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 SJIF Impact Factor: 4.144 ISSN: 2455-7838(Online)
EPRA International Journal of Research and Development (IJRD)
Volume: 2 | Issue: 5 | May | 2017

IMPACT OF EXTERNAL FACTORS ON BANK

PROFITABILITY

Muhammad Aslam Javed1

1
Department of Management Science, University of Lahore Islamabad Campus,
Islamabad, Pakistan

Muhammad Farhan Basheer2

2
School of Economics Banking and Finance, UUM

ABSTRACT
The study endeavors to shed light on the indicators of profitability for the banking system of Pakistan by taking
into consideration Bank-Specific and Macroeconomic Factors. This study reveals an efficient image of the profitability on
banking sector of Pakistan for the period 2003-2013. The effect of macroeconomic variables like: Market Concentration,
Interest Rate, Real Gdp Growth Rate, Bank Expense and Bank Fixed Asset on Bank profitability (ROA) in Pakistan.The
methodologies used are Descriptive, Correlationand Multiple Regression Analysis. The regression was performed in order to
predict the ROA and five independent variables were selected. Out of these five independent variables (predictors), four
appeared significant as indicated by the probability values. The most significant predicator for ROA highlighted by our
regression results is IR (t-statistics 3.34, p=0.001) followed by C (t-statistics 3.34, p=0.003). However, when the
regression coefficient was compared for these significant variables, a contrasting difference was observed. These results are
helpful for policy makers, Government and foreign investors.
KEYWORDS: Profitability, micro and macro, steadiness, GDP growth rate, Interest Rate, Bank Expense, Bank Asset
and Market Concentration.

INTRODUCTION Sufian, (2010) Bhatti and Hussain (2010) and

A profitable and sound banking sector is Ahamed (2012).
in a superior position to endure negative upsets Profitable banks are the most important as
and add to the permanence of the financial system these offer savings, mobilization and financial
{Athanasoglou, Brissimis& Delis (2008)}. The resource allocation institutions. Consequently,
observed literature on the determinants of bank these roles make them an important phenomenon
profitability is wide-ranging. Conversely little is in economic growth and development. In
acknowledged with reference to the determinants performing this role, it must be realized that banks
of profitability on banking system of Pakistan. have the potential, scope and prospects for
The purpose of this study by Athanasoglou et al mobilizing financial resources and allocating them
(2008) is to recognize the vital determinants that to productive investments. Therefore, no matter
affect the profitability of the public and private the sources of the generation of income or the
commercial banks over the period of 2003-2013 economic policies of the country, commercial
also second by Lloyd Williams et al (1994), banks would be interested in giving out loans and

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 EPRA International Journal of Research and Development (IJRD) |ISSN:2455-7838 (Online) |SJIF Impact Factor: 4.144

