 2% and
 Int. J. Bank. Finan. Law 007

Table 3. Correlation Matrix among the variables

ROE LOGA CA LA NPL DP NIM NII IGSEC OI

ROE Pearson Correlation 1 .045 .424(*) .223 -.616(**) .209 .355 -.231 -.369 -.134
Sig. (2-tailed) . .842 .049 .318 .002 .350 .105 .302 .091 .551
N 22 22 22 22 22 22 22 22 22 22
LOGA Pearson Correlation .045 1 .500(*) -.130 -.123 -.395 -.081 .150 .119 -.220
Sig. (2-tailed) .842 . .018 .564 .585 .069 .721 .506 .599 .325
N 22 22 22 22 22 22 22 22 22 22
CA Pearson Correlation .424(*) .500(*) 1 .024 .452(*) -.364 -.504(*) .341 .461(*) -.019
Sig. (2-tailed) .049 .018 . .916 .035 .096 .017 .120 .031 .932
N 22 22 22 22 22 22 22 22 22 22
LA Pearson Correlation .223 -.130 .024 1 -.320 .118 .077 .233 -.553(**) .415
Sig. (2-tailed) .318 .564 .916 . .147 .601 .733 .297 .008 .055
N 22 22 22 22 22 22 22 22 22 22
NPL Pearson Correlation -.616(**) -.123 .452(*) -.320 1 -.051 -.327 .101 .471(*) .008
Sig. (2-tailed) .002 .585 .035 .147 . .822 .138 .656 .027 .970
N 22 22 22 22 22 22 22 22 22 22
DP Pearson Correlation .209 -.395 -.364 .118 -.051 1 -.009 -.346 .072 .605(**)
Sig. (2-tailed) .350 .069 .096 .601 .822 . .967 .115 .752 .003
N 22 22 22 22 22 22 22 22 22 22
NIM Pearson Correlation .355 -.081 -.504(*) .077 -.327 -.009 1 -.425(*) -.543(**) -.201
Sig. (2-tailed) .105 .721 .017 .733 .138 .967 . .049 .009 .371
N 22 22 22 22 22 22 22 22 22 22
NII Pearson Correlation -.231 .150 .341 .233 .101 -.346 -.425(*) 1 .084 -.034
Sig. (2-tailed) .302 .506 .120 .297 .656 .115 .049 . .711 .881
N 22 22 22 22 22 22 22 22 22 22
IGSEC Pearson Correlation -.369 .119 .461(*) -.553(**) .471(*) .072 -.543(**) .084 1 -.322
Sig. (2-tailed) .091 .599 .031 .008 .027 .752 .009 .711 . .144
N 22 22 22 22 22 22 22 22 22 22
OI Pearson Correlation -.134 -.220 -.019 .415 .008 .605(**) -.201 -.034 -.322 1
Sig. (2-tailed) .551 .325 .932 .055 .970 .003 .371 .881 .144 .
N 22 22 22 22 22 22 22 22 22 22
*Correlation is significant at 0.05 levels (Two-tailed)
**Correlation is significant at 0.001 levels (Two-tailed)
Source: calculated by the author from the annual report of banks.

