Determinants Of Profitability In Banking: Ordinary Least Squares Method, Correlations Required

Literature Review and Literature Gap

Title: Determinants of profitability in banking Ordinary Least Squares method, correlations required

Background of the study 

The profitability of the bank is duly regarded as an immense important ingredient in the context of financial development. The fundamental reason behind this is that the relevance of banking profitability determinants is not only limited within the context of banking; but also extended to the macroeconomic stability of a particular nation. From a banking perspective, it can be stated that if the returns are substantially higher, then the overall fragility of the bank reduces. However, from a contrary viewpoint, it is projected from the macroeconomic perspective; owing to the fact that if profitability of a bank increases, then it is quite sustainable for the banking sector to finance economic development of the nation in a seamless manner. One thing that should be taken into consideration in this entire aspect is that because of the intermediation role present in the banking system it is often considered that if the bank is oriented towards giving higher returns, then the loan interest associated with the bank would also increase over time. That is why one of the crucial determinants of banking profitability, the regulatory authorities, are always oriented towards ensuring that the banking sectors are regulated. However, it also has its fair share of disadvantages associated with it. Since the number of regulations increases in the banking sector, the sector has thus been exposed to a greater magnitude of regulations over time. For instance, between the time period of 1990 and 2005, banking sectors are exposed to a diverse set of regulations such as maintaining a minimum share capital in banks operating across US and European union. However, the fundamental objective of executing this particular measure is to ensure that the profitability, financial stability and the balance sheet of the banks are emboldened as time elapses. However, the outcome of this measure has resulted in a somewhat different manner which was beyond expectation of the concerned regulatory authorities (Jumono and Mala, 2019). 

In other words, the factors that are referred to as determinants in terms of shaping the profitability in the banking industry, in order to make it a profitable enterprise is the main focus of the study. As per the opinion of scholars the performance of any bank can be enhanced significantly within a short span of time, provided a substantial amount of attention is oriented towards internal factors such as managerial efficiency. On the contrary, economists have argued that the impact of the banking industry in a broader context is quite prudential when it comes to influencing the determinants that could result into profitability of the banking sector. The following research investigates specific variables that are coherent in the banking sector and macroeconomic influences that are pertinent to the industry (Yüksel et al. 2018). 

The fundamental motivation to carry out this study has stemmed from the lack of appropriate and adequate theory to substantiate the factors which act as determinants in terms of influencing the banking profitability. In other words, the rationale of this research is to determine whether macroeconomic variables, bank specific or industry specific variables are the actual determinant of banks profitability (Almaqtari et al. 2019). 

Research Methodology and Data Analysis

The aim of the research is to determine the key components that act as a determinant in terms of influencing the profitability of the bank. The objectives of the research are as follows:

• To determine ingredients that can be referred to as a profitability determinant in a banking operation (Nguyen and Nguyen, 2020).
• To elaborate the components that falls under the category of determinants.
• To evaluate the existing relationships between the determinants and bank’s profitability.   

What are the determinants of profitability in banking? 

Significance of the study 

The significance of this particular research primarily encompasses varieties of factors that are not only bank specific in nature; but at the same time also inculcate macroeconomic factors that could determine the profitability of a bank. In the following research, a time period from 1980 to 2010 is considered to analyze the subject matter and identify the key concerns which could later on guide policymakers to target variables while formulating policies in order to enhance the performance of the banking sector of the nation (Koroleva et al. 2021). 

Outline of the Chapters

The initial chapter of the research introduces the core concept of the research; followed by literature review as well as literature gap. In the literature review, sections that are relevant with the core concept are emphasized upon. Research methodology and data analysis chapters are followed with substantial discussion sections which explain the fundamental notion of banking profitability in an intricate manner. After analyzing the accumulated data, the research concludes by highlighting the key findings of the research (Al-Homaidi et al. 2018).

Chapter 1: A brief overview of the determinants of the bank’s profitability 

In order to evaluate the profitability of a bank, factors such as return on asset or return on equity are considered. In certain instances, it is also observed that net interest margin is also regarded to assess the bank’s profitability. Generally, these variables are categorized into internal variables and external variables. The internal variables are accountable for determining the management decisions undertaken in the bank that specifically impact policy objectives of the bank, likely bank size, credit risk, liquidity risk, expense management and financial leverage. External variables, on the other hand, revolve around macroeconomic influences as well as industry related factors such as unemployment rate, inflation rate, competition in the market, market concentration and per capita income (Zainudin, Mahdzan and Leong, 2018). According to the statement made by Ali and Puah, 2019, both the external as well as internal factors that are mentioned above are critically important in terms of determining the profitability of a bank. The important variables that play a quintessential role in determining the profitability of banking sector are as follows: 

Bank Related Variables: 

