Advance Research methodology-605

SUBMITTED BY

KHALID
REGISTRATION ID#: 10351

STUDENT OF MS (MS)

SUBMITTED TO
MS. Simra Kiran -PROFESSOR

DEPARTMENT OF MANAGEMENT SCIENCES

CITY UNIVERSITY OF SCIENCE AND INFORMATION TECHNOLOGY
PESHAWAR – PAKISTAN
 Topic
Factors Affecting Commercial
Banks Profitability in Pakistan
Introduction
Banking sector is one of the important sector for sustainable economic
growth in economy (Anuar, Choo, Khan, &Khan, 2011; Shah, 2016). In
service sector different types of banks playing important role in
economy like state bank, commercial banks, Islamic banks, foreign
banks, agriculture banks. State bank is main head and regulatory body
of all banks working in Pakistan. Economic growth is possible only if
these banks improve his function in a good way. Profitability is one of
the important and main objective of commercial banks. Without
profitability commercial banks cannot survive in market. Therefore, it is
important to identifying factor which has main influence on bank
profitability. Due to technological improvement the performance of
bank is improved (Javaid, Anwar, Zaman & Ghafoor, 2011). The main
motive of bank is to generate favorable returns and minimize risk
factors. Online and commercial banking plays a significant role in the
growth of banking sector (Sadeghi & Farokhian, 2011). Banks deal with
money, so stability of bank is necessary for growth .therefore it is
necessary for the policy maker, regulatory authorities and state bank to
identifying and understand the factors which effect the bank
performance. Pakistani banking sector show high growth continuously
in few decade. In 2008 Pakistani banking face liquidity and solvency
problem which effected bank performance as well as profitability.
Banks can handle critical situation. If they have huge amount of
liquidity. Then they have the capability of controlling debt, deposit etc.
because managing debt, deposit, asset management factor affect
directly on profitability, it is understood that in economic development
banking has a significant role. . In Pakistan, the profit reached the
highest level of rupees 188 billion before tax in 2018. It showed 46
percent increase as compared to 2017.
Problem statement.
Banking is one of the important sector for economic growth. For economic
growth different type of banks playing important role. Due to technological
advancement the banking services is also improved and much facilitated. But
banking faces some problems which make hurdle on bank profitability. The
research is to find out the internal and external factors which effecting the
commercial bank profitability and performance. Now problem arises how to
find these factors, and which factor is more significant and which is more risky.
This research focus on those internal and external factors which effect the
bank performance and profitability.

Research Questions.
 What are the important factors that affect commercial banks
profitability?
 Are identifying factors impact on banks profitability?
 How is the relationship among these factors and profitability?

Purpose of the research.

The main motive and purpose of this research is to identifying those factors
which effects commercial banks profitability in Pakistan.

Research objective.
These are the following main objective of research.
 To investigate the relationship among identifying factor and profitability.
 To identify those factor which leads to high profitability.
 To explain main source through which banks generate revenue.
Scope of research.
 The scope of my research is limited to 20 commercial banks for the time
period of 2013 to 2018.
 The study of research identifying different factor which lead to a
significant result.
 Which is implementing in commercial banks of Pakistan.

