DETERMINATION OF MICRO AND MACRO FACTORS AFFECTING THE PROFITABILITY OF SRI

LANKAN DOMESTIC COMMERCIAL BANKSBy Dinusha Dissanayake

Dr. (Mrs.) Annista Wijayanayake

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Introduction Literature review Research methodology Results Conclusions &

Recommendations

BACKGROUND OF THE STUDY• History records that banking exist in 3900 BC .Over the years banking has improved into current e base system with virtual branches being placed. Banks are a significant contributors to their respective economies.

• Globally profits of the banks fluctuates in economic recessions and expansion era’s. When a segment collapsed others have progressed and maintain their profitability.

• Factors to maintain and improve profitability of banking sector are not clearly identified .

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Introduction Literature review Research methodology Results Conclusions &

Recommendations

2010 2011 2012 2013 2014020406080

100120140

Industry Profit Before Tax Rs BN

Series1•Sri Lankan banking system began in 1888 catering to plantation sector . Sector contributes to over 9% of GDP at present .

•Profitability has been consistently increasing pre and post war situations with slight fluctuations.

•Factors affecting the profitability of 25 commercial banks have not clearly being determined

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Introduction Literature review Research methodology Results Conclusions &

RecommendationsOBJECTIVES OF THE RESEARCH

01. •To determine which micro and macro factors affect the profitability of Sri Lankan Domestic Commercial Banks

02. •To analyze measures taken to improve the profitability of Sri Lankan Domestic Commercial Banks

03. •To make recommendations based on the research of this study to maintain or improve the performance of Sri Lankan Domestic Commercial Banks

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Introduction Literature review Research methodology Results Conclusions &

Recommendations

LITERATURE REVIEW• The literature by Sivaperumaan, Sehrish Gul & others, Javaid suggests that equity capital, total assets, loans,equity,deposits and macro factors such as economic growth, inflation, stock capitalization affect the profitability. • A study by Thota finds that profitability affected by both internal and external factors and changes in the overall environment irrespective of the ownership .• A study by V Weerasingha and Perera concludes that profitability is affected by size, liquidity, operational cost and interest rate , measured by ROA ,suggest that banks with high efficiency , low liquidity have reported high profitability. • Some other studies considered suggest that level of liquidity, tax policy, foreign ownership, technology, effects of the business cycle, world economic environment had an impact on profitability of banks.

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Introduction Literature review Research methodology Results Conclusions &

Recommendations

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Introduction Literature review Research methodology Results Conclusions &

Recommendations

CONCEPTUAL FRAMEWORKBank Specific Variables•Capital Ratio•Loan Portfolio•Interest Income•Non Interest Income•Non Performing Loan Portfolio•Loan to Deposit Ratio•Cost to Income Ratio

Macro Level Variables• GDP Growth Rate• Inflation Rate• Interest Rate

Bank’s Profitability

(ROA and ROE)

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Introduction Literature review Research methodology Results Conclusions &

Recommendations

HYPOTHESISHo -The Capital Ratio has no impact on Profitability of SLDCBHo- The size of loan portfolio has no impact on profitability of SLDCBHo- Interest income has no impact on profitability of SLDCB Ho-Non interest income has no impact on profitability of SLDCBHo- Non performing loans has no impact on the profitability of SLDCBHo- Deposit Portfolio has no impact on the profitability of SLDCBHo-Cost income ratio has no impact on profitability of SLDCBHo- GDP Growth Rate has no impact on profitability of SLDCBHo- Rate of Inflation has no impact on profitability of SLDCBHo- Rate of Interest has no impact on profitability of SLDCB

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Sample Selection• Eleven domestic commercial banks have been selected in the

sample. Eight years of secondary data has been extracted from Annual Reports of these banks.

• A survey of managers perceptions on the determinants of profitability was conducted

Data Analysis Techniques

• E-Views 8 Package was utilized for the data analysis• Simple regressions were estimated• Correlation matrix was developed, general to specific method was adopted and only significant variables were chosen from multiple regression.

Introduction Literature review Research methodology Results Conclusions &

Recommendations

RESEARCH DESIGN

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RESULTS ROAIntroduction Literature review Research

methodology Results Conclusions & Recommendations

ROA Co-efficient

Probability

R Squared

EffectNegative/ Positive

Significance / Impact

NON INTEREST INCOME RATIO

0.0670 0.003 0.724 Positive Significant

NON PERFORMING LOANS RATIO

-0.0276 0.026 0.724 Negative Significant

COST TO INCOME RATIO

-0.0368 0.000 0.724 Negative Significant

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RESULTS ROEIntroduction Literature review Research

methodology Results Conclusions & Recommendations

ROE Co-efficient

Probability

R- Squared

EffectNegative/ Positive

Significance / Impact

LOAN PORTFOLIO

0.232 0.0216 0.750 Positive Significant

NON INTEREST INCOME

0.828 0.000 0.750 Positive Significant

COST INCOME RATIO

-0.393 0.000 0.750 Negative

Significant

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Introduction Literature review Research methodology Results Conclusions &

Recommendations

RESULTS OF THE QUESTIONNAIRE

Capit

al Rati

o

Loan P

ortfol

io

Intere

st Inco

me

Non Int

erest

Incom

e

Non Pe

rform

ing Lo

an Por

t

Loan t

o Depo

sit Rati

o

Cost

Incom

e Rati

o0

40

80

120

Series1

707580859095

100105

Series1

Impact on Return On Assets Ratio

Impact on Return On Equity Ratio

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CONCLUSIONS Introduction Literature review Research

methodology Results Conclusions & Recommendations

• Bank specific factors determine the profitability of SLDCB than economic factors.

•Most significant impact on profitability are Loan portfolio, Non Interest Income, and Cost Income Ratio , Non performing loan portfolio.

• An increase in Non-Interest Income has played a crucial role in the study in increasing profitability in recent years.

• Interest income, Non Interest Income ,Non Performing loan Portfolio, and increasing loan portfolio has been considered by the managers in practice to increase profitability.

•Cost to income ratio has not been considered as significant by managers.

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RECOMMENDATIONSIntroduction Literature review Research

methodology Results Conclusions & Recommendations

• Profitability of commercial banks can maximize through Increase in lending volumes , Concentrating on Non Interest Income ,Managing expenses prudently .

• Non Performing Loans portfolio needs to reduce which will have a negative affect on profitability.

• Governments should adopt policies to create an environment where banks can grow their loan portfolio’s, NII levels and minimize Non Performing Loan Portfolio’s. When banks are more profitable, Governments can charge greater levies and earn more tax revenue.

• Managers need to concentrate more on reducing cost to Income Ratio as they have not considered same as significant in questionnaire based survey.

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Introduction Literature review Research methodology Results Conclusions &

Recommendations

LIMITATIONS OF THE STUDY

POSSIBILITIES OF FUTURE RESEARCH

• The author has not considered the foreign banks who are competing in the domestic market• If segregation of banks in to large, medium ,and small and regression was not conduct

• Study determinants of all 26 commercial banks in Sri Lanka• Study with a larger sample size for the questionnaire

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