• Minimum holding reserve and its pertinent opportunity cost with the central bank (OPP): Alzoubi, 2018, argued that the existence of minimum holding reserve which has no characteristic attribute to bear interest in the bank influences the economic cost associated with the fund; in such manner that it exceeds published interest expense. In other words, opportunity cost of holding reserve can be defined as a ratio between assets that are potential to bear interest with that of total interest earning assets. The output of which should be multiplied by the average rate of the Treasury bill. In general OPP is expected to be positive then it is profitable for the banking operation (Ali and Puah, 2019). 
• Ratio between operating expense with respect to total asset (OEA): This is regarded as a proxy which represents the non-financial inputs in the bank. In general, operating expenses encompasses expenses related with staff and employee benefits. On top of that, administrative expenses such as expenses that are related to banking operations, incorporating new technology into the banking working function, marketing expenses, legal fee and depreciation all fall under the continuum of operating expenses. However, one thing should be taken into consideration in this particular aspect is that provision for loan related losses is not actually inculcated into operating expenses. Athanasoglou et al., has resolved that although operating expense has a negative influence on banking operations, it is potent enough to impact the banking profitability (Hasan, Manurung and Usman, 2020). 
• Ratio of total loans to total assets (TLA): The fundamental aim of this ratio is to evaluate the credit risk, which in turn reflects the change in the bank’s portfolio of loans. Since it is related to banking performance in the long run. To put it in a different spectrum it can be stated that if the banking operation is greatly exposed towards credit risk, then there is a fair probability that the profitability of the bank is deteriorating. Hence, it is fair to state that banking profitability is directly related with the credit risk (Abugamea, 2018).
• Ratio of total deposit to total loan (DTL): This ratio is evaluated to determine correlation between the credit risk of a bank with respect to its profitability. If the outstanding loan is attributed as non-tradable in nature; then only credit risk is pre-determined as a variable. According to the standard asset pricing model which has a positive association between bank risk and profit (Kingu, Macha and Gwahula, 2018). 
• Ratio of non interest income to operating profit (NOP): Depending on strategic objective or expertise of the bank, the coefficient associated with NOP could either be positive or negative in nature. Simply put, if the bank has a substantial amount of non-interest income product line that does not require human capital but has technical capability to generate revenue; then the NOP ratio would be positive. On the contrary, if the bank is more accustomed with practicing traditional and conventional mechanisms of dealing with its consumer by investing more on human capital, then the NOP ratio would be negative (Alarussi and Alhaderi, 2018).  
• Ratio of demand deposit to total deposit (DTD): This ratio reflects the influences of deposit mix on the bank’s profitability. Generally, if the DTD ratio is high, then efficiency of the bank increases drastically. In view of the fact that the bank can utilize the core deposit as the source of financial capital without facing the consequences of high interest cost. Additionally, DTD also reflects the proportion of liquidity a bank has within itself (Ünvan and Yakubu, 2020). 
• Ratio of non-performing loans to total loans (NPL): This ratio primarily reflects the impact of environmental factors on the performance of the bank. High NPL ratio generally translates into the fact that the bank’s performance is heavily influenced by environmental aspects and the profitability of the bank, provided the environmental aspects are adversarial in nature. This ratio also evaluates the credit risk that the bank has exposed itself to (Abbas, Iqbal and Aziz, 2019).

Industry related factors:  

• Banking market power is directly influenced by competition present in the market and choice of evaluating market competition. Claessens and Laeven arguably stated that it is often taken into account that the net interest margin reflects market competition in the banking industry. However, in reality that always does not necessarily translate because net interest margin does not have the necessary factors inculcated within it to reflect the competition present in the banking industry. There can be a plethora of factors such as stability and corporate governance that is practiced in a banking firm, magnitude and extent of financial intermediation, quality as well as bank specific factors. Traditional indicators which are capable of reflecting the market competition or forces that can influence the profitability of a business do not generally work well in the banking industry. For instance, Hirschman-Herfindahl index, which is more commonly referred to as HHI; along with concentration ratio does not reflect on differentiation strategies and its impact on banking industry. However, with respect to other indicators HHI stands out, since competitive tendencies of banking firms and the impact of market concentration on the performance of the bank is necessarily captured by HHI.

Macroeconomic determinants

• Exchange rate (EXR): The name exchange rate is pretty self-explanatory in nature; since it measures the exchange rate that is ongoing and its impact on the banking system of the nation. However, the outcome varies based on whether a flexible or fixed exchange rate is adopted or not. In developing economies, it is especially observed that when a fixed exchange rate is adopted, the profitability of the banking sector of the developing economies surges within a short span of time. On the other hand, in the case of a developed economy, if fixed as well as flexible exchange rate is adopted; then the profitability of the banking industry is exposed to financial crisis extensively.
• Inflation rate (INF): It is widely accepted that the inflation rate influences the economic condition in a nation. However, as of now there is no clear relationship that is established by scholars to draw a clear inference that inflation rate can influence profitability of a bank and it is an ambiguous proposition that inflation and bank’s performance shares a positive correlation with each other. The important aspects that should be focused upon in this particular instance is to evaluate whether other economic factors which are also crucial enough with respect to inflation are experiencing a steep incline within a similar time frame. In other words, if the non-interest cost and employment ratio of the nation is increasing sharply with respect to the rate of inflation; then only profitability of the bank increases on a similar note. In 1919, a study conducted by DemiurgicKunt, and Huizinga clearly established the relationship that net interest margins of banks are influenced by inflation rate to a great extent. 

