Determinants of Banks' Profitability: A Study of Pakistan Banking Sector

Abstract

Profitability is the relative measure that defines the association of different factors in profit. This study investigates different determinants that effect banks’ profitability in context Pakistani banking sector. The descriptive analysis shows that the banking sector is unique compared to other industry sectors as banking sector in Pakistan is greatly regulated. And commercial, mutual, co-operative and government-owned banks jointly operate in the sector. The empirical part of present study discusses specially the issues related to ownership and regulation. The analysis extends research of previous researchers by examining additional determinants of banks’ profitability and by focusing on the Pakistani banking sector. Unbalanced panel data of 20 banks between 2009 and 2013 is used in present study. Present study shows that profit diligences still exist in the banking sector. The advance econometric technique is used to conduct the analysis in Eviews 8. The finding of present study also suggests that the equity-to-asset ratio is positively related to banks’ profitability supporting the bankruptcy cost hypothesis or signaling hypothesis. There is no evidence found that the funding- and liquidity structure are determinants for profitability, both proxies appears to be insignificant. Besides, little evidence is found for the agency theory.