advances to their numerous customers bearing in profitability {Karceski et al (2004) and Khan et al
mind, the three principles guiding their operations (1997)}.
which are, profitability, liquidity and solvency. There are many macroeconomic variables
Financial intermediation is essential for which have significant impact on bank
economic development. The international banking profitability like market concentration, market
industry has undergone substantial structural growth, scarcity of capital, money supply, GDP
reforms over the last two decades. There have growth rate, interest rate, Money supply, exchange
been fundamental changes in the behavior of rate, human capital, inflation, political instability
banks with more emphasis on profitability and and economic instability etc. {Berger et al (1987),
comprehensive asset management in recent period. Berger (1995), Neely & Wheelock (1997), Naceur
It is particularly important for emerging countries (2003), Mamatzakis&Remoundos (2003),
to ensure that the banking system is stable and Naceur&Goaeid (2001, 2005)}. Mutual relations
efficient. Such a banking development should lead between the micro and macro Variable and Bank
to private and infrastructural projects which are Profitability have attracted much attention of
being financed effectively and allocated researcher for previous decades {Khizar et al
efficiently. As Albertazzi&Gambacorta (2009) (2011), Mamatzakis&Remoundos (2003),
argue, because of phenomena such as Naceur&Goaeid (2001, 2005) and Alper& Anbar
globalization, growing international financial (2011)}.
markets, deregulation and advances in technology, THE RESEARCH OBJECTIVES
identifying the determinants of bank performance The objectives of this study are:
is an important predictor of unstable economic 1. To find the impact of (Market Concentration,
conditions. Athanasoglou et al. (2008) also point Interest Rate, GDP Growth Rate, Bank Fixed
out that a profitable banking system is likely to Asset and Bank Expense)on Bank Profitability in
absorb negative shocks, thus maintaining the Pakistan.
stability of the financial system. In this respect, it 2. To help the foreign investor to identify the factors,
is important to investigate the effectiveness of that can affect the Bank profitability, while
emerging banks. How banks are affected by investing in Pakistan.
increased competitive pressures, depends partly on 3. To provide the guidelines for policy makers in
how efficiently they are run. Banks can increase formulating the macroeconomic policies.
their profitability through either improvement of 4. To explore which of the external factor affect the
their cost efficiency or exerting their market bank profitability more than then other factor?
power. The latter approach to make profit can These are the questions which are to be discussed
reduce total social welfare. in this research.
A profitable banking sector is better able 1. Is there any impact of Market Concentration,
to withstand negative shocks and contribute to the Interest Rate, GDP Growth Rate, Bank Fixed
stability of the financial system. The importance Asset and Bank Expense on Bank Profitability
of bank profitability can be appraised at the micro (ROA) in Pakistan?
and macro levels of the economy. At the micro 2. To determine which variables (Market
level, profit is determined by bank’s management Concentration, Interest Rate, GDP Growth Rate,
decisions and policy objectives, while the Bank Fixed Asset and Bank Expense influence
macroeconomic determinants look at variables more on Bank Profitability (ROA) in Pakistan?
that reflect the economic and legal environment SIGNIFICANCE OF STUDIES
where the credit institution operates. The current study is distinct from the
Profitable commercial banks also stabilize previous studies on account that it adopts model
the financial system of a country. Commercial that focus not only bank specific factors but also
banks perform major function of accepting the industry and macroeconomic factors in order to
deposits from the general public and advances investigate their impact on banks profitability. The
loans. In the past a lot of work has been done by study included Market Concentration, Real
the researchers on the profitability determinants of Interest rate, GDP growth rate, Bank expense and
commercial banks {Sufian et al (2011), Gul et al Bank Asset.
(2011), Karceski et al (2004)}. LITERATURE REVIEW
Some researchers have used only bank Ani et al (2012) investigated the
characteristics or internal factors in their study but determinants of profitability of commercial banks
some also used the macroeconomic factors or in Nigeria for the period of ten years from 2001 to
external factors in their study along with internal 2010 including the observation of 147 banks.
factors {Saira et.al (2011)}. Bank size or total Pooled ordinary least square was used to estimate
assets does not lead any profitability of the coefficient. Study finds that bank size does not
commercial banks but equity and deposits have a increase the profit of any commercial banks in
significant influence on the profitability of Nigeria. Greater capital-asset ratio increases the
commercial bank Pilloff& Rhoades (2002) discus profitability of banks.
the positive relationship of the size with bank’s

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 EPRA International Journal of Research and Development (IJRD) |ISSN:2455-7838 (Online) |SJIF Impact Factor: 4.144

