Factors influencing profitability of conventional banks as measured by Tobin’s q: evidence from banking sector of Pakistan

Abstract

Financial sector is the key player to enhance sustainable economic growth. Commercial banks play an important role to improve the performance of the financial sector of the economy and their profitability is intricately connected to the soundness of the entire economy. The purpose of this study is to determine the internal determinants (bank specific) and external determinants (macro-economic) of profitability. In this regard, the study adopted quantitative research design by using the panel data of 17 commercial banks of Pakistan over the period of 2014-2018. Internal factors analyzed in this study were Liquidity, Size and Capital Adequacy. While external factors were Gross Domestic Product (GDP) and Inflation. The data was analyzed by using simple OLS regression and Tobin's Q ratio. The analysis showed that GDP has significant impact on profitability. However, inflation has no impact on the profitability. Tobin's Q ratio of most of the banks are increasing which depicted their equilibrium position. Based on the findings, the study recommended some policies that will encourage banks to reduce credit risk and minimize their liquidity holdings. Moreover, Government should take the proper initiatives to enhance the confidence of investors towards stock market.

The Influence of the Capital Adequacy Ratio, Net Interest Margin, Gross Domestic Product and Inflation on the Profitability of Islamic Banks in the Middle of the Pandemic Covid-19

“…As a result, the community still believe that banking products can be used to increase profits. The results of this research are in line with studies conducted by Rolle et al [20] and Ebenezer et al [21].…”