It is a well known fact that the demand of private commercial banks and their contributions to the world economy is booming day by day, and Bangladesh is not lagging behind in that regard. Hence, rigorous research in this area is of utmost importance to have a sound financial system.
Scrutinizing profit, gathering data to explore the impact of non-performing loans (NPLs), cost-to-income ratio, loan-to-deposit ratio, commission and fee income, cost of fund, and operating expenses in terms of profitability indicators of banks, like return on asset (ROA) and return on equity (ROE) needs to be given higher priority.
Research has been conducted aimed at investigating the determinants of profitability for 15 select private commercial banks in Bangladesh over the period of 2005-2015.
The experimental outcome of this research has found strong indication that NPLs and operating expense have a significant effect on the profitability of banks. This study has shown that higher NPLs lead to less profit due to the provision of classified loans and write-off of bad debts.
From data collected over the past 10 years, the investigation was focused on finding the impact of NPLs -- which also includes how NPLs affect the profitability of banks. At present, banks are spending more money than ever before for their day-to-day activities, and this can severely affect the profitability of the banks.
Private commercial banks should focus on evaluating their efficiency ratio in order to maintain operating expenses at an acceptable margin.
This research shows that a 1% increase in the NPLs reduces the growth in the return on assets by 0.29% and 1% growth in the operating expense reduces growth in return on assets by 0.19%.
Similarly, a 1% growth in NPLs reduces the growth in return on equity by 0.37% and 1% growth in the operating expenses reduces the growth in return on equity by 0.30%.
To elaborate, NPL has a significantly negative relationship (at 5% level) with return on equity. The random effect estimation (robust) results show that a 1% growth in NPLs reduces the growth in return on equity by 0.37%.
In addition, the results of commission and operating expenses also show significant results at 5 % and 1% respectively, with expected signs. When the earnings from commission go up by 1%, the return on equity increases by 0.43%. However, a 1% growth in the operating expenses reduces the growth in return on equity by 0.30%.
It has become more palpable from the research that NPLs and operating expenses play a fundamental role in determining the profitability of the private commercial banks of Bangladesh.
As hinted at earlier, high NPLs are the main threat to any bank’s profitability. High NPLs not only affect banks’ profitability but also the country’s economy. The study also finds that over the last 10 years the amount of NPLs in commercial banks have been increasing, although average percentages of NPLs are decreasing. The analysis also shows that high operating expenses reduces the profitability of the banks.
Md Ariful Islam is a business analyst and a banker of the Mutual Trust Bank Ltd.
