International Journal of Banking and Financial Law Vol. 1(1), pp , June, ISSN: XXXX-XXXX

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1 International Journal of Banking and Financial Law Vol. 1(1), pp , June, ISSN: XXXX-XXXX IJBFL Research Article Determinants of Profitability of Commercial Banks in Bangladesh Md. Asadul Islam 1, Md. Nazirul Islam Sarker 2, Mahabub Rahman 3, Arifin Sultana 4, AZM Shafiullah Prodhan 5 1 Department of Finance and Banking, Jahangirnagar University, Bangladesh. 2 School of Public Administration, Sichuan University, China. 3 Department of Statistics, Jahangirnagar University, Bangladesh. 4 Department of Psychology, National University, Bangladesh. 5 Department of Horticulture, Bangabandhu Sheikh Mujibur Rahman Agricultural University, Gazipur, Bangladesh. The paper examined the profitability determinants of private commercial banks of Bangladesh for the year 2014 and The study employed annual data for all the 11 private commercial banks of Bangladesh for the year 2014 and Multiple regression analyses were run to capture the significant determinants of profitability and to test hypothesis. The empirical findings from this study suggested that asset size and Net Interest Margin ratio had no significant effect on the profitability. But the impact of nonperforming loans to total loans (NPL) on profitability was observed as the most significant among various variables. Furthermore, investment activities, mainly in shares and debentures of private sectors also have some positive impact on return on equity (ROE). The findings also suggested that diversified banking activities including the investment activities made these banks more profitable. Diversified banking activities are welcomed but if these activities include higher proportion of volatile trading activity rather than low risk income streams like fees and commission, the risk may become higher. The policy direction should be directed in such a way which will enhance the resilience and efficiency of the financial institutions with the aim of intensifying the sturdiness as well as strength of the banking sector. Keywords: Determinant, profitability, performance analysis, Bank, Bangladesh. INTRODUCTION The private commercial banks are the major parts of banking sector in terms of market share and profitability in Bangladesh with high profit growth. Current Commercial banking is the main character of present economy as it makes flow of the resource. Finance is blood of the trade, commerce and they play the role of vanes in the Circulation of the funds in economy and the primary growth of any country depends upon the robust banking system. Commercial banks are the main pillar of the financial system in Bangladesh as banks provide different opportunity and services to clients. The importance of the banking sectors is immense in the progress and richness of any state. The economic development and prosperity comes from the well-rounded developed and perfect banking system. Strong banking system plays important role in efficient allocation and utilization of credit (Haque and Tariq, 2012). Bank is a backbone of all the industries, because every transaction where money is involved, the bank is the main pillar of funding. *Corresponding Author: Md. Nazirul Islam Sarker, Interdisciplinary Center for Food Security, Bangladesh Agricultural University, Mymensingh, Bangladesh. sarker.scu@yahoo.com

2 Islam et al. 002 Banks attract saving from people. The main role of a financial system is not only to transfer funds from savers to investors but also to ensure that funds are being transferred to the sectors which are most important for an economy. Economies that have a profitable banking sector are better able to withstand negative shocks and contribute to the stability of the financial system (Athanasoglou, Brissimis and Delis, 2005). On the other hand, banks insolvencies can result in systemic crisis. Therefore, it is important to understand the factors which really affect the banking sector s profitability. The Financial sector of Bangladesh, like most in developing countries, is dominated by banking industry. After the independence of Bangladesh in 1971, all the domestic banks were merged and grouped into few state owned commercial banks. The aim of the government was to channel funds to the public sector and to prioritize credit to those sectors that sought to reconstruct the waraffected country mainly industries and agricultural sectors. However, their performance was not satisfactory in terms of profitability, customer service and overall performance. To set up a proper regulatory system that would diagnose such problems and correct them was also tough while the government intervention was in existence everywhere. Therefore, banking concept like profitability, liquidity and capital adequacy were alien to bank managers. Some private banks were allowed