The limitations of the study

The main focus of this study is to identifying the factors which effect the
bank’s profitability and performance in Pakistan. But we face some limitation
due to these limitation we do not cover all aspect of study.
 The study of research is bound to commercial banks only.
 Secondary data is collected only 20 commercial banks in Pakistan
because some commercial banks data is not available completely.
 This research is not applicable on globally because this research is
limited to Pakistani commercial banks
Literature Review
Most of researchers have been working on the factors which effecting commercial
and Islamic banks profitability .The factors which effect banks profitability are
most of the time classify into internal and external factors. Some piece of work
were specially limited to specific country and many of them were describe overall
factors of banks profitability. Which were suitable and implementable in
everywhere. It shows us that determinants of banks profitability are divided into
further two groups one is internal and another one is external. In this part we will
discuss those factors which effect commercial banks profitability in the context of
Pakistan with the help of previous worked.
Bashir (2003) have done a research on commercial banking system to examine
the characteristics and financial environment that affect the performance of
commercial banks. He has taken data of eight Middle Eastern countries for this
purpose and examine different characteristics. He examine both characteristic
internal and external The results showed that equity to total assets and loan to
total assets ratios are directly related with profitability. Hijazi and Shah (2004);
Awan, Rashid and Rehman(2011) conducted a research on commercial banking
system to analyze debt to assets whether effect commercial bank profitability.
They found a negative but statistically significant relationship between debts to
assets and profitability.
Al-Mutairi and Al-Omar (2008) had analyze the factors affecting the profitability
of ten national banks in Oman for 1997 to 2009. They found that total assets
equity of a bank are directly related with return on assets (ROA). Moreover the
effect of loan are not significantly important.
Kosmidou (2008) has done research on the factors of banks’ profits in Korea. He
has taken a sample of 20 banks from 1995 to 2005. He collected data from banks
financial statements and annual report and used regression analysis for the
analysis of data. The results showed that equity to assets ratio is positively and
significantly related to profitability. Size of bank is also positively and significantly
related to profitability.
Chatzoglou, Diamantidis and Vraimaki (2010) studied banking productivity by
taking a sample of 15 banks in Greece. They used standard ratio analysis for
measuring the performance of banks. Their results indicated that large size banks
perform better than medium and small banks. Through this we reach to the
conclusion that profitability has a positively relation with banks size.
Anuar, Choo, Khan and Khan (2011) has conducted research on determinants of
bank profitability by taking a sample of 13 banks for 2005-2015. They reach to the
conclusion that bank size has positive relation with banks profitability if banks size
is increase banks earning is also increase with banks size. Their results also
describe that whether banks size is small or large, the effect of net interest
margin (NIM) is positive and significantly contributes to profits. They also indicate
that deposit to asset ratio, and loan to asset ratio are significantly influencing the
bank’s profitability
Gul, Irshad and Zaman (2011) conducted a research relevant to the factors which
effect commercial banks profitability they studied both factors internal as well as
external which effect banks profitability they found both factors have same
effect and same relation and strong influence on banks profitability and also
found that banks size also effect the bank’s profitability .larger banks are in a
good position as compare to smaller banks so its means size of banks has
significant and direct relation with banks profitability . Deposits to total assets
have a positive and significant effect on profitability. Loans to total assets and
equity to total assets ratios have also similar effect on profitability

Malik (2011) has conducted research on the factors which affecting the
profitability of 30 listed life and non-life insurance companies from 2007 to 2011
in Pakistan. His result showed that size and capital of each company has
significantly related with profitability. Current and quick ratio has not a positive
relation with bank profitability it has negative relation with banks profitability.
Ali and Sadaqat (2011) had worked on micro and macroeconomic indicators of
commercial banks profitability. They analyzed 20 commercial banks data by SPSS
from 2007-2012. Their result showed that total assets and equity has positive and
significantly relation with banks profitability, and, credit risk have also playing and
important role on bank performance. Moreover, the results describe that bank
size is main factors which effect banks profitability and it has positive relation. If
bank size is increase the bank’s profitability is also increase.
Javaid et al. (2011) conducted a research on internal factor analysis of 15 banks
profitability for 2006-2010 in Pakistan. To find the effect of total assets, debts,
total equity, and total deposits on return on asset (ROA). Their research describe
that total assets, debts, and total equity, and total deposits on return on asset has
a positive and strong impact on bank profitability. It is not necessary that if a
company has higher total assets they have higher profit. And loan has also not
strong impact on banks profitability. However deposits and equity have positive
impact of profitability.
Obamuyi (2013) examined profitability elements for 20 Nigerian commercial
banks for 2006-2012. The results describe that high capital has also contribution
on banks profitability and it has positive impact.
Riaz (2013) studied the profitability determinants of 32 commercial banks in
Pakistan during 2006-2010. The results describe that total assets ratio, total
deposits and loan, size of banks has much impact on banks profitability. .
Sohail, Iqbal, Tariq and Mumtaz (2013) investigated commercial banks
profitability in Pakistan. Using cross sectional time series data it showed that
internal factors like liquidity, assets composition and debt composition as well as
external factors like bank size have a significant impact on banks profitability.
Abdullah, Parvez and Ayreen (2014) probed the macroeconomic determinants of
26 commercial banks profitability in Bangladesh for 2008 to 2011. Their result
showed us that there is positive relationship between profitability and capital and
banks size as well as total equity, total assets.
Jabbar (2014) examined banks profitability in 31 commercial banks for 2009 to
2012. He reach to the conclusion that banks size and capital of bank has positive
relation with bank profitability. And also found the effect on loan and deposits
growth are insignificant.
Lim (2015) has worked on the same topic. The researcher collected data of eleven
universal banks in Philippines for 2006 to 2013. The study used correlation
analysis for determining the linkage between capital structure and profitability
and found that equity, total assets and debt to assets ratio has positive relation
with bank profitability.
Theoretical Framework
The most important part in a research is the theoretical framework (Shah &
Afridi, 2015). It shows the number of dependent and independent variables used
in the research. In literature review, different variables are identified that affect a
bank’s profitability. The theoretical framework shows the relationship that exists
among dependent and independent variables and the direction of the
relationship (Sekaran & Bougie, 2016).

