Determinants of Profitability of Commercial Banks in Bangladesh

Abstract

The banking sector plays a significant role in the Bangladesh economy by channeling funds from surplus groups to defect groups. The objective of this report is to determine the profitability of listed commercial banks in Bangladesh. The study uses a panel regression model to explore the factors that can influence the profitability of commercial banks. The data covers the periods over 2017-2021 for twenty listed commercial banks on the Dhaka Stock Exchange and has been collected from respective annual reports. The return on assets (ROA) and return on equity (ROE) are used as profitability indicators, whereas economic growth, capital adequacy ratio, and size of the bank are used as explanatory variables in the model. Panel data regression is carried out to examine the factors that can influence the profitability of commercial banks. First, both fixed effect and random effects models are estimated, and then we choose the random effect model appropriate for the study based on the Hausman test. The results of the random effect model of ROE indicate that non-performing loans can significantly affect the profitability of commercial banks in Bangladesh. No other bank specific and macroeconomic variables can determine the profitability of banks.