to operate in the market in 1980s, they begun to perform satisfactorily. Later more private commercial banks were allowed to play in the market. At present private commercial banks are dominant in respect of market share and profitability in the banking sector of Bangladesh. Banking Sector in Bangladesh After the independence of Bangladesh, the Government of Bangladesh declared the Dhaka branch of the State Bank of Pakistan as the central bank of the country, and it was renamed as Bangladesh Bank. This was done through the Presidential Order No. 127of 1972 and the Bangladesh Bank came into existence with retrospective effect from 16 December The Bangladesh government decided to nationalize all banks except foreign banks and renamed the various banks in All the domestic banks were merged and grouped into six commercial banks. The aim of the government was to channel funds to the public sector and to prioritize credit to those sectors that sought to reconstruct the waraffected country mainly industries and agricultural sectors. However, these banks were unable to function well because of the government control at the wrong sectors. The situation was worsened by the fact that loans were provided to the public sector without taking account of the commercial viability. At that period banks had poor capital lease, poor customer services and lacked any market-based monetary instruments. But mostly, as credits were given out without commercial viability, and because it took a long time to call a loan non-performing, and when it was called so, recovery was so abjectly expensive under the erstwhile laws, the loan recovery rate was also extremely poor. To set up a proper regulatory system that would diagnose such problems and correct them was also tough while the government intervention was in existence everywhere. Therefore, banking concept like profitability, liquidity and capital adequacy were alien to bank managers. There were no domestic private commercial banks in operation until 1982; When the Arab-Bangladesh Bank Ltd. (currently AB bank Ltd.) started its business as private commercial bank in the country. To adopt with more market based system as well as to increase competition, in early 1980 the government encouraged some private banks to flourish in the country. Accordingly, licenses were given to six new private banks to operate in the country till With the good performance of the new private banks and keeping in view the poor performance of nationalized commercial banks government privatized two state owned banks namely the Uttara Bank and the Pubali Bank during Another state owned bank, The Rupali Bank Limited has also been transferred to the private sector in More commercial banks were permitted to operate in the private sector during the mid-1990s. The number of banks in all now stands at 53 in Bangladesh. Out of the 53 banks, 4 are Nationalized Commercial Banks (NCBs), 28 local private commercial banks, 12 foreign banks, 5 are Development Financial Institutions (DFIs) and the rest of 4 are other bank among them Sonali Bank is the largest among the NCBs while Pubali is leading in the private ones. Among the 12 foreign banks, Standard Chartered has become the largest in the country. Besides the scheduled banks, Samabai (Cooperative) Bank, Ansar-VDP Bank, Karmasansthan (Employment) Bank and Grameen bank are functioning in the financial sector. The main objective of the study is to identify the major determinants of the profitability of Private Commercial Banks in Bangladesh in recent years. LITERATURE REVIEW This study examines some of the theories relating to capital and profitability as well as bank size and profitability. The theories include the signaling theory, expected Bankruptcy cost hypothesis, risk-return hypothesis, market power and efficiency Structure hypothesis. The relationship between capital and profitability is explained by signaling theory (Berger, 1995; Trujillo- Ponce, 2012), expected bankruptcy cost hypothesis and risk-return hypothesis (Athanasoglou, Brissimis and Delis, 2005; Olweny and Shipho, 2011). The signaling

3 Int. J. Bank. Finan. Law 003 hypothesis suggested that a higher capital was a positive signal to the market of the value of a bank (Ommeren, 2011). As Berger (1995) and Trujillo-Ponce (2012) observed that, under the signaling theory, bank management signaled private information that the future prospects are good by increasing capital. Thus, a lower leverage indicates that banks perform better than their competitors who cannot raise their equity without further deteriorating the profitability (Ommeren, 2011). On the other hand, bankruptcy hypothesis argued that in a case where bankruptcy costs were unexpectedly high, a bank holds more equity to avoid period of distress (Berger, 1995). As the literature review pointed out, the signaling hypothesis and bankruptcy cost hypothesis supported a