profitability of commercial banks bangladesh

CHAPTER 1: INTRODUCTION

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1.1 OBJECTIVES OF THE REPORT Some specific objectives of this study are as follows: 1. 2. 3. 4.

To assess the effectiveness of banking industry in the economy. To find out the profitability towards banking industry. To analyze the significance of banking industry in the economy of Bangladesh. To investigate the contribution of banking industry on economic development of Bangladesh. 5. To explore the residuals of banking industry. 1.2 SCOPE OF THE STUDY The report has focused mainly on the Profitability of banking industry in Bangladesh. Through which I have got the opportunity to gather relevant information and gain adequate experience about different aspects of banking sector. I have got enough information while preparing this report and utilized the chance to enhance our practical knowledge as well as derive concrete ideas. 1.3 METHODOLOGY In order to carry on the report we indented to use both the primary and the secondary data for the successful completion of the report. But I mainly collect data from secondary sources. Secondary Data The secondary data are collected in following ways: 1. Different Web Sites. 2. Journals and Articles. Also collect data from different banks annual report.

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1.3.1 Research Data Analysis From the collected data of secondary source we will analyze the profitability of banking industry in Bangladesh. Variables: There are 1 dependent variable and 4 independent variables that we will use to determine the profitability of banking industry in Bangladesh. Symbols ROA

Dependent Variable Variables Return on Assets

Formula Net profit/ Average common stock equity

Independent Variable Variables Bank Size Loan to Deposit Ratio Non-Performing Loan Ratio Capital Structure

Formula Total Asset Total Loan/Total Deposit Non-Performing Loan/Total Loan Total Debt/Total Asset

1.4 LIMITATIONS A major challenge faced during producing such a report was absence of harmony in the structure of annual report. Bank used to publish a consolidated annual report on the basis of its category but there are many categories as Islamic banking and so on. There is also some problem of segregation of data that is I needed some information that was not provided on annual report. There is also time limitation that creates a mental pressure that has an implicit effect on the report.

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CHAPTER-2: BANKING INDUSTRY IN BANGLADESH

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2.1 BANKING HISTORY OF BANGLADESH The banking system at independence consisted of two branch offices of the former State Bank of Pakistan and seventeen large commercial banks, two of which were controlled by Bangladeshi interests and three by foreigners other than West Pakistanis. There were fourteen smaller commercial banks. Virtually all banking services were concentrated in urban areas. The newly independent government immediately designated the Dhaka branch of the State Bank of Pakistan as the central bank and renamed it the Bangladesh Bank. The bank was responsible for regulating currency, controlling credit and monetary policy, and administering exchange control and the official foreign exchange reserves. The Bangladesh government initially nationalized the entire domestic banking system and proceeded to reorganize and rename the various banks. Foreignowned banks were permitted to continue doing business in Bangladesh. The insurance business was also nationalized and became a source of potential investment funds. Cooperative credit systems and postal savings offices handled service to small individual and rural accounts. The new banking system succeeded in establishing reasonably efficient procedures for managing credit and foreign exchange. The primary function of the credit system throughout the 1970s was to finance trade and the public sector, which together absorbed 75 percent of total advances. The The formally known ‘State Bank of Pakistan’ was renamed as ‘Bangladesh Bank’ right after Bangladesh’s independence. The Bangladesh Bank automatically became official foreign exchange reserve institute. It was too accountable for currency control, monitoring exchange and credit control. In the early 1970s, the government decided to permit foreign banks to continue their business and nationalize the local banks. In that very decade of 1970s, the primary concern of the government was to develop the country’s agricultural industry. This resulted in the Krishi Bank extending loans to more farmers. In the later decades, however, the county’s focus shifted to industrialization; resulting in various difficulties in the economic growth process. Lack of proper private activity guidelines and proper methods on loan giving were more significant of these problems. It was not until the late 1980s that these difficulties were being overcome and compensated for the agro sector. However the financial institutions failed to recover the loans the industrial sector. Interestingly, Grameen Bank has set an ideal example of how things should be managed during this devastating time. The bank gave out small amount of loans to the poor population in order for themselves to be self-employed. The selection process for giving out these loans was extraordinary. They gave loans mostly to women who were subordinated; these women became self-employed and hence paid back when were helped with guidance to run their business. . In the 1980's banking industry achieved significant expansion with the entrance of private banks. Now, banks in Bangladesh are primarily of two types:

