Question

Evaluate the performance of the commercial banking industry in recent years..

Answer 1

Banking sector is the most important component of financial system. Development of banking system contributes to the stability and sustainable economic growth. While banks determine policies for profit maximization, they should make efforts to create liquidity and security margins to minimize risk. Therefore, determination of factors affecting the profitability of banks is an important issue in order to identify their policies applied. This study investigates the impact of bank-specific and macroeconomic determinants on profitability of 14 private and commercial banks in world all over where banks tend to be largest part of financial system with free market system and liberalization policies as in other transition economies for 2009-2013 period by panel data analysis. Return on asset (ROA), return on equity (ROE) and net interest margin (NIM) that have been widely used in the earlier literature as profitability measures were employed. The results indicate that the most important bank-specific determinants are net loans, nonperforming loans and capital adequacy ratio. The other bank specific determinants, asset size and credit to deposit ratio have statistically insignificant impact on profitability of the banks. On the other hand, while one of two macroeconomic determinants of profitability, money supply (M2), has positive significant impact at 10% significance level, other macroeconomic determinant, inflation rate, has insignificant impact on profitability performance levels of the banks included in the study.

                                                             Commercial banks occupy a crucial role in the development efforts as well as act as a catalyst for economic growth. Banking reforms have brought sea changes in the banking space and public sector banks are no exception to this. The major concern in the financial sector has been the profitability of the commercial banking industry. The opening up of the banking sector for private players has put pressure on better performance of public sector banks. The private and foreign banks with advanced technology and management skills have put pressure on the profitability of public sector banks. Hence, these public sector banks need to be equipped enough to counter the pressures, otherwise, repercussions are likely to be great. With this background, the paper investigates the impact of banking reforms on the performance of public, private, and foreign banks. The performance of a bank can be measured by a number of indicators. Profitability is the most important indicator which assumes a greater importance in the ever-changing scenario of financial sector reforms. The viability of banks depends largely on the adequacy of profits and profitability. The study has analysed the impact of banking sector reforms on the performance of all bank groups in in the pre and post reform period. The undertaken regressors showed a significant impact on total income in the post-reform period for all bank groups.