Saira et al (2011) examined the 11 commercial banks operating in Pakistan for the
profitability of top 10 the commercial banks of period of 2005-2009.The study uses the regression
Pakistan for the period of 2004- 2008.Pooled analysis to implicate the result with the
ordinary least square has been used to check the hypoArticle. The findings from this research paper
impact of internal factors includes assets, loan, are that internal factors impact the profitability of
equity and deposits on the profitability of banks the commercial banks whereas external factors do
on dependent variable called return on asset not impact.
(ROA). The study found that internal factors Khizar et al (2011) analyzed the
stated above effect the bank’s profitability. Bank profitability factors impacting on the profit of the
size or total assets does not lead any profitability 22 commercial banks both public and private
of commercial banks but equity and deposits have working in Pakistan for the period of 2006-
a significant influence on the profitability of 2009.The study used the descriptive statistics,
commercial banks. Abdel (2013) analyzed the correlation and regression analysis. Return on
internal factors that impact on the profitability of assets (ROA) and return on equity (ROE) have
the commercial banks listed in Amman Stock been used as dependent variables and on the other
Exchange in Jordan for the duration of 2005- hand internal and external factors have been used
2011.The study constitutes that the cost-income as independent variables. The results show that
ratio has a significant collide with the profitability when the economic growth increases the
of commercial banks in Jordan. profitability increases. And on the other side when
Imad et al (2011) took apart the the credit risk increases the profitability decreases.
determinants of profitability of 10 Jordan banks Deger (2011) probed the internal and
for the period of 2001-2010.They have used return external factors of banks profitability of Turkey
on equity (ROE) and return on assets (ROA) as for the period of 2002-2010.In this study the
dependent variables and internal and external return on assets (ROA) and return on equity
factors have been used as an independent variables (ROE) both are the dependent variables and the
and the type of data of Jordan banks is penal data. function of internal and external factors.
Results designated that profitability of the Jordan Profitability increases when the non-interest
banks depend upon the well capitalized banks, income and asset size increases. And real interest
high loaning activities, less credit risk and cost rate in the external factors has positive effect on
management efficiency. Findings also expressed profitability.
that size does not increase the profitability of Srinivas et al (2013) analyzed the
Jordan banks. profitability determinants of Tanzania commercial
Sufian et al (2008) studied the profitability banks for the period of 2006-2012.Internal
of the banks in Philippines for the period of 1990- determinants use the variables like liquidity risk,
2005.The outcome paint a picture that profitability credit risk, operating efficiency, business assets
factors have significantly impact on bank and capital adequacy and external determinants
profitability. The study also suggests that if the use the variables GDP growth rate and inflation
expense related behavior and credit risk increases rate. All of these variables are independent. The
the profitability of the banks operating in study found that internal variables determine the
Philippines decreases and the non-interest income bank’s profitability whereas external factors do
and capitalization both have the positive not influence the profitability of commercial
relationship with bank’s profitability. During the banks.
study undertaken the inflation increases the profit Abuzar (2013) studied the determinants of
of the banks in Philippines decreases. profitability of Islamic banks operating in Sudan.
Sehrish, Irshad&Zaman (2011) tried out This study found that only the internal factors
the relationship between the bank specific have the substantial impact on the profitability of
characteristics and the profitability of the banks the commercial banks. Cost, liquidity and the size
using the data of top fifteen commercial banks of the banks have the positive relationship with the
operating in the economy of Pakistan for the bank profitability. Macroeconomic or external
period of 2005-2009.This paper applies the Polled factors have no substantial impact on profitability.
Ordinary Least Square method to look into the hit Alkassim (2005) examined the profitability of
of assets, loans, equity, deposits, economic Islamic and conventional banks in GCC countries
growth, inflation and market capitalization on for the period of 1997- 2004.He analyzed both the
major profitability blinkers like return on assets internal and external factors impacting on the
(ROA) ,return on equity (ROE), return on capital profitability of Islamic and conventional banks.
employed (ROCE) and net interest margin (NIM) This study showed that asset quality of the
one by one. The study constitute that both the conventional banks is better than others. Interest
internal and external factors have a solid influence free lending impact on the profitability of the
on the banks profitability. Islamic bank and total expenditures impact on the
Syeda (2012) analyzed the internal and profitability of the conventional banks operating in
external factors that effect on the profitability of the GCC countries negatively.

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 EPRA International Journal of Research and Development (IJRD) |ISSN:2455-7838 (Online) |SJIF Impact Factor: 4.144