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1. Scheduled Banks: The banks which get license to operate under Bank Company Act, 1991 (Amended upto 2013) are termed as Scheduled Banks. There are 57 scheduled banks in Bangladesh which operate under full control and supervision of Bangladesh Bank. 2. Non-Scheduled Banks: The banks which are established for special and definite objective and operate under the acts that are enacted for meeting up those objectives, are termed as NonScheduled Banks. These banks cannot perform all functions of scheduled banks. There are now 4 non-scheduled banks in Bangladesh. In the 1990s, many private banks started to emerge. Local group of companies became aggressive in investment so the money flow was rather big. Bangladesh Bank played key role in managing these private banks with modern outlook. As consciences the banking sector grew many folds. Introduction of ATM has brought a huge change in banking sector of Bangladesh. The first ATM brought in Bangladesh by Standard Chartered Bank in 1994 and was installed & maintained by LEADS Corporation Ltd. It was a third Generation Cash Dispenser made by NCR. ANZ Grindlays Bank (Now merges with Standard Chartered Bank) started issuing both MasterCard and Visa branded local currency (BDT) Credit Card in January 1997. But in 1988 it started acquiring MasterCard within limited hemisphere. This was the first if its kind in Bangladesh to use foreign cards as foreigners had to rely on. In early 1997 National Bank Limited started issuing MasterCard branded credit card for both Local and International type. Since the beginning NBL issued cards by imprinting and embossing few features on the imported plastic cards in its own house. This unique in house service enabled it to deliver the cards to its customers within 24 hours from the very beginning. This technological facility by this time has become common because gradually market has expanded through creating 17 card issuing Financing Institutions. Among these card issuers only three institutions are creating seventeen card issuing Financing Institutions. Among these card issues only three institutions are principal members of MasterCard and the rest are issuing Visa Cards. Now in Bangladesh there are three types of credit cards- Local, International and Dual card. Basically these are of two status- Silver Card and Gold Card status. Mobile banking is another success in our banking history, as this make banking easy n convenient for all class n occupations people. At May 2011 Dutch Bangla Bank has first introduced this. Then bKash has been introduced by Brac Bank at July 2011. Bkash is now became a part of modern banking. Throughout the 2000s, governments maintained positive economic policies. The economy grew, so did the Bangladesh's banking sector and business sector. Since 2011 however, many banking scams took place, mainly at government owned banks. This created a bad vibe which is still to recover from.

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2.2 OVERVIEW OF BANGLADESH BANK Establishment Bangladesh Bank, the central bank and apex regulatory body for the country's monetary and financial system, was established in Dhaka as a body corporate vide the Bangladesh Bank Order, 1972 (P.O. No. 127 of 1972) with effect from 16th December, 1971. At present it has ten Offices located at Motijheel, Sadarghat, Chittagong, Khulna, Bogra, Rajshahi, Sylhet, Barisal, Rangpur and Mymensingh in Bangladesh; total manpower stood at 5807 (officials 3981, subordinate staff 1826) as on March 31, 2015.

Functions Bangladesh Bank performs all the core functions of a typical monetary and financial sector regulator, and a number of other non-core functions. The major functional areas include: 1. Formulation and implementation of monetary and credit policies. 2. Regulation and supervision of banks and non-bank financial institutions, promotion and development of domestic financial markets. 3. Management of the country's international reserves. 4. Issuance of currency notes. 5. Regulation and supervision of the payment system. 6. Acting as banker to the government. 7. Money Laundering Prevention. 8. Collection and furnishing of credit information. 9. Implementation of the Foreign exchange regulation Act. 10. Managing a Deposit Insurance Scheme.

