Determinants of Commercial Bank Profitability: South Asian Evidence

Abstract

This study investigates the bank-specific and other determinants of commercial bank profitability in selected South Asian countries (Bangladesh, India, Pakistan and Sri Lanka). The single-equation, dynamic panel data procedure employed accommodates explicit measures of production efficiency, industry competition, profit persistence and country-specific differences in governance. The findings reveal profit persistence in South Asian banking markets. Even though increasing competition exerts negative pressure on bank profitability, high industry concentration still allows these banks to earn higher profits. The well-capitalised banks and those with relatively more efficient production processes are the more profitable. South Asian banks also seem to experience economies of scale as bank size is positively associated with profitability. The results also indicate that slack legal systems in these countries (leading to inferior contract enforcement) positively affect profits as banks probably require higher risk premiums on their loan contracts.