 Chapter 2

The role of banks in the context of developing nations can only be properly interpreted provided the determinants behind the success of its banks are analyzed meticulously. The reason being that banks are definitely considered as the fundamental predator that can substantiate the economy of the developing nation. According to a report published by the World Bank in 2016, it is revealed that if a developing nation has consolidated its infrastructure regarding regulating banking industry; its economy has become much more sustainable afterwards. Due to the fact that the scope of investment projects in those economies can be financed with the help of its banking sector single-handedly, without external financial support (Al-Harbi, 2019). The consequences of which open up new vacancies in diverse groups of industries; thereby reducing the rate of unemployment in the developing nation significantly. Once the unemployment rate is reduced, the economic landscape of the nation is enhanced substantially. Oftentimes it is observed that once the economy is in contraction or the business cycle of the nation is experiencing unfavourable circumstances, the central bank incorporates a certain set of regulations that can consolidate its banking sector by tweaking the determinants; which can ensure the profitability of the bank is enhanced. The monetary policies that are introduced by the central bank in member states across the European Union are regulated while keeping the notion of inflation rate and other factors that could potentially jeopardize the economy in hindsight. It is often noticed that the soundness of the economy is reverberated directly across the health of the nation’s banking segment. In this context it can be stated that the health of any bank is directly proportional to its profitability. With the onset of globalization, it is imperative for any nation to have consolidated banking infrastructure. Otherwise, its national economy could be jeopardized from external threats. Once the banks are profitable, then diversification of their assets under management would be executed seamlessly, thereby hedging against any potential threat that could impede the seamless growth of the banking sector of the nation (Elhussein and Osman, 2019). In this manner any systematic risk of the banking industry is taken care of. In 2008, after the global economy experienced a tremendous downturn, it has been proven that banking sectors which are profitable in nature not only cleared the national economy; but also safeguarded the economic interest of the nation extensively. Therefore, determining factors that are responsible for ensuring the profitability of the bank is an essential part and parcel of the bank management; so that it can be accomplished annually (Muraina, 2018). Apart from bank management, financial analysts and economic scholars have projected that the gravity of these determinants is required to be understood extensively; so that appropriate forecasting can be carried out to not only promote the health of the bank alone, but to mitigate any negative consequences from the entire banking segment of a nation. 2019 a group of scholars from the University of North Carolina has conducted a survey across reputed banks and North America to determine the extent of influence caused by both external as well as internal determinants in terms of shaping the profitability of the banking sector. The primary outcome of the survey reflects that besides the size of the bank, capital adequacy and the risk which the bank has exposed itself to play a significant role in determining its profitability. Moreover, certain macroeconomic influencers are also responsible for streamlining the bottom line of the banking industry (Le and Ngo, 2020).  

Internal and External Variables

One of the breakthrough theories primarily emphasizes the relationship of capital profitability. In 1985, Modigliani and Miller pointed out that in a perfect capital landscape; the capital structure of a bank crucially projects its profitability. However, real life instances such as deposit insurance, barriers to enter into the market, bankruptcy cost as well as taxation are not present in the perfect capital market. If the management of the bank discloses all the necessary information regarding bank’s investment pay off to its shareholder and creditor to such an extent that the management of the bank does not withhold any private information on their own; then the capital structure composition can be easily obtained by the bank’s management (Duho, Onumah and Asare, 2020). In 1995, Berger came across the fact that there is an identical amount between rate of returns in the book and market provided the additional equity is replaced as a substitute of the debt. The capital adequacy ratio that is maintained by the bank downsizes the risk factor extensively. Thereby ensuring that the risk factor associated with individual financial interest of the bank is aged appropriately. In other words, if the risk of investment is diversified extensively by the bank, the profitability of the bank seems to be exemplary in nature. Berger in 1995, further stated that two hypotheses can be attributed to this particular instance where a positive capital earnings relationship exists in a bank (Alarussi and Alhaderi, 2018).

Chapter 3

In 1967, Baxter first came up with the term expected bankruptcy hypothesis where it is implied that if the economic ambiance of a nation changes abruptly; then the adversarial impact impacts the banking industry. The financial distress caused by the economic upheaval influences the capital adequacy ratio of a bank. The expected cost of bankruptcy can be defined as a product between the deadweight liquidation cost along with failure probability of a bank. Under all circumstances, this must be confiscated by the creditor of the bank provided the bank is subjected to bankruptcy. If it is observed that the bank is not maintaining the appropriate capital adequacy rate that it should in the first place; then the probability of the bank to fail in the long-term increases eventually. Consequently, it is imperative for concerned authorities that are in charge of regulating the banking segment to promote capital adequacy ratio extensively; so that the probability of the bank to experience failure can be mitigated completely (Bitar, Pukthuanthong and Walker, 2018). Additionally extra attention should be given towards building ROE and downsizing any cost associated with insurance or uninsured debt. At this particular juncture, the hypothesis of expected bankruptcy cost is successfully able to establish a positive correlation between ROE and capital adequacy ratio in the context of its bank’s operation. On the contrary in 1995, Baxter proposed signalling theory, which helps to maintain a positive relationship between the financial market in which the bank operates and the performance of a bank (Nguyen, 2018). Many scholars believe that originally this theory stems from 1978 Akeloff and Spencer’s research; that particularly highlights the significance of non-financial assets in a bank’s performance. In the financial market it is always noticed that information asymmetry between insiders as well as outsiders of the bank can create impediment in the seamless growth of the bank. If the bank managers have certain information which they are not willing to disclose to their shareholder or creditor in the future, the prospect of the bank would suffer immensely; provided the actions undertaken by the bank management without disclosing it previously to the shareholder in the Annual General Meeting has backfired. Future prospects of securing investment towards the bank or promoting its brand equity would also experience tremendous entrances down the line. This single-handedly impedes the performance of the bank to increase over time (Omodero and Alpheaus, 2019). Signalling theory distinctly classifies banks as good banks that are capable of maintaining appropriate capital adequacy ratio; thereby exposing the banks financial interest less towards risk ambiance. Followed by bad banks which are necessarily involved in certain transactions that are highly attuned towards risk exposure, and it has not abided by the legislative principles of maintaining appropriate and adequate capital adequacy ratio. Generally, there is a tendency to spend a substantial proportion of the Bank’s capital for signalling in bad banks which is not at all present or practiced in banks that are internationally recognized or have an exemplary reputation. This is a strategic factor that management of the bank should be concerned about, since it determines the profitability that the bank is going to experience in the near future (Chaabouni, Zouaoui and Ellouz, 2018).