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2.3 BASEL III PLAN AND ITS IMPLEMENTATION FOR GREATER PROFITABILITY IN BANKING INDUSTRY: Basel III refers to the latest capital and liquidity standards prescribed by the Bank for International Settlements (BIS). Bangladesh has entered into the Basel III regime effective from January 01, 2015. Bangladesh Bank (BB) amended its capital standard in which was based on Basel II and circulated new regulatory capital and liquidity guidelines in line with Basel III of BIS. The new capital and liquidity standards have great implications for banks. The discussion may be started from original Basel III accord of the BIS, which is the base of the BB's guideline. Basel III was introduced in 2010 with the intention of gradual implementation starting from January 01, 2013 and full implementation starting from January 01, 2019. Basel II guideline, the previous version of capital standard, was felt inadequate to maintain financial stability during global financial crisis started in 2007. The financial instability took a heavy toll and led to economic crisis in various countries. Basel III guideline has been formulated to improve shock resilience capacity of the banks to prevent recurrence of such financial and economic crisis. Bangladesh is now tried to follow the Basel III for the improvement of commercial bank. To strengthen capital and liquidity rules with the goal of promoting a more resilient banking sector, the Basel Committee on Banking Supervision (BCBS) issued “Basel III: International framework for liquidity risk measurement, standards and monitoring” in December 2010. The objective of the reforms was to improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spillover from the financial sector to the real economy. Through its reform package, BCBS also aims to improve risk management and governance as well as strengthen banks‟ transparency and disclosures. Basel Committee’s comprehensive reform package also addressed the lessons of the financial crisis. One of the main reasons the economic and financial crisis, which began in 2007, became so severe was that the banking sectors of many countries had built up excessive on and off-balance sheet leverage. This was accompanied by a gradual erosion of the level and quality of the capital base. At the same time, many banks were holding insufficient liquidity buffers.

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Potential Basel III practice in Bangladesh Particular

2015

Minimum 4.50% Common Equity Tier-1 (CET-1) Capital Ratio

2016

2017

2018

2019

4.50%

4.50%

4.50%

4.50%

Capital Conservation Buffer Minimum CET-1 plus Capital Conservation Buffer 4. Minimum T-1 Capital Ratio Minimum Total Capital Ratio Minimum Total Capital plus Capital Conservation Buffer RR for Fixed Assets

-

0.625%

1.875%

1.25%

2.50%

50%

5.125%

5.75%

6.375%

7.00%

5.50%

5.50%

6.00%

6.00%

6.00%

10.00%

10.00%

10.00%

10.00%

10.00%

10.00%

10.625%

11.25%

11.875%

12.50%

40%

60%

80%

100%

100%

RR for Securities RR for Equity Securities Liquidity Coverage Ratio Net Stable Funding Ratio

40%

60%

80%

100%

100%

50%

100%

100%

100%

100%

≥100%

≥100%

≥100%

≥100%

≥100%

≥100%

≥100%

≥100%

≥100%

≥100%

http://www.bangladesh-bank.org https://www.bb.org.bd/mediaroom/circulars/brpd/dec212014brpd18e.pdf

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2.4 BANKS IN BANGLADESH The Banking Industry is Bangladesh is one characterized by strict regulations and monitoring from the central governing body, the Bangladesh Bank. The chief concern is that currently there are far too many banks for the market to sustain. As a result, the market will only accommodate only those banks that can transpire as the most competitive and profitable ones in the future. After the independence, banking industry in Bangladesh started its journey with 6 nationalized commercialized banks, 2 State owned specialized banks and 3 Foreign Banks. In the 1980's banking industry achieved significant expansion with the entrance of private banks. Now, banks in Bangladesh are primarily of two types:  

Scheduled Banks: The banks which get license to operate under Bank Company Act, 1991 (Amended in 2003) are termed as Scheduled Banks. Non-Scheduled Banks: The banks which are established for special and definite objective and operate under the acts that are enacted for meeting up those objectives, are termed as Non-Scheduled Banks. These banks cannot perform all functions of scheduled banks.

Scheduled banks: There are 57 scheduled banks in Bangladesh who operate under full control and supervision of Bangladesh Bank which is empowered to do so through Bangladesh Bank Order, 1972 and Bank Company Act, 1991. Scheduled Banks are classified into following types:

State Owned Commercial Banks (SOCBs): There are 5 SOCBs which are fully or majorly owned by the Government of Bangladesh. I. Sonali Bank II. Agrani Bank III. Rupali Bank IV. Janata Bank

Specialized Banks (SDBs): 3 specialized banks are now operating which were established for specific objectives like agricultural or industrial development. These banks are also fully or majorly owned by the Government of Bangladesh.

Private Commercial Banks (PCBs): There are 39 private commercial banks which are majorly owned by the private entities. PCBs can be categorized into two groups:

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 

Conventional PCBs: 31 conventional PCBs are now operating in the industry. They perform the banking functions in conventional fashion i.e interest based operations. Islami Shariah based PCBs: There are 8 Islami Shariah based PCBs in Bangladesh and they execute banking activities according to Islami Shariah based principles i.e. ProfitLoss Sharing (PLS) mode.