positive relationship between capital and profitability. However, the risk-return hypothesis suggested that increasing risks, by increasing leverage of the firm, leads to higher expected returns. Therefore, if a bank expects increased returns (profitability) and takes up more risks, by increasing leverage, the equity to asset ratio (represented by capital) will be reduced. Thus, risk-return hypothesis predicts a negative relationship between capital and profitability (Dietrich and Wanzenrid, 2009; Ommeren, 2011; Saona, 2011; Sharma and Gounder, 2012). Consequently, the Market Power (MP) and Efficiency Structure (ES) theories explained the relationship between the bank size and profitability. Olweny and Shipho (2011) observed that the market power posits that performance of banks was influenced by the market structure of the industry and that the Efficiency Structure (ES) hypothesis maintains that banks earn high profits because they were more efficient than the others. Concluding on the MP and ES theories, Olweny and Shipho (2011) argued that MP theory assumed that the profitability of a bank is a function of external market factors, while the ES assume that bank profitability is influenced by internal efficiencies. The empirical review of the study was done by identifying similarities and differences across the various economies studied by previous researchers. The factors affecting banks profitability have been empirically examined by many authors, especially in the developed countries. Demirgüç-Kunt and Huizinga (1999), using bank level data for 80 countries in the periods, showed that differences in interest margins and banks profitability reflect a variety of determinants: the characteristics of the bank, macroeconomic conditions, explicit and implicit bank taxation, deposit insurance regulation, overall financial structure, and several underlying legal and institutional indicators. Athanasoglou et al. (2005) studied the effect of bank-specific, industry-specific and macroeconomic determinants of bank profitability, using an empirical framework that incorporates the traditional Structure-Conduct-Performance (SCP) hypothesis. The results indicated that all bank-specific determinants, with the exception of size, affect bank profitability significantly in the anticipated way. Saona (2011) examined the determinants of the profitability of the US banks during the period The empirical analysis was combined bank specific (endogenous) and macroeconomic (exogenous) variables through the GMM system estimator. He found a negative link between the capital ratio and the profitability, which supports the notion that banks were operating over-cautiously and ignoring potentially profitable trading opportunities. Scott and Arias (2011) also investigated the primary determinants of profitability of the top five bank holding companies in the United States. Profitability determinants for the banking industry include capital to asset ratio, annual percentage changes in the external per capita income and internal factor of size (as measured by an organization s total assets). Staikouras and Wood (2004) constructed the OLS and fixed effect models to examine the determinants of European bank profitability from 1994 to The profitability of European banks is influenced not only by factors related to their management decisions but also to changes in the external macroeconomic environment. Khrawish (2011) accessed the Jordanian commercial bank profitability from 2000 through 2010, and categorized the factors affecting profitability into internal and external factors. The author found that there was significant and positive relationship between return on asset (ROA) and the bank size, total liabilities/ total assets, total equity/ total assets, net interest margin and exchange rate of the commercial banks and that there was significant and negative relationship between ROA of the commercial banks and annual growth rate for gross domestic product and inflation rate. Dietrich and Wanzenrid (2009) analyzed the profitability of commercial banks in Switzerland over the period 1999 to Their findings revealed that the most important factors are the GDP growth variable, which affects the bank profitability positively, and the effective tax rate and the market concentration rate, which both had a significantly negative impact on bank profitability. The bank specific and macroeconomic determinants of profitability in participation banks for Turkish banking sector using ROA and ROE. The bank specific determinants of profitability, the ratio of non-performing loans to total loans had a significant negative effect on profitability. The result was consistent with the study by Davydenko (2010) in the Ukraine. Flamini, McDonald and Schumacher (2009) investigated the determinants of bank profitability in 41 Sub-Saharan African (SSA) countries, using a sample of 389 banks. The study proved that apart from credit risk, higher returns on assets were associated with larger bank size, activity diversification, and private ownership. The results also indicated that bank returns were affected by macroeconomic variables, suggesting that macroeconomic policies that promote low inflation and stable output growth do boost credit expansion. Sharma and Gounder (2012) investigated the profitability