Bank-Related Variables, Industry-Related Factors, and Macroeconomic Determinants

In 2006, both Berger and Bonaccorsi experimented on capital earning association. At the inception efficiency risk hypothesis primarily revolved around the notion that banks that are highly efficient in terms of management performance are more oriented towards opting for lower capital ratio while all other conditions remain constant. The fundamental cause behind this approach is that if the banks are highly efficient; generally expect higher return with respect to investment (Osazefua, 2019). Hence for an efficient bank, it is fair to state that there is always a positive correlation between ROE and profit efficiency. In 1997, DeYoung extensively expanded on this particular paradox, where it is observed that banks located in the European Union are much more efficient in terms of profit management, because they always expect higher return in lieu of their investments. In a contrasting note, it is also noted that American banks which are quite efficient in terms of profitability management are always looking for options where higher capital ratios are attributed (Zahid et al. 2020). In 1999, Buffer theory was put forward by Calem and Rob which states that relationship between equity and profitability is a significant part of bank management and can be duly considered as an important determinant in this paradigm. For the sake of averting incurred cost in the context of infringing capital requirement, banks seek after boosting equity; so that the financial institutions can accomplish minimum regulatory capital ratio. This is also seen as an approach towards risk minimization. Contrarily, banks that are undercapitalized would always have a tendency to take more risk; so that within a predetermined time frame, the returns could multiply (Dang, 2020). This is an approach undertaken by undercapitalized banks to raise a substantial amount of capital within a predefined time frame(Bitar, 2021). 

The SCP paradigm, which is also known as the structure conduct performance paradigm, reflects that market concentration has a direct influence on profitability of the banks that operate in the same market. One of the noticeable features in this particular paradigm is that it provided Collusion hypothesis, where a handful of a bank may have explicit or tacit collusion or authority over the market where these financial institutions can influence the rate of interest charged on the basis of loans, service fees and the amount of interest paid in lieu of deposit accounts of respective customers in the banks (Le, 2018). As a consequence of the collusion, whenever the number of banks in a particular market increases substantially, the chances of regulating the aforementioned aspects by those banking institutions in that particular market landscape increases proportionately. This means that a positive correlation between market concentration and profitability does exist in reality. On a converse note, it can be stated that the efficient market hypothesis points out that asset price reflects the available information in the market.  Therefore, it is not feasible for banks to simply influence the rate of interest even if it has a substantial amount of presence in a particular market landscape (Kweh et al. 2019).  

Significance of the Research

The current literature primarily establishes the connection of individual determinants with return on equity, return on asset and net interest margin. However, the cumulative aspect of the integral influence on banks performance is not depicted appropriately, because of inadequate support. Additionally, there are several other influencing factors that are responsible for dramatically changing the course of a bank’s performance over a period of time, which are not always generalized. In this study, these aspects are not considered because it would change the entire approach of analyzing the determinants of the bank’s respective performance.

Research Philosophy 

Out of the four primary research philosophies such as pragmatism, positivism, interpretivism and realism; positivism is primarily chosen for this research. The main reason behind opting positivism is that in positivism, the emphasis on factual knowledge is carried out on the basis of rigorous as well as meticulous observation. Additionally, if the accumulated information is evaluated and trustworthy in nature; then only the data is taken for research purposes. Otherwise, it is rejected instantly. In this instance, positivism would reflect whether the determinants that are discussed in the literature review are potential enough to change the course of a bank’s profitability. In positivism, an empiricist perspective is respected, and the researcher firmly believes that knowledge generates from human experience; which means that if the bank’s balance sheets are consolidated over time because of increased profitability, then only these factors will be considered as appropriate determinants in the research philosophy (Godswill et al. 2018). 

Out of inductive approach and deductive approach, the research primarily inculcates the deductive approach. The deductive approach concerns developing hypotheses on the basis of prevalent and traditional theoretical observations. Based on the theoretical knowledge the research strategies designed which are capable of determining the determinants for profitability of a bank. The possibility of elaborating causal relationships between variables and concepts are seemingly high in deductive approach with respect to inductive approach. Another important aspect is that the research emphasizes on quantitative analysis, which means that inductive approach quantifying the variables which would potentially be considered as determinants in bank’s profitability becomes a convenient process (Bhattacharyya and Rahman, 2020).  

The design of the research is primarily quantitative in nature. In other words, understanding the balance sheet of a bank by quantifying the variables is an important and relevant approach that could be applicable in terms of determining the role of determinants in enhancing the profitability of a bank. Qualitative data is not as important as quantitative information in this context. That is why the research design emphasizes quantitative analysis to a great extent.

For successfully constructing the research, the researchers have emphasized on the approaches and the sources of data accumulation. For this research, primarily scholarly articles and journals that are relevant in the context of bank’s performance across the world are taken into account. Additionally, the analytical approach of the accumulated information primarily encompasses determining the relevance of the data with respect to local and international events surrounding the bank’s performance. Once the data is accumulated it is subject to quantitative analysis for extracting and summarizing the information in an articulate manner (Patwary and Tasneem, 2019).

Key Findings

One of the crucial ethical considerations that the researcher has to keep in the hindsight while conducting this research is that information that is accumulated in the due course of the study is primarily oriented towards educational purposes. Under no circumstances, the information that is accumulated should be used for commercial or economic gain. 

The research has its fair share of limitations starting from lack of appropriate time frame to conduct the research. In general, topics such as identification of important determinants in a bank’s performance require a substantial amount of time. However, in this particular case the time is limited. Additionally, the financial support for conducting this research is limited which also limits the scope of exploring varieties of articles and journals. Hence, it is fair to assume that if the financial support towards the research is adequate in nature; then the quality and the credibility of the accumulated information would also increase substantially (Chamberlain, Hidayat and Khokhar, 2020).