Foreign Commercial Banks (FCBs): 9 FCBs are operating in Bangladesh as the branches of the banks which are incorporated in abroad.

http://www.bangladesh-bank.org

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2.5 BANKING ACT OF BANGLADESH A new Banking Company Act was introduced in 1991 in Bangladesh in order to strengthen the regulation and monitoring system. Since 1994, Bangladesh has also introduced the CAMEL framework in its banking system. In order to strengthen credit discipline and bring classification gradually into line with international standards, a new policy was introduced on 3 March 2005. Prudential guidelines for consumer and small enterprise financing were issued. In order to improve credit risk management, the central bank reduced the single borrower exposure limit from 50 per cent to 35 per cent of total capital, subject to the condition that the maximum fundbased credit facilities did not exceed 15 per cent of its total capital. A set of acts, laws, regulations, and guidelines have been enacted and promulgated time to time since BB‟s establishment which helped BB to perform its role as a central bank particularly, to control and regulate country’s monetary and financial system. Among others, important laws and acts include: 1. Bangladesh Bank Order, 1972 2. Bank Company Act, 1991 3. Bank Company (amendment) Act, 2013 4. The Negotiable Instruments Act, 1881 5. The Bankers‟ Book Evidence Act, 1891 6. Foreign Exchange Regulations Act, 1947 7. Financial Institutions Act, 1993 8. Bank Deposit Insurance Act, 2000 9. Money Loan Court Act, 2003 10. Micro Credit Regulatory Authority Act, 2006 11. Money Laundering Prevention Act, 2012 12. Anti-terrorism Act, 2009

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CHAPTER 3: THEORY OF FACTORS AFFECTING PROBABILITY

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The study investigated the determinants of bank profitability using annual data for 5 sample Bangladeshi private commercial banks during 2010- 2014. ROA and NIM is use for the determination of bank performance in Bangladesh. But ROE has little or almost no impact banks profitability. There are lots of internal and external factors used for banks profitability calculation. Those factors are given bellow: • ROA is a ratio calculated by dividing the net income over total assets. ROA have been used in most of the studies for the measurement the profitability of the banks. ROA measures the profit earned per dollar of assets and reflect how well bank management uses the bank’s real investments resources to generate profits. • ROE measures the rate of return on the ownership interest (shareholders' equity) of the common stock owners. It measures a firm's efficiency at generating profits from every unit of shareholders' equity (also known as net assets or assets minus liabilities). ROE shows how well a company uses investment funds to generate earnings growth. ROEs between 15% and 20% are considered desirable. Return on equity (ROE) is the ratio of net income to total equity. • ROCE compares earnings with capital invested in the company. It is similar to Return on Assets (ROA), but takes into account sources of financing. ROCE is the ratio of non-markup income to capital employed. • NIM is a measure of the difference between the interest income generated by banks or other financial institutions and the amount of interest paid out to their lenders (for example, deposits), relative to the amount of their (interest-earning) assets. It is similar to the gross margin of nonfinancial companies. It is usually expressed as a percentage of what the financial institution earns on loans in a time period and other assets minus the interest paid on borrowed funds divided by the average amount of the assets on which it earned income in that time period (the average earning assets). The NIM variable is defined as the net interest income divided by total assets. NIM is focused on the profit earned on interest activities. • SIZE is used to capture the fact that larger banks are better placed than smaller banks in harnessing economies of scale in transactions to the plain effect that they will tend to enjoy a higher level of profits. Consequently, a positive relationship is expected between size and profits. Molyneux and Thornton (1992), Bikker and Hu (2002) and Goddard et al. (2004) find size has a positively related to profitability. The size of the bank is also included as an independent variable to account for size related economies and diseconomies of scale. In most of the finance literature, the total assets of the banks are used as a proxy for bank size. • CAPITAL is taken as the ratio of equity capital to total assets. It’s interesting to note that higher the capital level breeds higher profitability level since by having more capital, a bank can easily adhere to regulatory capital standards so that excess capital can be provided as loans.

