Determinants of Bank Profitability: A Study on Private Commercial Banks in Bangladesh

Abstract

The profitability of a bank is mainly determined by its ability to generate income relative to its costs and risks. Bank profitability reflects how efficiently a bank utilizes its resources to yield revenues and profits. Return on Assets (ROA), Return on Equity (ROE), and Net Interest Margin (NIM) are the common financial metrics. ROA ratio measures a bank’s ability to generate profit from its assets. It is calculated as net income divided by total assets. A higher ROA indicates better profitability from the bank’s asset base. ROE is a critical measure of a bank’s profitability relative to shareholders’ equity. It is calculated as net income divided by shareholders’ equity. A higher ROE means the bank is effectively utilizing shareholder funds to generate profit. NIM is the difference between the interest income a bank earns on its loans and the interest it pays on deposits and other borrowings, divided by the average earning assets. A higher NIM generally means a bank is more efficient in generating income from its assets. In this report I was working on the Determinants of Bank Profitability. I have collected last Ten-year financial data of five selected private commercial bank National Credit and Commercial Bank PLC, Eastern Bank PLC, City Bank PLC, Bank Asia PLC, BRAC Bank PLC about return on asset ratio from banks annual reports. There are six variables; these are return on assets, total deposit, operating expenses, total assets, total interest income and capital adequacy ratio, each of the data I have collected from annual reports of the banks. Mainly, in this report I analyse how internal variables influence the bank’s profitability.