4 Islam et al. 004 determinants of deposit taking institutions in Fiji, over the periods. The study used panel data techniques of fixed effects estimation and generalized method of moments (GMM). The authors discovered that market power (measured by the Lerner Index) was a key determinant of profitability. Thus, institutions were allowed to pass on to their clients the interest costs of raising deposit liabilities and the overall cost of operations. Naceur and Goaied (2008) observed a positive relationship between capital and net interest margin or profitability in Tunisia, but determined that the bank size impacts negatively on profitability, which implied that Tunisia banks are operating above their optimal level. Olweny and Shipho (2011) evaluated the effects of banking sectoral-factors on the profitability of commercial banks in Kenya, using panel data from 2002 to 2008 of 38 commercial banks. The authors concluded that the bank-specific factors were more significant factors influencing the profitability of commercial banks in Kenya than market factors. The study revealed that profitable commercial banks were those that strive to improve their capital bases, reduce operational costs, improves assets quality by reducing the rate of nonperforming loans, employs revenue diversification strategies as opposed to focused strategies and kept the right amount of liquid assets. Aburime (2008) investigated the determinants of bank profitability in Nigeria, using a panel data from He found that real interest rates, monetary policy, and exchange rate regime were significant macroeconomic determinants of bank profitability in Nigeria, while banking sector development, stock market development, and financial structure were insignificant. Also, Oladele, Sulaimon and Akeke (2012) found that operating expense; relationship between cost and income, and equity to total assets significantly affected the performance of banks in Nigeria. Ani et al. (2012) established that capital and asset composition positively affect bank profitability, while bank size had negative effect on profitability in Nigeria. Sufian and Habibullah (2009) examined the determinants of commercial bank profitability in Bangladesh using the data of 37 banks over the period The result of the study indicated that loans intensity, credit risk and cost were the bank specific factors that had positive and significant impact on the profitability of Bangladeshi commercial banks. However, the finding of the study was inconclusive with regard to the impact of size on profitability. While size was found to have positive and significant impact on ROAA and NIM, its impact on ROAE is negative and significant. As far as the external factors were concerned, the study indicated that such factors had no significant impact on the profitability of commercial banks in Bangladesh. Jahangir et al. (2007) examined the profitability in the context of Bangladeshi banking industry. The study was carried out on the data from the year 2000 to 2005 of only the listed commercial banks in DSE (Dhaka Stock Exchange). It was found that there was a strong and significant relationship between market size and bank's return on equity. It seemed that capital adequacy was an important factor for a bank to be profitable. The above literature showed the consistency of some of the internal (bank-specific) factors like capital, size and credit risks in determining bank profitability across different economies of the world. The external (macroeconomic) factors of gross domestic product growth rate and interest rate had also been prominent in the determination of bank profitability. Consequently, the review showed that return on assets (ROA) and return on equity (ROE) were the most common criteria employed as measures of profitability by most researchers. In principle, ROA reflects the ability of a bank s management to generate profits from the bank s assets, although it may be misleading due to off-balance-sheet activities. Thus, Return on Asset (ROA) is primarily an indicator of managerial efficiency. Return on Equity (ROE) indicates the return to shareholders on their equity. Thus, it is a measure of the rate of return flowing to shareholders. As such it approximates the net benefit that the shareholders received from investing their capital in the financial institution. Moreover, ROE equals ROA times the total assets-to-equity ratio. The latter is often referred to as the bank s equity multiplier and