Alper& Anbar (2011) analyzed the Public, Private and Foreign banks from 2002 to
internal and external factors of the commercial 2007 in terms of profitability. The frequent
banks of Turkey for the period of 2002-2010.The determinants such of macroeconomics and bank-
study shows that non-interest income and bank specific are to be implemented in this subject.
size have the positive impact on the bank Moreover the outcomes of this analysis reveal the
profitability. And on the side of the profitability of Indian banks has significantly
macroeconomic or external factors only the real increased over the past years. The
interest rates impact on the profitability of the macroeconomics determinants (income per capita,
commercial banks positively. Vong& Chan (2006) exports and foreign exchange reserves) indeed
analyzed the impact of internal and external influence substantially their profitability. In other
factors on the profitability of Macao banking word, no sign of negativity in profitability is
industry for the period of 15 years. This study emphasized on this Indian banking sector.
found that high capitalization leads to the high BANK PROFITABILITY AND ITS
profitability and size of the bank increases the DETERMINANTS
profitability its mean banks are enjoying the Performance measure
benefit of economies of scale. And on the other The empirical evidence supports that the two
hand loan loss provision impact on the variables which were used to measure the
profitability of the Macao banking industry profitability i.e. Return on Assets (ROA) and
unfavorably. Return on equity (ROE) {Ramlall (2009),
Anwar &Herwanay (2006) worked on the Koasmidou, (2008), Sufian&Habibullah (2009),
subject of bank profitability in Indonesia that Sayilgan&Yildirim (2009)}. Both profitability
specialized on empirical study between Provincial measures reflect to breeds of earing form optimum
Government’s banks and Private Non-foreign utilization of resources.
Exchange banks. Their data are set for the period Internal Indicators
of 1993-2000. ROA and ROE are used as The bank-specific indicators have more
dependent variables to determine the profitability ability to influence the profitability of banks. The
of the Indonesian banking industry. Their results bank size, operating efficiency, capital, credit risk,
show that Capital and Reserves to Total Asset portfolio composition and asset management all
(CRTA) and Loans to Deposits Ratio (LIQ) are these variables considered independent which can
the ones affecting the profitability positively. influence profitability internally. These factors are
Sufian (2011) investigated the profitability controllable and the empirical evidence discusses
of the Korean banking sector for the period of all these variables and their relationship with
1992-2003 and he comes up with the following profitability and the proportionate change occurs
findings that the banking system in Korea due to all these variables (Sufian&Habibullah
impulses profitability when there is low liquidity (2009), Ramlall (2009), Sayilgan&Yildirim
in their assets and their macroeconomic (2009).
determinants especially inflation have a significant
External Indicators
impact on bank profitability. However, the impact
The macroeconomic variables can
of credit risk and cost are always negative.
externally influence the profitability of the banks.
Furthermore, it is observed that on average the
These indicators cannot control by the banks
Korean banking sector is relatively more
because their impact appears at macro level.
profitable during the pre-crisis period under both
profitability measures, i.e., ROA and ROE. One Proposed Model
relevant view that is included in Sufian paper is The Market Concentration, Interest Rate,
that the Korean banking system was under fire GDP Growth Rate, Bank Fixed Asset and Bank
during the Asian financial crisis. Expense are independent variable while ROA is
Sing and Chaudhary (2009) put their dependent variable. The study is conducted by
efforts together to analyze the Indian’s banking taking annual data of Banks from 2003 to 2013.
sector from three (3) different perspectives such as

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 Figure 1: Proposed Study Model

HYPOTHESES OF THE STUDY To check the dependence of ROA on

HO: There is no impacts of Market Macroeconomic variables in Pakistan, a model has
Concentration, Real interest rate, GDP Growth been developed through theoretical and empirical
Rate, Bank fixed asset and Bank Expense on Bank literature. The study also used other variables that
Profitability. can affect the ROA are Market Concentration,
H0: α =0, β1 = 0, β2 = 0 β3 = 0, β4 = 0, β5 = 0 Real GDP growth rate , Interest Rate, Bank
H1: There is a significant impact of Market Expense and Bank Fixed Asset.
Concentration, Real interest rate, GDP Growth ROA= α + β1 (MC) + β2 (GDP) + β3 (INT) +
Rate, fixed asset and Bank Expense on Bank β4 (FA) + β5 (EXP)
Profitability. Data Description and Sources
H1: α ≠ 0, β1 ≠ 0, β2 ≠ 0, β3 ≠ 0, β4 ≠ 0, β5 ≠ 0 This study is based on secondary data. The data on
RESEARCH METHODOLOGY ROA is taken from Annual reports of banks, while
The effect of macroeconomic variables data relating to Market Concentration, Interest
like: market concentration, interest rate, real GDP Rate, Real Gdp Growth Rate, Bank Expense and
growth rate, bank expense and bank fixed asset on Bank Fixed Asset is taken from (Annual reports of
bank profitability(ROA) in Pakistan investigated banks) for the period 2003-2013.
by using a regression analysis technique as used  The State Bank of Pakistan
by Talat et al (2013), Aqeel&Nishat (2004),  SBP Banking Service Corporation
Edward & Charles (2011) , Kiyota& Urata (2002),  National institute of Banking and Finance
Nasir & Hassan (2009) , Mahmood & Ali (2011) ,
Masayuki &Ivohasina (2005), Shah & Ahmad
(2003), Hakro&Ghumro (2007), Shamsuddin
(1994) , and Shah & Ahmad (2003). Annual data
for the period 2003-2013 has been used in this
study. Model Specification and Justification of
Variable

