The Profitability Determinants of Private Commercial Banks in Bangladesh Presented by Md. Sohel Saklain Md. Sohel Saklain Examination Committee: Dr. Sundar Venkatesh (Chairperson) Dr. Juthathip Jongwanich Dr. Yousre Badir Professional Master’s in Banking and Finance 1
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The Profitability Determinants of
Private Commercial Banks in
Bangladesh
Presented
by
Md. Sohel SaklainMd. Sohel Saklain
Examination Committee: Dr. Sundar Venkatesh (Chairperson)
Dr. Juthathip Jongwanich
Dr. Yousre Badir
Professional Master’s in Banking and Finance
1
Agenda
1. Overview of the Banking Sector in Bangladesh
2. Analysis of Profitability: The Case of One Commercial Bank
3. Problem Statement & Objectives of The Research StudyResearch Study
4. Research Methodology
5. Analysis of The Profitability Determinants of Private Commercial Banks in Bangladesh
6. Conclusion and Recommendations for Policy Implications
2
BangladeshFinancial System of
Bangladesh
Central Bank
(Bangladesh Bank)
State Owned Commercial Banks (SCBs)
Private Commercial Banks (PCBs)
Controller of Insurance
(under the ministry of commerce)
Life Insurance
Rural Development
and Cooperative Division
( RDCD )
Co-operative Banks
Micro Credit Regulatory Authority
Micro finance
Institutions
Securities and Exchange
Commission
(SEC)
Dhaka Stock Exchange
Banks (PCBs)
Foreign Banks (FCBs)
Government-owned
Specialized Banks (DFIs)
Non-Bank Financial
Institution (NBFIs)
General Insurance
Chittagong Stock
Exchange
3
•The Financial sector of Bangladesh, like most in
developing countries, is dominated by banking
industry.
1. Overview of the Banking Sector in Bangladesh
6 64 4 4 4 4 4
2 2 2 35 5 5 4
810
13
2730 30
46 7 7
913
9 9
5
10
15
20
25
30
35
Number of Banks in Bangladesh (by Type) from 1975 to 2010
Nationalised banks
Specialised banks
Private banks
4
4 4 4 4 4 42 2 2 3
5 5 5 44
0
5
1975 1980 1985 1990 1995 2000 2005 2010
Year
Private banks
Foreign banks
• In 1982 license to few Private Commercial Banks (PCBs) were given for the first
time.
•First Generation- License in early 1980s, Second Generation- license in late 1980s
and early 1990s , Third Generation- license in Late 1990s and onward
1. Overview of the Banking Sector in Bangladesh Cont..
4 4
30
9
0
10
20
30
40
SCBs DFIs PCBs FCBs
Bank Type
Number of Scheduled Banks (by Type)
in Bangladesh (as on June, 2010)
SCBs
29%
FCBs
7%
Share of Industry Assets by Type(as on
June, 2010)
5
Bank Type
3394
1366
2427
590
1000
2000
3000
4000
SCBs DFIs PCBs FCBs
Bank Type
Number of Bank Branches by Type(as
on June, 2010) DFIs
7%
PCBs
57%
1. Overview of the Banking Sector in Bangladesh Cont..
89.45
70.8962.43 62.07
55.22
40.52
27.8326.06 27.8531.47
46.47
60.81
40
50
60
70
80
90
100
%
Deposit of Scheduled Banks by Types
SCBs
DFIs
6
•The higher interest rate on deposit may be the probable reason for rising
trend of PCBs deposit.
27.83
4.34 4.4 4.37 4.9 5.98 5.97 5.10
18.3426.06 27.85
31.47
6.21 6.37 7.14 5.18 7.04 7.04 6.26
0
10
20
30
40
1980 1985 1990 1995 2000 2005 2010
Year
PCBs
FCBs
1. Overview of the Banking Sector in Bangladesh Cont..
80.2
58.2652.78 52.36
47.17
35.2531.13
49.02
65.39
40
50
60
70
80
90
%
Advances of Scheduled Banks by Types
SCBs
DFIs
7
•One of the probable reason of increasing trend of advances for PCBs is
the quicker and easier loan processing .
21.816.16
22.94 20.42 17.18 16.169.18 6.95
0
13.51
21.05 25.1331.13
3.65 5.29 5.75 5.32 5.54 6.55 5.86
0
10
20
30
40
1980 1985 1990 1995 2000 2005 2010
Year
DFIs
PCBs
FCBs
1. Overview of the Banking Sector in Bangladesh Cont..
9440.30
36555.90
0.00
10000.00
20000.00
30000.00
40000.00
50000.00
Million
Taka
Trend of Net Profit of Scheduled Banks by Type
SCBs
FCBs
8
-44159.20-50000.00
-40000.00
-30000.00
-20000.00
-10000.00
0.00
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
(p)Taka
Year
PCBs
DFIs
• From the year 2006 the profit of PCBs begun to rise in the rocket
high rate and it ended with 36,555.90 million taka in the year 2009.