measures financial leverage. Essentially the ROE ROA relationship clearly illustrates the fundamental trade-off banks face between risk and return, whereas the equity multiplier reflects the leverage or financing policies, i.e. the sources (debt or equity) chosen to fund the bank. Banks with lower leverage, and thus higher equity, generally report higher ROA, but lower ROE. Athanassoglou, (2005) argued that an analysis based on ROE disregards the risks associated with leverage, often a consequence of regulation. On the other hand, Goddard et al (2004) employed ROE as an appropriate profitability measure, arguing that for many European banks the off-balance-sheet business makes a significant contribution to total profit. The earnings generated from these activities were excluded from the denominator of ROA. In our analysis ROE has been used as the key ratio for the evaluation of bank profitability, akin to the approach followed by Goddard et al (2004). RESEARCH METHODOLOGY This study employed annual data for all the 11 second generation private commercial banks of Bangladesh for the year 2015 and The total sample consisted of 22 (11 2) bank-year observations. The main source of data was the annual report of each bank. It is worth noting here that all the 11 private commercial banks are listed in the Dhaka Stock Exchange. To capture the recent year s profitability determinants less emphasis has been given to the time series analysis. On the other hand no sampling has been made to select the banks. As the profitability of private commercial banks seemed to be at

5 Int. J. Bank. Finan. Law 005 the highest point in the recent years, our approach is assumed to be very much logical to explain the high profitability of these banks. In our model, we presented one dependent and nine explanatory variables that influenced the profitability of a bank. Our objective of choosing the proxies was to capture the significant determinants of profitability. Multiple regression analyses were run for the year 2015 and 2014 to explain the relationship between ROE and independent variables. was likely that the higher this ratio, the lower the need for external funding and thus leads to the higher profitability of the bank. Equity to total assets ratio was expected to have positive relation with performance that wellcapitalized banks face lower costs of going bankrupt which reduced their costs of funding and risks (Berger, 1995; Bourke, 1989; Hassan and Bashir, 2003). Asset Quality Variables To analyze the determinants of the profitability of private commercial banks 10 variables included in this study, one of them was the dependent and the others were as explanatory or independent variables. Dependent Variables In most of the literature, bank s profitability, usually measured by return on asset (ROA) and return on equity (ROE). In this study, Return on Equity (ROE) was used as measures of bank s profitability. ROE was determined as net profit divided by total equity and was expressed in percent. ROE showed the profit earned per dollar of equity and most importantly Independent Variables By reviewing several literatures, it was found that several researchers identified some common factors which influence profitability of a bank. Summarizing the results from numerous studies, bank specific financial ratios representing capital adequacy, cost efficiency, income expenditure mix, asset quality, and size are mostly used internal variables. So we included the following bank specific variables to capture the determinants of profitability: Asset Size In many finance literature, total assets of the banks were used as to capture the possible effect of bank s size on profitability. Generally natural logarithm of total asset (log A) was used to represent bank size. The effect of bank size on profitability is generally expected to be positive (Smirlock, 1985). Eichengreen and Gibson (2001) suggested that the effect of a growing bank s size on profitability might be positive up to a certain limit. Beyond this point the effect of size could be negative due to bureaucratic and other reasons. Hence, the size profitability relationship might be expected to be nonlinear. Capital Adequacy The ratio of equity to total assets (CA) was generally used to represent the basic ratios for capital strength. It To address the asset quality two ratios were used in this study: loans to total assets (LA) and non-performing loans to total loans (NPL). As loans was one of the main source of income of a bank, the ratio loans to total assets was expected to affect profitability positively unless an unacceptable level of risk is taken by a bank. Nonperforming loans (loans which are considered not to generate earnings) to total loans ratio measures the asset quality of bank. In other words, it reflected the health of bank s loan portfolio that affects performance of bank negatively. The higher