In this article the determinants of profitability are analyzed in Pakistani Banking Sector. Return on Assets (ROA) is the most widely used ratio in this regard. During 2006 to 2010, the world banking sector showed a huge declining trend in profitability due to global economic recession with many renowned banks filing for liquidation and this affected the Pakistani banking scenario as well, and the nation’s banks both public and private showed a declining trend.
Our analysis is mainly concerned with calculating Leverage, Tax Rate and capital adequacy of the selected 10 banks and then comparing them with ROA. Along with it, the impact of variables will also be analyzed in order to see how much fluctuation that is made in banks profitability and what kind of role is played by these variables.
A bank is taken as a model of depository financial institution so that’s why banking sector is one of the main constituents of any economy. The changing trend of globalization has introduced changes in the situation of business and so Pakistani banking sector has also adopted these changes. But in last decades the banking sector all over the world has faced a great recession due to decline in the investment trend. Pakistani banking sector reforms were initiated early in 1990s under the legislative supervision of State Bank of Pakistan to transform the sector into a proficient and strong banking system to support the country’s economy.
As the main goal of bank’s senior management is to maximize profits via high returns on loans and securities, so these determinants which show the change in profitability of banking sector in Pakistan will help the policy makers to make policies according to the changes. Leverage tells us the way by which we can know from our sales that how much EBIT (earnings before interest and taxes) will be. Financial leverage is a gauge of how much a business depends on debt in order to operate or we can say that leverage is a financial effect which cannot be obtained cogently.
ROA (Return on Assets) is the percentage which shows the company’s assets profitability in generating revenue but it is considered as more volatile. Tax shield gives leverage to the bank and hence increasing the profitability. Tax policies consider the cost and benefits which alternatively increases the firm’s profitability. Also bank’s organizational form is associated with tax matters.
In view of the above analysis, it has been concluded that the effect of all the determinants selected are different on Return on Assets of each bank. Some banks are positively affected by the change and some are negatively affected.
Article Source: http://www.articlesbase.com/banking-articles/determinants-of-profitability-in-banking-sector-of-pakistan-4654687.html
About the Author
Writing by professional author Farooq Khilji http://khilji-co.blogspot.com”>Burewala. He is a well reputed writer amongst the leading writers on Banking and Finance.