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 EPRA International Journal of Research and Development (IJRD) |ISSN:2455-7838 (Online) |SJIF Impact Factor: 4.144

Variables Description Sources

Bank Profitability (ROA) Bank profitability Annual Reports
Market Concentration Market concentration of bank Annual Reports
Interest Rate Interest rate of banks Annual Reports
GDP Growth Rate Gross Domestic Product Annual Reports
Bank Asset fixed asset of Banks Annual Reports
Bank Expense Expense of Banks Annual Reports

Banks including in our Research:

Following bank are including in our research.

S.NO BANKS CATEGORY

1. HABIB BANK LIMITED Commercial Bank
2. BANK AL-HABIB Commercial Bank
3. UNITED BANK LIMITED Commercial Bank
4. STANDARD CHARTER BANK LIMITED Commercial Bank
5. ALLIED BANK LIMITED Commercial Bank
6. ZARI TARAQIATI BANK LIMITED Commercial Bank
7. ASKARI BANK Commercial Bank
8. BANK ALFALAH Commercial Bank
9. NATIONAL BANK OF PAKISTAN Government Bank
10. THE BANK OF PUNJAB Government Bank
Econometric Model and Estimation Bank Expense and Bank Assets on Return on
Techniques Asset) Kiyota and Urata (2002), are made in order
E-views 8.1 software package was used for to check the normality of variables which is
regression and other Diagnostic test. {Edward & described in the Table 4: Descriptive statistics of
Charles (2011), Kiyota& Urata (2002), Nasir & the variables from 2003-2013. Descriptive
Hassan (2009), Masayuki &Ivohasina (2005), statistics are distinguished from inferential
Shah & Ahmad (2003), Mushtaq et al (2012), statistics (or inductive statistics), in that
Hakro&Ghumro (2007), Shamsuddin (1994), and descriptive statistics aim to summarize a sample,
Shah & Ahmad (2003)}. The following techniques rather than use the data to learn about the
are applied to estimate the econometric model of population that the sample of data is thought to
this study from the period 2003-2013 and pooled represent.
data is used for this article. The descriptive statistics shows that all the four
Model variables i.e. ROA, Dependent variable and
ROA= α+β1 (MC) +β2 (INT) +β3 (GDP) + β4 MC.IR, GDP, BA and BE has lot of variability in
(FA) + β5 (BE) terms of minimum and maximum values. Due to
Where: the difference between minimum and maximum
ROA= Bank Profitability values the range statistics parameter “Skewness”
α = y-Intercept exceed beyond 1 for ROA which further shows
β1 = Coefficient of MC (Market Concentration) that the data is skewed and not normally
β2 = Coefficient of INT (Real Interest Rate) distributed. However, for rest of the parameters,
β3 = Coefficient of GDP (GDP Growth Rate) the values for skewness between -1 to +1 which is
β4 = Coefficient of FA (Fixed Asset) an indication of normal distribution of data for
β5 = Coefficient of BE (Bank Expense) MC.IR,GDP, Bank Expense and Fixed Asset.
Estimation Techniques The mean value of ROA is 0.016 with a standard
deviation of 0.027545 and its distribution is
 Descriptive statistics
positively skewed. The mean of Interest rate (IR)
 Correlation analysis
is 10.18182 with standard deviation of 4.400129
 Multiple Regression analysis(OLS) and its distribution is also positively skewed and
 Panel EGLS (CROSS SECTIONAL SUR leptokurtic. Similarly the mean of GDP Growth
METHOD) Rate, Bank Fixed Asset and Bank Expense is
EMPIRICAL RESULTS 4.536364,16571884 and 11858371 respectively
Descriptive Statistics with standard deviation 2.066452,43434490 and
The descriptive statistics of the variables (Market 12011540 positively skewed and leptokurtic
Concentration, Interest Rate, Gdp Growth Rate, distribution.