1. Overview of the Banking Sector in Bangladesh Cont….
0.700.96
0.740.80 0.70
1.20 1.10 1.101.30 1.40
1.55
2.00
2.402.60
3.20 3.10
2.20
3.102.90
3.182.87
1.00
1.50
2.00
2.50
3.00
3.50
%
Trend of ROA of Scheduled Banks by Type
SCBs
DFIs
9
0.10 0.10-0.10 -0.10 0.00 0.00
0.70 0.74
0.30
0.00
-0.20
-0.10
-0.20 -0.30 -0.60
0.370.22
0.80 0.70
-1.00
-0.50
0.00
0.50
1.00
Year
DFIs
PCBs
FCBs
• PCBs always maintained the second level of ROA in the industry for the
entire period.
• From the year 2009 to 2010 the ROA of PCBs rose remarkably.
2. Analysis of Profitability: The Case of AB Bank Ltd.
• The coefficient of NII is the highest for both the year.
5. Analysis of The Profitability Determinants cont..
• Hypothesis H1a: Asset size measured by natural logarithm of totalassets (logA) has a significant positive impact on ROA
•Coefficient = 0.0015 and -0.0004
t= 0.6225 and -0.1684
p= 0.5406 and 0.8679
Hypothesis Test
p= 0.5406 and 0.8679
Result: Rejected
• Hypothesis H2a: Net Interest Margin (NIM) has a significantpositive impact on ROA
Coefficient =0.1751 and 0.1245
t= 0.9814 and 0.9062
p= 0.3381 and 0.3756
Result: Accepted25
5. Analysis of The Profitability Determinants cont..
• Hypothesis H3a Banks with more diversified income measured by Non-Interest Income (NII) tend to be more profitable
Coefficient = 0.4152 and 0.4540
t= 3.2677 and 4.7546
p = 0.0039 and 0.0001
Result: Accepted
Hypothesis Test
Result: Accepted
• Hypothesis H4a: Investment activities mainly in quoted and unquoted shares and debentures of private sectors measured by Other Investment (OI) have a significant positive impact on ROA
Coefficient = 0.1373 and 0.1331
t= 2.1722 and 1.8856
p= 0.0420 and 0.0740
Result: Accepted
26
6. Conclusion and Recommendations
Asset size:
– No significant effect on profitability
– It suggests that to achieve a higher level of ROA it is not always necessary to be
a larger bank
Interest income:
– It is always considered to be the main source of income and found to have
positive impact on profitability
Non-interest income:
Major Findings
Non-interest income:
– The most significant variable which affects the profitability
– This indicates that greater diversification in banking activities positively
influence profitability
Investment activities:
– Other Investment- mainly in shares and debentures (quoted and unquoted) of
private sectors have a significant positive impact on ROA
– It suggests that banks which are more exposed to the capital market or invest
higher proportion of funds in unquoted shares and debenture may achieve
higher profitability 27
6. Conclusion and Recommendations Cont..
• Diversified banking activities- bring more new and innovativeproducts and services - can have argument whether it should bewelcomed or not
• Diversification reduces risks, but if the earning includes volatiletrading activity in higher proportion the risk may become higher.
• More exposure in the capital market may bring more risk – when
Policy Relevance
• More exposure in the capital market may bring more risk – whenspeculation rather than the real financial indicators is dominant.
• New and Innovative products- create more complexity- customerscan be exploited by higher fees and commission.
Non-traditional activates of banks (other than deposit taking andlending) may lead banks to higher exposure to the risk. So, from theregulatory perspective, risk management should be the key focus.
28
6. Conclusion and Recommendations
The policy direction should be directed in such a way which willenhance the resilience and efficiency of the financial institutionswith the aim of intensifying the robustness as well as stability ofthe banking sector.
• Capital adequacy should be emphasized so that banks are ableto withstand any negative shock
Recommendations
to withstand any negative shock
• Ring-fencing traditional banking from investment bankingactivities
• Putting limit on the exposure to risk taking investmentactivities can be one of the way to minimize the risk
• The risk taking investment activities also should be monitoredvery closely by the supervisor
• Fees and commission should be monitored and managed sothat a customer is not deceived