Regional Development and RBM: Proposals for improvement
Factors Affecting Profitability of Sri Lankan Banks
1.
2. Introduction Literature review
Research
methodology
Results
Conclusions &
Recommendations
• History records that banking exist in 3900 BC .Over the years
banking has improved into current e base system with virtual branches
being placed. Banks are a significant contributors to their respective
economies.
• Globally profits of the banks fluctuates in economic recessions and
expansion era’s. When a segment collapsed others have progressed
and maintain their profitability.
• Factors to maintain and improve profitability of banking sector are
not clearly identified .
2
3. Introduction Literature review
Research
methodology
Results
Conclusions &
Recommendations
0
50
100
150
2010 2011 2012 2013 2014
Industry Profit Before Tax Rs BN
Series2
•Sri Lankan banking system began in 1888 catering to
plantation sector . Sector contributes to over 9% of GDP at
present .
•Profitability has been consistently increasing pre and post
war situations with slight fluctuations.
•Factors affecting the profitability of 25 commercial banks
have not clearly being determined
3
4. Introduction Literature review
Research
methodology
Results
Conclusions &
Recommendations
01.
•Determination of micro and macro factors affecting the
profitability of Sri Lankan Domestic Commercial Banks
02.
•To analyze measures taken to improve the profitability
of Sri Lankan Domestic Commercial Banks
03.
•To make recommendations based on the research of
this study to maintain or improve the performance of Sri
Lankan Domestic Commercial Banks
4
5. Introduction Literature review
Research
methodology
Results
Conclusions &
Recommendations
• The literature by Sivaperumaan, Sehrish Gul & others, Javaid
suggests that equity capital, total assets, loans,equity,deposits and
macro factors such as economic growth, inflation, stock capitalization
affect the profitability.
• A study by Thota finds that profitability affected by both internal
and external factors and changes in the overall environment
irrespective of the ownership .
• A study by V Weerasingha and Perera concludes that profitability is
affected by size, liquidity, operational cost and interest rate ,
measured by ROA ,suggest that banks with high efficiency , low
liquidity have reported high profitability.
• Some other studies considered suggest that level of liquidity, tax
policy, foreign ownership, technology, effects of the business cycle,
world economic environment had an impact on profitability of banks.
5
7. Introduction Literature review
Research
methodology
Results
Conclusions &
Recommendations
Bank Specific Variables
•Capital Ratio
•Loan Portfolio
•Interest Income
•Non Interest Income
•Non Performing Loan
Portfolio
•Loan to Deposit Ratio
•Cost to Income Ratio
Macro Level Variables
• GDP Growth Rate
• Inflation Rate
• Interest Rate
Bank’s
Profitability
(ROA and ROE)
7
8. Introduction Literature review
Research
methodology
Results
Conclusions &
Recommendations
Ho -The Capital Ratio has no impact on Profitability of SLDCB
Ho- The size of loan portfolio has no impact on profitability of SLDCB
Ho- Interest income has no impact on profitability of SLDCB
Ho-Non interest income has no impact on profitability of SLDCB
Ho- Non performing loans has no impact on the profitability of SLDCB
Ho- Deposit Portfolio has no impact on the profitability of SLDCB
Ho-Cost income ratio has no impact on profitability of SLDCB
Ho- GDP Growth Rate has no impact on profitability of SLDCB
Ho- Rate of Inflation has no impact on profitability of SLDCB
Ho- Rate of Interest has no impact on profitability of SLDCB
8
9. Sample Selection
• Eleven domestic commercial banks have been selected in the
sample. Eight years of secondary data has been extracted from
Annual Reports of these banks.
• A survey of managers perceptions on the determinants of
profitability was conducted
9
Data Analysis Techniques
• E-Views 8 Package was utilized for the data analysis
• Simple regressions were estimated
• Correlation matrix was developed, general to specific method
was adopted and only significant variables were chosen from
multiple regression.
Introduction Literature review
Research
methodology
Results
Conclusions &
Recommendations
10. Introduction Literature review
Research
methodology
Results
Conclusions &
Recommendations
ROA Co-
efficient
Probability R
Squared
Effect
Negative/
Positive
Significance
/ Impact
NON
INTEREST
INCOME
RATIO
0.0670 0.003 0.724 Positive Significant
NON
PERFORMIN
G LOANS
RATIO
-0.0276 0.026 0.724 Negative Significant
COST TO
INCOME
-0.0368 0.000 0.724 Negative Significant
10
11. Introduction Literature review
Research
methodology
Results
Conclusions &
Recommendations
ROE Co-
efficient Probability
R- Squared Effect
Negative
/
Positive
Significanc
e / Impact
LOAN
PORTFOLIO
0.232 0.0216 0.750 Positive Significant
NON INTEREST
INCOME
0.828 0.000 0.750 Positive Significant
COST INCOME
RATIO
-0.393 0.000 0.750 Negative Significant
11
13. Introduction Literature review
Research
methodology
Results
Conclusions &
Recommendations
• Bank specific factors determine the profitability of SLDCB than
economic factors.
•Most significant impact on profitability are Loan portfolio, Non
Interest Income, and Cost Income Ratio , Non performing loan
portfolio.
• An increase in Non-Interest Income has played a crucial role in the
study in increasing profitability in recent years.
• Interest income, Non Interest Income ,Non Performing loan
Portfolio, and increasing loan portfolio has been considered by the
managers in practice to increase profitability.
•Cost to income ratio has not been considered as significant by
managers.
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14. Introduction Literature review
Research
methodology
Results
Conclusions &
Recommendations
• Profitability of commercial banks can maximize through
Increase in lending volumes , Concentrating on Non Interest
Income ,Managing expenses prudently .
• Non Performing Loans portfolio needs to reduce which will
have a negative affect on profitability.
• Governments should adopt policies to create an environment
where banks can grow their loan portfolio’s, NII levels and
minimize Non Performing Loan Portfolio’s. When banks are
more profitable, Governments can charge greater levies and
earn more tax revenue.
• Managers need to concentrate more on reducing cost to
Income Ratio as they have not considered same as significant in
questionnaire based survey.
14
15. Introduction Literature review
Research
methodology
Results
Conclusions &
Recommendations
15
• The author has not considered the foreign banks who are
competing in the domestic market
• If segregation of banks in to large, medium ,and small and
regression was not conduct
• Study determinants of all 26 commercial banks in Sri Lanka
• Study with a larger sample size for the questionnaire