Primary Research 

In order to conduct empirical analysis on the accumulated information, determining the core linearity between correlation coefficient of the accumulated variables is prudential in nature. This helps to ascertain the relevance of the variable with respect to the performance of the bank. The variable that is relevant would be then subjected to analytical study so that random or fixed events associated with the performance of the bank can be determined. In this manner plausible measures that are associated with profitability can be segregated from the irrelevant variables (Opeyemi, 2019).  

Correlation Matrix
	ROA	ROE	NIM	OPP	DTD	NPL	NOP	OEA	TLA	DTL	ihhi	lexr	linf
ROA	1
ROE	0.667938	1
NIM	0.343049	0.13617	1
OPP	-0.05296	0.024876	0.299294	1
DTD	0.143834	0.002782	0.210822	-0.05465	1
NPL	-0.07428	0.0207	0.437699	0.546191	-0.02816	1
NOP	0.10846	0.073231	0.101614	0.062911	-0.04388	0.065971	1
OEA	0.277613	0.132587	0.766724	0.317084	0.335114	0.439206	0.054301	1
TLA	-0.14286	-0.08466	-0.21579	-0.25537	-0.14328	-0.4034	-0.0113	-0.34006	1
DTL	0.134753	0.047927	0.550934	0.061714	0.191834	0.035806	0.043001	0.65994	0.059386	1
IHHI	-0.008107	-0.036733	0.335144	-0.193656	0.048554	-0.367594	0.031701	0.31988	-0.344014	0.055281	1
LEXR	0.126646	0.011194	0.886078	-0.131942	0.240388	-0.331788	0.074702	0.97982	-0.308208	0.098282	0.15478	1
LINF	0.118539	-0.025539	0.221458	-0.325598	0.288942	-0.699382	0.106403	0.29987	-0.675802	0.129983	0.15748	0.325148	1

The aforementioned tabular representation reflects the multicollinearity between the variables that are taken into consideration for this research purpose. The value of the correlation of 0.2 away from the -1 or +1 is registered as absolute basis point and would be considered as multicollinear for the sake of the research purpose. The econometric analysis of the tabular representation is conducted to determine the dependent variables. In the first model, it is observed that the dependent variables are return on assets, return on equity and net interest margins (Alkurdi et al. 2019).  

Elaborative statistics

Variable	OBS	Mean	Std Dev	Min	Max
ROA	141	-4.393264	0.7763751	-7.528869	-2.880163
ROE	141	-1.694198	0.9104956	-5.517494	2.890372
NIM	150	-2.970046	0.4972508	-4.820282	-1.674743
OPP	155	1.63962	1.224146	0	7.761322
DTD	155	0.4340951	0.2117458	0	1.318395
NPL	155	0.2149832	0.1639178	0	0.8842832
NOP	155	0.6490783	21.18749111	-200	3.737480867
OEA	155	0.8640615	0.06087280762	0	4.410119867
TLA	155	0.0513139	-0.0657454981	0	5.082758867
DTL	155	0.9153754	-0.1923638038	0	5.755397867
IHHI	155	0.9666893	-0.3189821095	7.808729	6.428036867
LEXR	155	0.8859475	-0.4456004152	-0.604404	7.100675867
LINF	155	0.8547851	-0.572218721	1.686399	7.773314867
Variable	OBS	Mean	Std Dev	Min	Max
ROA	141	-4.393264	0.7763751	-7.528869	-2.880163
ROE	141	-1.694198	0.9104956	-5.517494	2.890372
NIM	150	-2.970046	0.4972508	-4.820282	-1.674743
OPP	155	1.63962	1.224146	0	7.761322
DTD	155	0.4340951	0.2117458	0	1.318395
NPL	155	0.2149832	0.1639178	0	0.8842832
NOP	155	0.6490783	21.18749111	-200	3.737480867
OEA	155	0.8640615	0.06087280762	0	4.410119867
TLA	155	0.0513139	-0.0657454981	0	5.082758867
DTL	155	0.9153754	-0.1923638038	0	5.755397867
IHHI	155	0.9666893	-0.3189821095	7.808729	6.428036867
LEXR	155	0.8859475	-0.4456004152	-0.604404	7.100675867
LINF	155	0.8547851	-0.572218721	1.686399	7.773314867

In the aforementioned representation, whenever the value 0 is reflected it means that there is no data point currently available. Hence the overall panel data is completely unbalanced at those instances. Except one in NOP which has a wide range in standard deviation of 21, all other statistical evidence of standard deviation falls within a normal range (Akber, 2019). 

The aforementioned histograms reflect the distribution on return on asset, return on equity and net interest margin in a respective manner. For the sake of accomplishing asymmetrical approach, logarithmic scale of net interest margin, return on equity and return on asset has been executed. In the following analysis the technique of estimation abides by panel regression approach. From an apparent vision it would seem that the application of logarithmic scale in this particular aspect would simply complicate the mathematical expression. However, in reality generalized ordinary least square method with logarithmic expression simply declutter the complication associated with the mathematical expression and helps the researcher to study the characteristic attribute of the banking industry of a nation. This is conducted while segregating the heterogeneity of individual banking firms respectively. In panel data analysis, both random and fixed methods of estimation are applied in a consecutive manner (Hussain, 2021). 