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 Data Descriptive Analysis
ROA MC IR GDP FASST EXP_AD
Mean 0.016881 0.488147 10.18182 4.536364 16571884 11858371
Median 0.013383 0.467165 9.100000 4.800000 9401590. 8675001.
Maximum 0.214589 0.777244 20.30000 7.700000 3.41E+08 81478296
Minimum 0.001239 0.297312 2.900000 1.600000 444924.0 647895.0
Std.Dev. 0.027545 0.151832 4.400129 2.066452 43434490 12011540
Skewness 6.276426 0.512069 0.734445 0.050653 6.853025 3.076004
Kurtosis 44.19941 1.989385 3.408442 1.718145 49.76522 16.00294
Correlation Analysis negative and strong relationship with GDP
To check the relationship among the Growth Rate.
variables, correlation analysis is made. The ROA shows negative and strong
results of correlation analysis are depicted in relationship with interest rate, ROA show
the table 5. the three variables are positively positive relationship with bank expense, there
correlated with dependent variable (Return on is a positive relationship with fixed asset and
Asset (ROA) expect the Market Concentration market concentration. Bank expense show
and interest rate which shows a negative negative relationship with Gdp Growth Rate.
correlation with ROA. Interest Rate has a
ROA EXP_AD FASST MC GDP IR
ROA 1.000000 0.062221 0.083589 -0.012206 0.096139 -0.098385
EXP_AD 0.062221 1.000000 0.115686 -0.165202 -0.074981 0.008201
FASST 0.083589 0.115686 1.000000 0.174719 -0.004227 -0.022384
MC -0.012206 -0.165202 0.174719 1.000000 0.232190 0.141973
GDP 0.096139 -0.074981 -0.004227 0.232190 1.000000 -0.705708
IR -0.098385 0.008201 -0.022384 0.141973 -0.705708 1.000000

Bank profitability (ROA) shows negative Interest rate show positive relationship
relationship with market concentration, ROA with bank expense, investment and GDP growth
shows negative and strong correlations with rate show positive relationship with market
interest rate, Market concentration show negative concentration. Bank profitability show positive
relationship with interest rate.Bank profitability relationship with GDP Growth rate, interest rate
(ROA) show positive and strong relationship with show negative and strong relationship with
GDP Growth Rate, GDP Growth rate show ROA.GDP growth arte show negative relationship
negative relationship with interest rate, investment with Bank expense.
shows positive relationship with fixed assets.

Correlation among ROA, GDP Growth Rate, Interest Rat, Market Concentration,
Fixed Asset and Bank Expense
ROASS EXP AD FASST GDP INTEREST MARKET
GROWTH RATE CONCENTRATION
ROASS 1.000000 0.062221 0.083589 0.096139 -0.098385 -0.012206
EXP AD 0.062221 1.000000 0.115686 -0.074981 0.008201 -0.165202
FASST 0.083589 0.115686 1.000000 -0.004227 -0.022384 0.174719
GDP GROWTH 0.096139 -0.074981 -0.004227 1.000000 -0.705708 0.232190
INTEREST RATE -0.098385 0.008201 -0.022384 -0.705708 1.000000 0.141973
MARKET -0.012206 -0.165202 0.174719 0.232190 0.141973 1.000000
CONCENTRATION

Regression Analysis (OLS Method) variable. Our observation include 110 and r-square
Regression analysis is a is 0.968756, adjusted R square is 0.966718 and
statistical process for estimating the relationships Durbin Watson stat is 2.53278.
among variables. It includes many techniques for The regression was
modeling and analyzing several variables, when performed in order to predict the Bank
the focus is on the relationship between a profitability (ROA and five independent variables
dependent variable and one or more independent were selected. Out of these five independent

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 EPRA International Journal of Research and Development (IJRD) |ISSN:2455-7838 (Online) |SJIF Impact Factor: 4.144

variables (predictors), four appeared significant as p=0.003). However, when the regression
indicated by the probability values. The most coefficient was compared for these significant
significant predicator for ROA highlighted by our variables, a contrasting difference was observed
regression results is interest rate (IR) (t-statistics (Kiyota& Urata (2002).
3.34, p=0.001) followed by C (t-statistics 3.34,

