IMPACT OF EXTERNAL FACTORS ON PROFITABILITY OF BANKING SECTOR OF PAKISTAN

Abstract

Purpose: The purpose of this research was to identify the relationship between inflation, Imports, Exports and Foreign reserves held by country with the profitability of banks. Banking sector has an important role on financial stability of any economy. This research tests the trends of external environment inflation, Imports and exports and foreign reserves which are highly affecting the performance of the banking sector in Pakistan. Methodology: This research was conducted on the top 3 banks financial data which includes HBL, MCB, and UBL as they hold more than 60% of the deposit of the country. Linear regression was used to test the data keeping Inflation, Imports, exports and foreign reserves as Independent variable and Profitability, EPS, ROA, ROE as dependent variables This paper used return on Assets, return on equity and earning per share using it as the bank’s profitability measure to determine how these variables are affected by the current inflation, imports exports and reserves of the country, these dependent variables display the company’s current standing in market and are being judged on the same indicators in market when it comes to the overall growth of the banks, Findings: This research was concluded that inflation has a significant negative impact to the profitability of banks, and the exports had no significant impact on the profitability of banks, whereas the imports have significant positive relationship with the profitability measures keeping foreign reserves insignificant. Practical Implications: This paper would help the banking sector decision makers to identify the external factors causes on the banks profitability.