the NPL ratio the poorer the quality of loan portfolio and therefore it leaded to lower profitability. Deposits Deposits were considered as banks main source of funding and are the lowest cost of funds. The more deposits were transformed into loans, the higher the interest margin and profit. Hence, deposits generally had positive impact on profitability of the banks. But if a bank could not transform its deposits into loans efficiently it might bring negative impact on profitability also. Investment Activities Banks are not engaged in the deposit and lending activities only they also invest significant amount of their assets in Government securities, shares and debentures. To capture the influence of investment activities on profitability two ratios were used in this study: investment in government securities to total assets (IGSEC) and other investment to total assets (OI). Investment in government securities mainly includes government treasury bills, bonds, debenture etc. To maintain the statutory liquidity requirement of central bank commercial banks, need to investment certain percentage of their assets to government securities. This investment is always considered to be a safe investment, but it may or may not have positive influence on profitability as the return from government securities is not always competitive with the market. On the other hand, all the investment other than the government securities is included in the Other Investment category. Other investment of a bank mainly includes investment in quoted and unquoted shares and debentures of private sectors. Besides shares and debentures investment in subsidiaries and miscellaneous investment are also

6 Islam et al. 006 Table 1. Variables of profitability analysis and their measurement Variable Measure Notation Dependent variable Profitability Return on Equity (ROE)=Net ROE Profit/Total Equity Independent Variables Asset Size Natural Logarithm of Total loga Assets Capital Adequacy Equity/ Total Assets CA Asset Quality Loans / Total Assets Non-Performing Loans / Total Loans LA NPL Deposit Deposits/Total Assets DP Income-Expenditure Net Interest Margin = Net NIM Structure Interest Income/ Total Assets Investment Activities Non-Interest Income =Non- Interest Income /Total Assets Investment in Govt. securities/total Assets Other Investment/ Total Assets So, our profitability model would be as follows: ROE = β0 + β1loga + β2ca + β3la + β4npl + β5dp + β6nim + β7nii + β8igsec+ β9oi + ε NII IGSEC OI Table 2. Descriptive statistics of the variables Minimum Maximum Mean Standard Deviation ROE Log A CA LA NPL DP NIM NII IGSEC OI included in this category. Other investment was expected to have a positive impact on the profitability but it was not unusual to have a negative impact on the profitability when there was a downturn in the economy. ANALYSIS OF THE BANK S PROFITABILITY In this section we will try to analyze the data and present the result in various segments such as descriptive statistics correlation matrix among the variables and finally we will fit a regression model which will give us the appropriate result about the research Descriptive Statistics The Descriptive statistics of the variables are given in the above table 2. For each variable shows minimum, maximum, mean and standard deviation of eleven commercial banks in Bangladesh. On an average those bank has ROE is about 11.76% the ROE does not vary greatly across the bank because the standard deviation is about 2.99% whose minimum value is about 8% and maximum value is about 18%. Asset size is determined by the natural logarithm of total asset the mean of the asset size is 5.25 and minimum and maximum value are 5.05 and 5.45 respectively and standard deviation is Average of capital adequacy ratio is 8.6% and minimum and maximum values area 6% and 12% respectively and standard deviation is 1.7%. The average loan amount 64.23% and minimum and maximum values are 5% and 73% respectively and standard deviation is 5.72%. The average value of nonperforming loan is 5.73% and minimum and maximum values are 2% and

7 Int. J. Bank. Finan. Law 007 Table 3. Correlation Matrix among the variables ROE LOGA CA LA NPL DP NIM NII IGSEC OI ROE Pearson Correlation (*) (**) Sig. (2-tailed) LOGA Pearson Correlation (*) Sig. (2-tailed) CA Pearson Correlation.424(*).500(*) (*) (*) (*) Sig. (2-tailed) LA Pearson Correlation (**).415 Sig. (2-tailed) NPL Pearson Correlation -.616(**) (*) (*).008 Sig. (2-tailed) DP Pearson Correlation (**) Sig. (2-tailed) NIM Pearson Correlation (*) (*) -.543(**) Sig. (2-tailed) NII Pearson Correlation (*) Sig. (2-tailed) IGSEC Pearson Correlation (*) -.553(**).471(*) (**) Sig. (2-tailed) OI Pearson Correlation (**) Sig. (2-tailed) *Correlation is significant at 0.05 levels (Two-tailed) **Correlation is significant at levels (Two-tailed) Source: calculated by the author from the annual report of banks.