Dependent Variable: ROA

Method: Panel EGLS (Cross-section SUR)
Sample (adjusted): 2004 2013
Periods included: 10
Cross-sections included: 10
Total panel (unbalanced) observations: 99
Linear estimation after one-step weighting matrix
Variable Coefficient Std. Error t-Statistic Prob.
C -0.010828 0.000700 -15.47628 0.0000
EXP_AD -2.25E-14 7.84E-12 -0.002869 0.9977
FASST 4.21E-12 1.70E-12 2.471583 0.0153
MARKET_CONCENTRATION 0.015966 0.000590 27.04730 0.0000
GDP_GROWTH 0.000227 6.68E-05 3.395723 0.0010
ROA(-1) 0.769825 0.023987 32.09402 0.0000
INTEREST_RATE 0.000343 3.70E-05 9.282558 0.0000
Weighted Statistics
R-squared 0.968756 Mean dependent var 4.738015
Adjusted R-squared 0.966718 S.D. dependent var 15.59677
S.E. of regression 0.976547 Sum squared resid 87.73527
F-statistic 475.4221 Durbin-Watson stat 2.090507
Prob(F-statistic) 0.000000
Un weighted Statistics
R-squared 0.651608 Mean dependent var 0.012420
Sum squared resid 0.002656 Durbin-Watson stat 2.532748

The overall accuracy of regression model Market concentration increases by 1 unit the
can further be investigated by observing the profitability of banks (ROA) will increase by
adjusted R2 values. This adjusted R2 (0.96) we 0.015966.There is positive relationship between
can predict the overall trend accurately up to 96%. Market concentration and ROA. This result is
The variation in Bank profitability (ROA) is significant at 1% level of significance level.
explained by all independent variables included in Interest Rate and ROA:
the model is 96%. The remaining 4% variation is The table shows results of GLS
due to other factors that are not included in model. regression. The coefficient of Interest rate is
The higher value shows greater strength of model. 0.000343 that means when interest rate increases
R Square is a coefficient of determination show by 1 unit the profitability of banks (ROA) will
strength of model. F–test means model fit test they Increase by 0.000343. There is positive
are equal to 0%. The value of R-square (0.96) relationship between interest rate and ROA. This
shows that 96 % variation in dependent variable result is significant at 1% level of significance
(ROA) is explained by the independent variables level.
and show strong relationship. The relationship of GDP Growth Rate and ROA:
all independent variables with ROA is described The table shows results of GLS
below. regression. The coefficient of Gdp Growth rate is
Market Concentration and ROA: 0.000227 that means when GDP Growth rate
The table shows results of GLS increases by 1 unit the profitability of banks
regression. The coefficient of Market (ROA) will increase by 0.000227. There is
concentration is 0.015966 that means when positive relationship between Gdp Growth rate

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 EPRA International Journal of Research and Development (IJRD) |ISSN:2455-7838 (Online) |SJIF Impact Factor: 4.144

and ROA. This result is significant at 1% level of METHOD) regression. The coefficient of Market
significance level. concentration is 0.000179 that means when
Banks Fixed Asset and ROA Market concentration increases by 1 unit the
The table shows results of GLS profitability of banks (ROA) will increase by
regression. The coefficient of Fixed Asset is 0.000179.There is positive relationship between
4.21E-12 that means when Fixed Asset increases Market concentration and ROA. This result is
by 1 unit the profitability of banks (ROA) will significant at 1% level of significance level. The
increase by 4.21E-12. There is positive coefficient of Interest rate is 0.000360 that means
relationship between Fixed Asset and ROA. This when interest rate increases by 1 unit the
result is significant at 1% level of significance profitability of banks (ROA) will Increase by
level. (Goddard et al (2004). 0.000360. There is positive relationship between
Bank Expense and ROA interest rate and ROA. This result is significant at
The table shows results of GLS 1% level of significance level. The coefficient of
regression. The coefficient of Expense is -2.25E- Gdp Growth rate is 0.002229 that means when
14 that means when of Expense increases by 1 GDP Growth rate increases by 1 unit the
unit the profitability of banks (ROA) will decrease profitability of banks (ROA) will increase by
by -2.25E-14.There is negative relationship 0.002229. There is positive relationship between
between Bank expense and ROA. This result is Gdp Growth rate and ROA. This result is
significant at 1% level of significance level. significant at 1% level of significance level The
Panel EGLS (CROSS SECTIONAL coefficient of Fixed Asset is 5.77E-11 that means
SUR METHOD) when Fixed Asset increases by 1 unit the
The data is heterogeneous and we assign profitability of banks (ROA) will increase by
weight to the value. That why we uses panel 5.77E-11 There is positive relationship between
EGLS (cross sectional SUR method).The table Fixed Asset and ROA. This result is significant at
shows results of GLS (CROSS SECTIONAL SUR 1% level of significance level.