Determinants of Profitability of Commercial Banks in Bangladesh

Islam et al. 008
Table 4a. ANOVA
Model Sum of Squares
Regression .015
Residual .004
Total .019
Predictors: (Constant), OI, NPL, NII, LOGA, NIM, LA, DP, CA, IGSEC
Dependent Variable: ROE
Source: calculated by author from annual report of banks.
Table 4b. Model Summary
Model R R Square
1 .880(a) .774
Predictors: (Constant), OI, NPL, NII, LOGA, NIM, LA, DP, CA, IGSEC
Source: calculated by author from annual report of banks.
9% respectively and standard deviation is 1.88%. The
average value of deposit is 80.27% and minimum and
maximum values are 76% and 85% respectively and
standard deviation is 2.45%. The average value of net
interest margin is 2.115 and minimum and maximum
values are 1% and 4% respectively and standard
deviation is1.2%. The average value of noninterest
income is 2.11% and minimum and maximum values are
0% and 4% respectively and standard deviation is 1.2%.
The average value investment in government securities is
16.86% and minimum and maximum values are 8% and
30% respectively and standard deviation is 6%. The
average value of others investment is 2.055 and
minimum and maximum values are 0% and 5%
respectively and standard deviation is 2.05%.
Correlation among the variables
From the below correlation matrix table 2, it indicated that
ROE and log A were positively correlated but the
correlation was not significant. It explained that if asset
size increases the ROE will also increase. Again ROE
and CAR (Capital Adequacy Ratio) were positively
related and their relationship was significant i.e. if CA
increases then ROE will also increase. Again ROE and
LA (Loan Amount) were positively related i.e. if LA
increases then ROE will also increase but their
relationship was not statistically significant. Again ROE
and NPL (Non Performing Loan) were negatively related
which indicated that if NPL increase then ROE will must
be decrease and their relationship was statistically
significant. Again ROE and DP (Deposit) were also
positively related which explained that if deposit increase
then ROE will also be increase but their relationship was
not statistically significant. Again ROE and NIM (Net
interest income) were positively related which meant that
if NIM increase then ROE will also be increase but their
Determinants of Profitability of Commercial Banks in Bangladesh
df Mean Square F Sig.
9 .002 4.569 .009(a)
12 .000
21
Adjusted R Square Std. Error of the Estimate
.605 .01880
relation was not statistically significant. Again ROE and
NII (Non-interest income) were negatively related i.e. if
NII increase the ROE will also be Decrease and their
relation was not statistically significant. Again ROE and
IGSEC (Investment on Government Securities) were also
negatively related and their relation was not significant
and lastly ROE and OI (Others Investment) were
negatively related and the relation was not significant.
From the below correlation matrix, Log A (Asset size) and
CA (Capital Adequacy were positively related i.e. if asset
size increase then capital adequacy will also increase
and their relation was statistically significant. CA and NPL
were also positively related and the relation was
statistically significant. Again CA, NIM and IGSEC were
positively related and their relation was statistically
significant. Again LA and IGSEC were negatively related
and their relation was significant.
Regression analysis
From the above ANOVA it is clear that our regression
model is statistically significant and we reject our
research null hypothesis and accept the alternative
hypothesis ie we can say that there is a significant
relationship between internal factors and banks
profitability.
The model seems to fit the panel data reasonably well,
having fairly stable coefficients. The relatively high R
square suggests that variations in the dependent variable
profitability, as measured by ROE, are explained
satisfactorily by variations in the selected variables.
From the below regression coefficient table we can say
that LA and NPL are statistically significant and LA has
positive effect and NPL has negative effect of the bank
profitability and the remaining variables has impact on
bank profitability but they are not statistically significant.