8 Islam et al. 008 Table 4a. ANOVA Model Sum of Squares df Mean Square F Sig. Regression (a) Residual Total Predictors: (Constant), OI, NPL, NII, LOGA, NIM, LA, DP, CA, IGSEC Dependent Variable: ROE Source: calculated by author from annual report of banks. Table 4b. Model Summary Model R R Square Adjusted R Square Std. Error of the Estimate 1.880(a) Predictors: (Constant), OI, NPL, NII, LOGA, NIM, LA, DP, CA, IGSEC Source: calculated by author from annual report of banks. 9% respectively and standard deviation is 1.88%. The average value of deposit is 80.27% and minimum and maximum values are 76% and 85% respectively and standard deviation is 2.45%. The average value of net interest margin is and minimum and maximum values are 1% and 4% respectively and standard deviation is1.2%. The average value of noninterest income is 2.11% and minimum and maximum values are 0% and 4% respectively and standard deviation is 1.2%. The average value investment in government securities is 16.86% and minimum and maximum values are 8% and 30% respectively and standard deviation is 6%. The average value of others investment is and minimum and maximum values are 0% and 5% respectively and standard deviation is 2.05%. Correlation among the variables relation was not statistically significant. Again ROE and NII (Non-interest income) were negatively related i.e. if NII increase the ROE will also be Decrease and their relation was not statistically significant. Again ROE and IGSEC (Investment on Government Securities) were also negatively related and their relation was not significant and lastly ROE and OI (Others Investment) were negatively related and the relation was not significant. From the below correlation matrix, Log A (Asset size) and CA (Capital Adequacy were positively related i.e. if asset size increase then capital adequacy will also increase and their relation was statistically significant. CA and NPL were also positively related and the relation was statistically significant. Again CA, NIM and IGSEC were positively related and their relation was statistically significant. Again LA and IGSEC were negatively related and their relation was significant. From the below correlation matrix table 2, it indicated that ROE and log A were positively correlated but the correlation was not significant. It explained that if asset size increases the ROE will also increase. Again ROE and CAR (Capital Adequacy Ratio) were positively related and their relationship was significant i.e. if CA increases then ROE will also increase. Again ROE and LA (Loan Amount) were positively related i.e. if LA increases then ROE will also increase but their relationship was not statistically significant. Again ROE and NPL (Non Performing Loan) were negatively related which indicated that if NPL increase then ROE will must be decrease and their relationship was statistically significant. Again ROE and DP (Deposit) were also positively related which explained that if deposit increase then ROE will also be increase but their relationship was not statistically significant. Again ROE and NIM (Net interest income) were positively related which meant that if NIM increase then ROE will also be increase but their Regression analysis From the above ANOVA it is clear that our regression model is statistically significant and we reject our research null hypothesis and accept the alternative hypothesis ie we can say that there is a significant relationship between internal factors and bank s profitability. The model seems to fit the panel data reasonably well, having fairly stable coefficients. The relatively high R square suggests that variations in the dependent variable profitability, as measured by ROE, are explained satisfactorily by variations in the selected variables. From the below regression coefficient table we can say that LA and NPL are statistically significant and LA has positive effect and NPL has negative effect of the bank profitability and the remaining variables has impact on bank profitability but they are not statistically significant.