Regression Analysis of variable using Panel EGLS (CROSS SECTIONAL SUR

METHOD)
Dependent Variable: ROA
Method: Panel EGLS (Cross-section SUR)
Sample: 2003 2013
Periods included: 11
Cross-sections included: 10
Total panel (balanced) observations: 110
Linear estimation after one-step weighting matrix
Variable Coefficient Std. Error t-Statistic Prob.
MC 0.000179 0.002695 0.066545 0.9471
FASST 5.77E-11 6.06E-12 9.520982 0.0000
IR 0.000360 8.31E-05 4.327050 0.0000
GDP 0.002229 0.000177 12.60399 0.0000
EXP_AD 1.49E-10 1.80E-11 8.260394 0.0000
Weighted Statistics
R-squared 0.727073 Mean dependent var 2.127713
Adjusted R-squared 0.716676 S.D. dependent var 4.640548
S.E. of regression 1.000782 Sum squared resid 105.1644
Durbin-Watson stat 1.895207
Unweighted Statistics
R-squared 0.014254 Mean dependent var 0.016881
Sum squared resid 0.081523 Durbin-Watson stat 1.011050

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CONCLUSION AND SUGGESTION LIMITATION OF THE STUDY
The study endeavors to shed light on the The data constraint (due to large data set
indicators of profitability for the banking system i.e. five independent variables ,market
of Pakistan by taking into consideration bank- concentration, interest rate, GDP growth rate,
specific and macroeconomic factors. This study Bank Assets and bank Expense) is the major
reveals an efficient image of the profitability on limitation faced in this study, therefore this study
banking sector of Pakistan for the period 2003- is conducted from 2003-2013. Further,
2013.On the micro independent variables front, generalizability is another constraint of this study.
profitability seems to have been positively Because this study is done by taking annual data
affected by bank asset size, operating efficiency, set of the variables in Pakistan and it is a
portfolio composition, Kiyota& Urata (2002), developing country having different administrative
asset management and negatively by bank conditions, Goddard et al., 2004. Hence the results
expense, capital and credit risk in case profitability found from the various testing in this study are
is measured by return on assets (ROA). On the beneficial for Pakistani policy makers.
macroeconomic variables, MC, GDP and interest CONCLUSION
rate is found to having positive affect on This study is conducted to check the
profitability (as measured by ROA). This study impact of market concentration, real interest rate,
facilitates the academician, Goddard et al (2004) Gdp growth rate, bank expense and bank asset on
scholars and bankers to have a portrait about the bank profitability in Pakistan. The time period
banking developments in managing profitability as used in this study is from 2003-2013. The
the journey provides the study of commercial methodologies used are Descriptive, correlation,
banking to improve their consideration. multiple regression analysis. The regression was
The purpose of the study is to check the performed in order to predict the ROA and five
impact of macroeconomic like market independent variables were selected. Out of these
concentration, interest rate, GDP growth rate, and five independent variables (predictors), four
Bank asset and bank expense on Bank profitability appeared significant as indicated by the
in Pakistan using annual data from 2003 to 2013 probability values. The most significant predicator
by employing multiple regression analysis. The for ROA highlighted by our regression results is
previous chapter described the results and their IR (t-statistics 3.34, p=0.001) followed by C (t-
interpretation. This chapter summarizes the major statistics 3.34, p=0.003). However, when the
findings, and limitations of this study. Further, this regression coefficient was compared for these
chapter gives the policy implication and significant variables, a contrasting difference was
recommendations for the future research. observed. These results are helpful for policy
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