The mathematical expression of ordinary least square method is hereby mentioned below: 

The fixed effect model is generally regulated with characteristics attributed as time invariant in nature. This model particularly also mitigates any negative consequences that could arise from a mitigating variable bias. The random effect model contrarily believes that the banking industry and individual banking sector does not act on a predetermined pattern of variables. Additionally, the differences that do exist between the banking firms in a particular market does not follow a predictive pattern at all. In other words, this assembly is correlated with the variables that are previously explained in the literature review of the research. The aforementioned table reports the random impact of the generalized least square estimation approach, where a fixed model is represented (Agyei, 2018). It is observed that the estimation is calculated with respect to logarithmic scale of return on equity and return on assets with respect to the bank is not at all close approximation of the actual landscape in the banking industry. Contrarily, the random effect model has a better estimation regarding return on equity and return on asset of the bank. In addition to that, net interest margin calculation, which is reflected in the random effect model, is far more proximate to the actual landscape of the banking industry with respect to the fixed effect model (Uguru, Chukwu and Elom, 2018).

Firstly, the relationship between profitability and operation related risk factors that are carried out by a bank is reflected vividly from the aforementioned tables. This clearly reflects that the theoretical perspective matches with the economic expectation. If the income to cost ratio increases significantly in a bank, it reflects that the internal management of the bank is not at all confident enough in terms of managing the bank’s financial asset and viability appropriately. That is why if the operating cost increases, the probability of the risk associated with the operation also increases simultaneously, which in turn influences the profitability of the bank in a negative manner. One of the most interesting aspect in this particular context is that in both fixed effect model and random effects model, return on assets, return on equity and net interest margin is considered because out of all the determinants; these three particular aspects are the primary determinants in terms of redefining the profitability of a bank (Vo, 2018).

Estimation outcome in the context of return on assets which are attributed with dependent variables reflects that opportunity cost or OPP is crucial and abides by apriori expectation. Negative relationship in this particular aspect determines that whenever a bank holds more than its original cash reserve; then the profitability of the bank is bound to deteriorate eventually. The main cause behind this deterioration is substantiated with the fact that excess capital is then being subject to taxations. The coefficient reflects that if all other economic and financial conditions that are internal and external to the bank are taken as constant; then for single unit change in OPP; reflects a 13.3% deterioration of the profitability that is experienced by a bank (Moudud-Ul-Huq, Biswas and Dola, 2020). However, the notion of inconsistency among the accumulated data should also be considered which means that 13.3% may seem a significant number to be deteriorated from the perspective of the bank. However, in reality it does not take place. On the contrary, negative outcomes reflect that the relationship between OPP and profitability does exist. The ratio of nonperforming loans to total loans also known as NPL play a significant part in reflecting the profitability of the bank. If the loan default of a bank increases with time, then the chances of the bank to experience profit within the similar time frame also be sure. However, the impact of this relationship is defined in the Greek banking industry and the European banking industry (Barmuta et al. 2019). The ratio of non-interest income to operating profit or NOP positively influences the profitability of the bank. Owing to the fact that whenever a bank charges a fee for the service provided by the bank or commission generated by the bank; it actually accumulates to the bank profitability. The ratio of operating expense to total asset or OEA reflects that whenever a bank carries out any expenditure; then it is for the sake of developing the functionalities or streamlining the practices that are relevant in the bank. The main reason behind these operating expenses is to consolidate the working functionality of the bank. Thereby generating more profit in future references (Abobaker, 2018). The ratio of demand deposit with respect to total loans has also turned out to be negative in nature, which means that if the bank operations are significantly exposed to risk, then the probability of the bank to experience tremendous impediment in terms of generating profit would eventually surface. Hence it is mandatory for banks to ensure that the profitability is always prioritized overexposing the functionalities of the bank towards credit risk. The market concentration variable which is reflected as “lhhi” in this study has shown a negative outcome, which means that if the concentration of banking power increases with time, then the probability of the bank profitability to decrease with increased competition is an eventual and inevitable phenomena. In case of macroeconomic variables, a high correlation is observed from the fact that almost all of the fluctuations that has emerged during the course of currency related movement over a period of time. The changes in the exchange rate eventually feed into the cycle of inflation. That is why co linearity between these variables is observed extensively.

From the analysis it is obvious that profit of the bank is extensively based on variables that are the integral operation of the bank. Effectiveness of the bank management as well as the manner in which internal operations are handled and regulated define the financial path in which the bank would generate profit in the upcoming years. From the macroeconomic perspective, monetary policies can also streamline the profitability of a bank. Hence it is always necessary for a bank to ensure that the working function of the financial institution is in alignment and in compliance with the predetermined monetary policies. Contrary, managers of the bank should also charter their own course in which the bank’s bottom line is fostered in a positive direction.  

Market concentration is definitely one of the primary determinants when it comes to profitability enhancement of the bank. However, in broader context market concentration as per structure conduct performance hypothesis does not necessarily play out to be appropriate in the European as well as American banking industry. When market concentration is considered along with several other aspects, then only profit will be influenced. Single handedly market concentration alone does not have the necessary potential to change the course of a bank’s profitability. In an oligopolistic market it is not feasible for the banking industry to simply increase the concentration and influence the target market vehemently. Extracting excessive profit in developed economies is not supported by market concentration framework in the banking segment, banking firms are completely individualistic when it comes to the process of formulating decisions for the betterment of the organization. Single-handedly a banking institution does not have the necessary authority or financial power to make changes in the target market by influencing other banks in a seamless manner. 

The rate of inflation and exchange rate influencers the overall profitability of the bank in the long run. Even if the management of the bank is adequately maintaining all of the capital reserves as for the predetermined legislation, if the exchange rate or inflation rate is spiraling out of control; then it is not feasible for the bank to refrain from the economic upheaval simultaneously. If the bank fails to abide by the reasonable magnitude of provisions for liquidity; then the shock absorption power of the bank, in case of safeguarding its financial interest from economic downturn, reduces with time. In this case bank managers should concentrate their resources on developing a strategy in which liquidity of the bank increases. However, it should not be conducted at the expense of profitability.

