“Macroeconomic Determinants of Bank Profitability: Evidence from Conventional Banks in Bangladesh”

Abstract

This study explores how selected macroeconomic factors influence the profitability of conventional banks in Bangladesh. Using panel data and applying the Feasible Generalized Least Squares (FGLS) regression method, the analysis focuses on four key economic indicators—GDP growth, remittance growth, money supply (M2), and foreign direct investment (FDI)—and their effect on Return on Assets (ROA) and Return on Equity (ROE), two common measures of bank profitability. The findings show that GDP growth has a negative relationship with both ROA and ROE. This suggests that during periods of economic expansion, banks may face higher costs or competitive pressures that reduce profit margins. In contrast, growth in remittance inflows is positively associated with bank profitability, indicating that remittances provide vital liquidity and support banks in expanding their lending activities. The money supply (M2) is found to have a negative effect on both ROA and ROE, which may result from reduced interest spreads in periods of excess liquidity. Meanwhile, FDI shows a positive impact on ROA but has no significant influence on ROE, implying that while foreign investment supports income generation from assets, it may not directly enhance returns to shareholders .Supporting tests, such as VIF analysis and correlation checks, indicate that multicollinearity and strong variable dependency are not concerns in the model. These results suggest that macroeconomic conditions play an important role in shaping bank profitability in Bangladesh. In summary, the study concludes that while remittance flows have a favorable effect on banking performance, GDP growth and money supply present challenges. FDI contributes positively to asset-based profitability but less so to equity-based returns. Policymakers and bank managers should consider these macroeconomic influences when developing strategies to maintain and enhance bank performance in a changing economic environment.