Micro and Macro Level Determinants of Banks Profitability, the Role of Asset Quality: Evidence From Selected Countries of Asia

Abstract

For economic segment, commercial banks are crucial, especially in emerging countries in which financial markets aren't very well evolved and powerful. Conventional banking financial performance is critical meanwhile worthiness regarding sector stands strongly related with economy’s worthiness, as a whole. Study has researched profitability factors regarding the conventional banks functioning in developing countries of Asia, by specific emphasis on position towards quality of asset. That aspect became especially significant after the introduction of tighter banking regulatory standards. Study has involved both factors of financial performance; micro and macro level. Over the duration 2013-2018, the research has used a fixed effect or random estimation based on Houseman results for the balanced test panel data containing 383 commercial banks from 25 Asian countries. Furthermore, study has assessed profitability factors of developing-country’s commercial banks, through the sub division of Asia into different 4 regions namely; Western Asia, Southern Asia, South Eastern Asia, and Central Eastern Asia, which has provide with an in-depth look into the factors influencing banks’ performance. Results related to ROAA, a proxy of profitability, showed a significant impact of poor asset quality, capital adequacy ratio, inefficiency, and consumer price index. While, Results related to ROAE, a proxy of profitability, showed a significant impact of poor asset quality, capital adequacy, liquidity ratio, inefficiency ratio, and consumer price index. GDP growth rate and Interest spread insignificant effect on profitability. Income Diversification showed mixed results with profitability