Conclusion:

To conclude it can be inferred that the finding of the research primarily resolves the main questions of the research. Firstly, the research illustrates the primary aspects which are generally considered as determinants in the banking industry as performance enhancement tools. The research also shares a brief insight regarding the macroeconomic influences which are external to the bank’s performance management. The emphasis on return on asset, return on equity, net interest margin and capital adequacy ratio are extensively substantiated with statistical evidence in the due course of the research. On top of that, variables that are industry specific such as ROA and ROE and variables that are related with microeconomic influencing factors are also expounded intricately in the research. This is done with statistical acknowledgement of their individual roles and the manner in which they have influenced the performance of a bank. After meticulously analyzing all of the aforementioned statistical evidence an inference can be drawn that management of a bank is solely accountable for the manner in which the bank utilizes operating expenses. If the operational exposure towards risk alignment is minimized, then only the probability of the performance of the bank to increase over a short span of time would be feasible in nature. The objective of accomplishing a profitable target by the banks can only be conducted provided a substantial amount of liquid assets are in control of the bank. In a contrary scenario, it is reflected that if the liquid assets of the bank decreased over time, then the probability of the bank encountering impediment extensively that could potentially hinder the growth phase of the bank towards profitability is inevitable in nature. Throughout the research it is experienced that there is always a contradiction between the theoretical perspective and the statistical evidence that are regulated in regard to the bank’s performance. In certain instances, profitability and capital adequacy share a negative relation; it varies depending on nation or economic landscape. Hence, it is always imperative for a bank to ensure a minimum CAR. For all things considered a bank should always maintain a fair amount of capital that is considered as adequate as per the concerned regulatory authority, then even if the economic landscape of the particular market experiences a sudden downturn; the bank would be safeguarded potentially from the event. In addition to that if the bank has a substantial amount of cash within its reserve, then the probability of the bank to invest it in a particular entity where profitable returns are expected is substantially higher. Therefore, it is also noticed that apart from safeguarding the bank from infringing any legislative principle that are set forth by regulatory authorities, the banks profitability could also be influenced provided it has maintained a capital adequacy ratio appropriately. The primary techniques that are implemented in the study are ordinary least squares along with correlations matrix. With the help of these techniques there are certain factors which have proven to be quite effective as per theoretical projection with reference to the statistical evidence.

References:

Abbas, F., Iqbal, S. and Aziz, B., 2019. The impact of bank capital, bank liquidity and credit risk on profitability in postcrisis period:‎ A comparative study of US and Asia. Cogent Economics & Finance, 7(1), p.1605683.

Abobaker, M.J., 2018. Bank specific, industry concentration and macroeconomic determinants of Egyptian bank profitability. International Journal of Accounting and Financial Studies, 8(1), pp.p380-397.

Abugamea, G., 2018. Determinants of banking sector profitability: Empirical evidence from Palestine.

Agyei, S.K., 2018. Culture, financial literacy, and SME performance in Ghana. Cogent Economics & Finance, 6(1), p.1463813.

Akber, S.M., 2019. Influential Factors Responsible for Profitability: A Technical Study on Commercial Banks in Bangladesh. International Journal of Accounting & Finance Review, 4(2), pp.22-28.

Alarussi, A.S. and Alhaderi, S.M., 2018. Factors affecting profitability in Malaysia. Journal of Economic Studies.

Alarussi, A.S. and Alhaderi, S.M., 2018. Factors affecting profitability in Malaysia. Journal of Economic Studies.

Al-Harbi, A., 2019. The determinants of conventional banks profitability in developing and underdeveloped OIC countries. Journal of Economics, Finance and Administrative Science.

Al-Homaidi, E.A., Tabash, M.I., Farhan, N.H. and Almaqtari, F.A., 2018. Bank-specific and macro-economic determinants of profitability of Indian commercial banks: A panel data approach. Cogent Economics & Finance, 6(1), p.1548072.

Ali, M. and Puah, C.H., 2019. The internal determinants of bank profitability and stability: An insight from banking sector of Pakistan. Management Research Review.

Alkurdi, A., Hussainey, K., Tahat, Y. and Aladwan, M., 2019. The impact of corporate governance on risk disclosure: Jordanian evidence. Academy of Accounting and Financial Studies Journal, 23(1), pp.1-16.

Almaqtari, F.A., Al?Homaidi, E.A., Tabash, M.I. and Farhan, N.H., 2019. The determinants of profitability of Indian commercial banks: A panel data approach. International Journal of Finance & Economics, 24(1), pp.168-185.

Barmuta, K.A., Ponkratov, V.V., Maramygin, M., Kuznetsov, N.V., Ivlev, V. and Ivleva, M., 2019. Mathematical model of optimizing the balance sheet structure of the Russian banking system with allowance for the foreign exchange risk levels. Entrepreneurship and Sustainability Issues, 7(1), p.484.

Bhattacharyya, A. and Rahman, M.L., 2020. Mandatory CSR expenditure and stock return. Meditari Accountancy Research.

Bitar, M., Pukthuanthong, K. and Walker, T., 2018. The effect of capital ratios on the risk, efficiency and profitability of banks: Evidence from OECD countries. Journal of international financial Markets, Institutions and Money, 53, pp.227-262.

Bitar, M., (2021). Pukthuanthong, K. and Walker, T., 2018. The effect of capital ratios on the risk, efficiency and profitability of banks: Evidence from OECD countries. Journal of international financial Markets, Institutions and Money, 53, pp.227-262.