Table 5. Regression Coefficient
Model Unstandardized Coefficients
B Std. Error
1 (Constant) 1.182
LOGA -.060
CA .113
LA .358
NPL -1.282
DP .580
NIM .408
NII -.160
IGSEC -.073
OI .790
Source: calculated by author from annual report of banks.
As expected, the value of the credit risk coefficient is
negatively and significantly related to bank profitability. It
appears that Bangladesh banks implement risk-averse
strategies in their attempt to maximize profits, mainly
through systematic controls and monitoring of credit risk.
The banks under scrutiny, as well as the whole banking
sector in Bangladesh, have significantly higher level of
non-performing loans. Furthermore, non-performing loans
tend to remain on the banks balance sheets. Advanced
risk management techniques, strict lending policies
reinforced by reliable monitoring systems and non-
performing loan restructuring appear to have had a direct
impact on reducing the banks provisions for loan defaults
which in turn boosts profitability. The related literature
indicates that the effect of credit risk on profitability is
clearly negative (Athanassoglou et al, 2005). The sign of
the coefficient indicates that the higher the credit risk
assumed by a bank, the higher the accumulation of
defaulted loans. In turn, the higher the level of loans in
default, the greater the negative impact on bank
profitability.
DISCUSSION
The banking sector of Bangladesh has undergone
noteworthy financial reforms, which has significantly
transformed the sector. At present private commercial
banks are dominant in respect of market share and
profitability in this sector (Sarker and Rashid, 2015).
Profitability is always an important criterion to measure
the performance of banks. This study examined the
determinants of private commercial banks profitability in
Bangladesh by using the data obtained from the financial
statements of all the private commercial banks (11
commercial banks) for the year 2015 and 2014. The
Determinants of Profitability of Commercial Banks in Bangladesh
Int. J. Bank. Finan. Law 009
t Sig.
.395 2.991 .011
.051 -1.159 .269
.681 .166 .871
.142 -2.519 .027
.323 -3.967 .002
.490 -1.183 .260
.850 .480 .640
.455 -.352 .731
.240 -.304 .766
.824 .958 .357
study identified that asset size had no significant effect on
profitability. Interest income is always considered to be
the main source of income of a bank, but in our study it
was found that NIM/assets ratio did not have a significant
impact on profitability. But the most significant variable
which affected the profitability was found to be the loan
amount. This indicated that greater diversification in
banking activities positively influenced profitability. It was
also identified that investment activities, mainly in shares
and debentures (quoted and unquoted) of private sectors
had a positive impact on ROE but not significant. It
suggested that banks which were more exposed to the
capital market or invest higher proportion of funds in
unquoted shares and debenture might be achieved
higher profitability. The findings of this study have
considerable policy relevance. It could be argued that the
more profitable bank will be able to offer more new
products and services. The role of diversified banking
activities is particularly important, given that a bank with
relatively more innovative ideas and better fund
management capability may have added advantage over
its peers (Sarker et al, 2015). As per the portfolio theory
diversification reduces risks, so various sources of
earning should be welcomed. But if this earning includes
higher proportion of volatile trading activity rather than
low risk income streams like fees and commission, the
risk may become higher. In our study it was observed
that higher proportion of investment activities (other than
the government securities) could help to achieve higher
level of profitability, so a bank may have tendency to
increase its exposure to the capital market. More
exposure in the capital market may bring more risk to a
bank as the investment decision in the developing capital
market like Bangladesh depends mostly on speculation
rather than the real financial indicators. It suggested that
non-traditional activates of banks (other than deposit
Islam et al. 010
taking and lending) might lead banks to higher exposure
to the risk. So the ability to maximize risk adjusted
returns and sustaining stable and competitive returns is
an important element in the banking business. Thus, from
the regulatory perspective, risk management should be
the key focus. The policy direction should be directed in
such a way which will enhance the resilience and
efficiency of the financial institutions with the aim of
intensifying the robustness as well as stability of the
banking sector. In this regard, capital adequacy should
be emphasized so that banks are able to withstand any
negative shock. Ring-fencing traditional banking from
investment banking and putting limit on the exposure to
risk taking investment activities can be one of the way to
minimize the risk. The risk taking investment activities
also should be monitored very closely by the supervisor.
Bank profitability could be improved considerably if
appropriate mechanisms to screen, monitor and forecast
future levels of risk are put in place. Banks profitability is
expected to be sensitive to macroeconomic variables
such as Gross Domestic Product rate (GDP), inflation
rate (INF) and real interest rate (RI). Due to limited data
availability and time constraints, those external variables
have not been included in this study. There is also scope
to analyze the linkage between the banks profitability
and their exposure to the capital market more intensively.
Another potential important aspect is to analyze the
determinants of profitability by a panel data set.
CONCLUSION
Our findings showed that private commercial banks were
the dominant in the banking industry based on profitability
and market share. The study examined the determinants
of commercial banks of Bangladesh using data obtained
from financial statement of the respective bank. We
examined the data for the year of 2014 and 2015 of
eleven commercial banks. Our study revealed that the
interest income was the main income of the bank and
asset size did not have a significant effect on profitability.
It also suggested that a high return of asset is not
mandatory for large bank. It indicated that profitability
influenced by greater diversification of banking activities.
Our study also revealed that a higher investment of a
commercial bank helped to achieve the more profitability.
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Determinants of Profitability of Commercial Banks in Bangladesh