9 Int. J. Bank. Finan. Law 009 Table 5. Regression Coefficient Model Unstandardized Coefficients t Sig. B Std. Error 1 (Constant) LOGA CA LA NPL DP NIM NII IGSEC OI Source: calculated by author from annual report of banks. As expected, the value of the credit risk coefficient is negatively and significantly related to bank profitability. It appears that Bangladesh banks implement risk-averse strategies in their attempt to maximize profits, mainly through systematic controls and monitoring of credit risk. The banks under scrutiny, as well as the whole banking sector in Bangladesh, have significantly higher level of non-performing loans. Furthermore, non-performing loans tend to remain on the banks balance sheets. Advanced risk management techniques, strict lending policies reinforced by reliable monitoring systems and nonperforming loan restructuring appear to have had a direct impact on reducing the banks provisions for loan defaults which in turn boosts profitability. The related literature indicates that the effect of credit risk on profitability is clearly negative (Athanassoglou et al, 2005). The sign of the coefficient indicates that the higher the credit risk assumed by a bank, the higher the accumulation of defaulted loans. In turn, the higher the level of loans in default, the greater the negative impact on bank profitability. DISCUSSION The banking sector of Bangladesh has undergone noteworthy financial reforms, which has significantly transformed the sector. At present private commercial banks are dominant in respect of market share and profitability in this sector (Sarker and Rashid, 2015). Profitability is always an important criterion to measure the performance of banks. This study examined the determinants of private commercial bank s profitability in Bangladesh by using the data obtained from the financial statements of all the private commercial banks (11 commercial banks) for the year 2015 and The study identified that asset size had no significant effect on profitability. Interest income is always considered to be the main source of income of a bank, but in our study it was found that NIM/assets ratio did not have a significant impact on profitability. But the most significant variable which affected the profitability was found to be the loan amount. This indicated that greater diversification in banking activities positively influenced profitability. It was also identified that investment activities, mainly in shares and debentures (quoted and unquoted) of private sectors had a positive impact on ROE but not significant. It suggested that banks which were more exposed to the capital market or invest higher proportion of funds in unquoted shares and debenture might be achieved higher profitability. The findings of this study have considerable policy relevance. It could be argued that the more profitable bank will be able to offer more new products and services. The role of diversified banking activities is particularly important, given that a bank with relatively more innovative ideas and better fund management capability may have added advantage over its peers (Sarker et al, 2015). As per the portfolio theory diversification reduces risks, so various sources of earning should be welcomed. But if this earning includes higher proportion of volatile trading activity rather than low risk income streams like fees and commission, the risk may become higher. In our study it was observed that higher proportion of investment activities (other than the government securities) could help to achieve higher level of profitability, so a bank may have tendency to increase its exposure to the capital market. More exposure in the capital market may bring more risk to a bank as the investment decision in the developing capital market like Bangladesh depends mostly on speculation rather than the real financial indicators. It suggested that non-traditional activates of banks (other than deposit

10 Islam et al. 010 taking and lending) might lead banks to higher exposure to the risk. So the ability to maximize risk adjusted returns and sustaining stable and competitive returns is an important element in the banking business. Thus, from the regulatory perspective, risk management should be the key focus. The policy direction should be directed in such a way which will enhance the resilience and efficiency of the financial institutions with the aim of intensifying the robustness as well as stability of the banking sector. In this regard, capital adequacy should be emphasized so that banks are able to withstand any negative shock. Ring-fencing traditional banking from investment banking and putting limit on the exposure to risk taking investment activities can be one of the way to minimize the risk. The risk taking investment activities also should be monitored very closely by the supervisor. Bank profitability could be improved considerably if appropriate mechanisms to screen, monitor and forecast future levels of risk are put in place. Banks profitability is expected to be sensitive to macroeconomic variables such as Gross Domestic Product rate (GDP), inflation rate (INF) and real interest rate (RI). Due to limited data availability and time constraints, those external variables have not been included in this study. There is also scope to analyze the linkage between the bank s profitability and their exposure to the capital market more intensively. Another potential important aspect is to analyze the determinants of profitability by a panel data set. CONCLUSION Our findings showed that private commercial banks were the dominant in the banking industry based on profitability and market share. The study examined the determinants of commercial banks of Bangladesh using data obtained from financial statement of the respective bank. We examined the data for the year of 2014 and 2015 of eleven commercial banks. Our study revealed that the interest income was the main income of the bank and asset size did not have a significant effect on profitability. It also suggested that a high return of asset is not mandatory for large bank. It indicated that profitability influenced by greater diversification of banking activities. Our study also revealed that a higher investment of a commercial bank helped to achieve the more profitability. REFERENCES Aburime TU (2008). Determinants of Bank Profitability: Macroeconomics Evidence from Nigeria. Lagos Journal of Banking, Finance and Economics, Available at Ani WU, Ugwunta DO, Ezeudu IJ, Ugwuanyi GO (2012). An Assessment of the Determinants of bank Profitability in Nigeria: Bank Characteristics Panel Evidence. Journal of Accounting and Taxation, 4(3): Athanasoglou PP, Delis MD, Staikouras CK (2006). Determinants of Bank Profitability in the South Eastern European Region. 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