Chaabouni, M.M., Zouaoui, H. and Ellouz, N.Z., 2018. Bank capital and liquidity creation: new evidence from a quantile regression approach. Managerial Finance.

Chamberlain, T., Hidayat, S. and Khokhar, A.R., 2020. Credit risk in Islamic banking: evidence from the GCC. Journal of Islamic Accounting and Business Research.

Dang, V.D., 2020. Do non-traditional banking activities reduce bank liquidity creation? Evidence from Vietnam. Research in International Business and Finance, 54, p.101257.

Duho, K.C.T., Onumah, J.M. and Asare, E.T., 2020. Determinants and convergence of income diversification in Ghanaian banks. Journal of Research in Emerging Markets, 2(2), p.34.

Elhussein, N.H.A.E. and Osman, O.E.E.O., 2019. Exchange rate fluctuations and financial performance of banks: Evidence from Sudan. International Journal of Economics and Finance, 11(12), pp.1-15.

Godswill, O., Ailemen, I., Osabohien, R., Chisom, N. and Pascal, N., 2018. Working capital management and bank performance: Empirical research of ten deposit money banks in Nigeria. Banks & bank systems, (13, Iss. 2), pp.49-61.

Hasan, M.S.A., Manurung, A.H. and Usman, B., 2020. Determinants of bank profitability with size as moderating variable. Journal of Applied Finance and Banking, 10(3), pp.153-166.

Hussain, S., Nguyen, V.C., Nguyen, Q.M., Nguyen, H.T. and Nguyen, T.T., 2021. Macroeconomic factors, working capital management, and firm performance—A static and dynamic panel analysis. Humanities and Social Sciences Communications, 8(1), pp.1-14.

Jumono, S. and Mala, C.M.F., 2019. Determinants of profitability in banking industry: A case study of Indonesia. Asian Economic and Financial Review, 9(1), pp.91-108.

Kingu, P.S., Macha, S. and Gwahula, R., 2018. Impact of non-performing loans on bank’s profitability: Empirical evidence from commercial banks in Tanzania. International Journal of Scientific Research and Management, 6(1), pp.71-79.

Koroleva, E., Jigeer, S., Miao, A. and Skhvediani, A., 2021. Determinants Affecting Profitability of State-Owned Commercial Banks: Case Study of China. Risks, 9(8), p.150.

Kweh, Q.L., Ting, I.W.K., Hanh, L.T.M. and Zhang, C., 2019. Intellectual capital, governmental presence, and firm performance of publicly listed companies in Malaysia. International Journal of Learning and Intellectual Capital, 16(2), pp.193-211.

Le, T.D. and Ngo, T., 2020. The determinants of bank profitability: A cross-country analysis. Central Bank Review, 20(2), pp.65-73.

Le, T.D., 2018. Bank risk, capitalisation and technical efficiency in the Vietnamese banking system. Australasian Accounting, Business and Finance Journal, 12(3), pp.41-61.

Moudud-Ul-Huq, S., Biswas, T. and Dola, S.P., 2020. Effect of managerial ownership on bank value: insights of an emerging economy. Asian Journal of Accounting Research.

Muraina, S.A., 2018. Determinants of listed deposit money banks’ profitability in Nigeria. International Journal of Finance and Banking Research, 4(3), pp.40-56.

Nguyen, T.N.L. and Nguyen, V.C., 2020. The determinants of profitability in listed enterprises: a study from Vietnamese stock exchange. The Journal of Asian Finance, Economics, and Business, 7(1), pp.47-58.

Nguyen, N., 2018. The effect of corporate social responsibility disclosure on financial performance: Evidence from credit institutions in Vietnam. Available at SSRN 3101658.

Omodero, C.O. and Alpheaus, O.E., 2019. The effect of foreign debt on the economic growth of Nigeria. Management Dynamics in the Knowledge economy, 7(3), pp.291-306.

Opeyemi, A., 2019. The impact of Firm Size on Firms Performance in Nigeria: A comparative study of selected firms in the Building Industry in Nigeria. Asian Development Policy Review, 7(1), pp.1-11.

Osazefua, I.J., 2019. Operational efficiency and financial sustainability of listed manufacturing companies in Nigeria. Journal of Accounting and Taxation, 11(1), pp.17-31.

Patwary, M.S.H. and Tasneem, N., 2019. Impact of non-performing loan on profitability of banks in Bangladesh: A study from 1997 to 2017. Global Journal of Management And Business Research.

Uguru, L.C., Chukwu, U.C. and Elom, J.O., 2018. Effect of working capital management on the profitability of brewery firms in Nigeria. IOSR Journal of Economics and Finance, 9(2), pp.9-20.

Ünvan, Y.A. and Yakubu, I.N., 2020. Do bank-specific factors drive bank deposits in Ghana?. Journal of Computational and Applied Mathematics, 376, p.112827.

Vo, D.H., 2018. Should bankers be concerned with Intellectual capital? A study of the Thai banking sector. Journal of Intellectual Capital.

Yüksel, S., Mukhtarov, S., Mammadov, E. and Özsar?, M., 2018. Determinants of profitability in the banking sector: an analysis of post-soviet countries. Economies, 6(3), p.41.

Zahid, M., Rahman, H.U., Khan, M., Ali, W. and Shad, F., 2020. Addressing endogeneity by proposing novel instrumental variables in the nexus of sustainability reporting and firm financial performance: A step?by?step procedure for non?experts. Business Strategy and the Environment, 29(8), pp.3086-3103.

Zainudin, R., Mahdzan, N.S.A. and Leong, E.S., 2018. Firm-specific internal determinants of profitability performance: An exploratory study of selected life insurance firms in Asia. Journal of Asia Business Studies.