Theoretical framework diagram

Equity to Assets

Debt to Assets
profitability
Deposits to Assets

Bank Size

The theoretical frame work diagram shows the direction of association between
the dependent and independent variables. All of them are explained below

Dependent Variable –
 Return on Assets (ROA)
Return on assets ratio is used for determining how assets are efficiently managed
by banks for generating profits. It indicates profits of commercial banks. This ratio
is calculated by dividing net profits by total assets. Mathematically: ROA= Net
Profit/Total Assets. In most researches, ROA had been taken as dependent
variable in order to measure profitability of banks.
Independent variables
The independent variables include in this research are equity to assets, debt to
assets, deposits to assets, bank size.

 Equity to Assets
Equity to assets ratio shows the amount of assets that are financed with the
investment of owners of a firm by comparing total equity to total assets. This ratio
can be calculated by dividing total equity in a firm by total assets. Mathematically:
ETA= Total Equity/Total Assets. ETA can be called as stake of the investors in a
company. Companies having high ETA can attract new investors and creditors
because they know that the company is performing well.

 Debt to Assets
Debt to assets ratio shows the amount of assets that are financed with debts
rather than owners ‘equity. It shows the riskiness of the business. This ratio is
calculated as dividing total liabilities by total assets. Mathematically: DTA= Total
Liabilities/Total Assets. If DTA is greater than 1, it means that most of the assets of
company are financed with debts and if smaller than 1, it means that most of the
assets of company are financed with equity. A ratio greater than 1 also indicates
that the company is putting itself in higher risk because the assets are lesser in
worth than the liabilities and in case of liquidation won’t be enough to pay the
debts.

 Deposits to Assets
Deposits to assets ratio is another indicator of measuring profitability of
commercial banks. DPTA is considered as liability of banks. Customers make
current, fixed or saving deposits in banks. These deposits are considered as Bank
liabilities because they have to be repaid back to the depositors. Banks invest
these deposits in other projects and generate profits on them. Therefore, these
deposits are considered as the main sources of banks’ funding and hence they
influence the profitability of banks. This ratio can be calculated as dividing total
deposits by total assets. Mathematically: DPTA= Total Deposits/Total Assets
  Bank Size
Large size banks perform better than small and medium banks because of
economies of scale. So, large banks are perceived to earn more profits. In finance
research, banks total assets are used as a proxy for bank size.

Variables, their Proxies

Variables
Return on Assets (ROA)
Equity to Assets (ETA)
Debt to Assets (DTA)
Deposits to Assets
Bank Size
Proxies
Net Profit/Total Assets
Total Equity/Total Assets
Total Liabilities/Total Assets
Total Deposits/Total Assets
Total Assets

Research Hypothesis
The Four main hypothesis of the research are:
H1: There is a Positive Relationship between Bank Size and
Bank Profitability
H2: There is a Positive Relationship between Equity to Assets
and Bank Profitability
H3: There is a Positive Relationship between Deposits and Bank
Profitability
H4: There is a Positive Relationship between Debt to Assets and
Bank Profitability
Research Methodology
This is third part of research which covers population, sample, sample size, source
of data and data collection.

Types of Research
The current research is quantitative in nature, therefore, we have used
secondary data.

Sources of Data
The research is mostly quantitative in nature for which secondary data is
used. Data collected from the financial statements, Annual reports of the
banks and State Bank of Pakistan website.

Technique
Regression analysis technique will be used.

Population of the Study

This research is about finding the factors that affect the profitability of
commercial banks in Pakistan. The population of this study is all the
commercial banks that operate in Pakistan.

Sample Size
The sample size of this research is based on 20 commercial banks in Pakistan