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• LOAN is the main source of income and is expected to have a positive impact on bank performance. Other things constant, the more deposits are transformed into loans, the higher the interest margin and profits. However, if a bank needs to increase risk to have a higher loan-toasset ratio, then profits may decrease. In addition, as bank loans are the principal source of income, we expect that non-interest bearing assets impact negatively on profits. We also expect that the higher equity-to asset ratio, the lower the need to external funding and therefore higher profitability. It is also a sign that well capitalized bank face lower costs of going bankrupt and then cost of funding is reduced. • DEPOSITS are the ratio of total deposits to total assets which is another liquidity indicator but is considered as a liability. Deposits are the main source of bank funding and hence it has an impact on the profitability of the banks. Deposits to total assets ratio is included as an independent variable in this study. • GDP: Demirguc-Kunt and Huizinga (1999) show that rapid economic growth increase profitability for a large number of countries. Technically speaking, GDP captures upswings and downswings manifesting in the business cycles. Consequently, movements in general activity level are expected to generate direct impacts on profitability of banks. The empirical literature usually resorts towards two versions of GDP. First, there is cyclical output which basically reflects the deviation of GDP from an HP-Filtered GDP. Second, there is the use of GDP per capita to cater for the level of economic development. • INF: The importance of inflation on the performance of banks was heavily discussed in the literature, primarily due to the influence of inflation on the sources and users of banks’ financial resources. In particular, inflation affects companies’ pricing behavior. For instance, if companies expect general inflation to be higher in the future, they may believe that they can increase their prices without suffering a drop in demand for their output (Driver and Windram 2007, 2009). In this scenario, upon the condition that expected inflation will be equal to actual inflation, there will be no decrease in business activities and no negative effect on banks’ performance. • Stock Market Capitalization (MC): Modigliani and Miller (1958) points out that under perfect market conditions, debt and equity financing acts as perfect substitutes. In that respect, in case firms resort more towards equity financing, this will trigger a negative effect on banks’ profits. However, in case of developed capital markets, banks derive more information about customers so that information asymmetry problem is curtailed to thereby enhance banks’ profits. Hence, whether the substitution effect or the complementary effect predominates hinges on the sign of the effect. Empirical evidence from Demirgüç-Kunt and Huizinga (1999, 2001), Bashir (2000) and Naceur (2003) show that banks have greater profit opportunities in countries having well-developed stock markets, providing endorsement for the complementary effects.

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CHAPTER 4: GRAPHICAL PRESENTATION OF ROA AND INDEPENDENT VARIABLES

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4.1 Graph 1: ROA

Figure 1 ROA

Interpretation: This graph showing the change in ROA in Five consequential years from 2010 to 2014 of five different banks. Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. ROA was highest of EBL at year 2010; than it consequently decreases over next 2 years than again increase a bit than again fall. Next good position is City Banks, but ROA has suddenly fall over the year 2012 and 2013, than again raise at year 2014. Prime Banks ROA was high at year 2010 than consequently decreases over years. UCBs ROA is highest at 2011 and lowest at 2012. Brac Banks ROA condition is worse than other banks. It’s ROA is highest at 2011 and lowest at year 2012.

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4.2 Graph 2: Bank Size

Figure 2 Bank Size

Interpretation: This graph is showing bank size over five consequent years from 2010 to 2014 of five different banks. Bank Size shows asset condition of a Bank. Bank size was same for Brac Bank, UCBL and Prime Bank for all the five years. For year 2010 and 2011 the bank size was same at City Bank and EBL than it increases and become same as other banks at 2012 to 2014.

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4.3 Graph 3: Loan to Deposit Ratio:

Figure 3- Loan to Deposit Ratio

Interpretation: This graph is showing Loan to deposit Ratio of five consequent years of five different banks. The loan to deposit ratio is used to calculate a Bank’s ability to cover withdrawals made by its customers. A Bank must have a certain measure of liquidity to maintain its normal daily operations. Loan to Deposit Ratio is highest for EBL at year 2011 and 2012, and lowest at 2013. Loan to Deposit Ratio of City Bank is highest at 2014 and lowest at 2013. Loan to Deposit Ratio is highest of Brac Bank at 2010 and lowest at 2014. This ratio is almost same over the year af UCBL. Prime Banks’ loan to deposit ratio is almost same over the year 2010 to 2012 and thab fall, lowest at 2014.

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4.4 Graph 4: Non- Performing Loan Ratio:

Figure 4- Non Performing Loan Ratio

Interpretation: This graph is showing non- performing loan ratio of five consequent years from 2010 to 2014 of five different years. A nonperforming loan (NPL) is the sum of borrowed money upon which the debtor has not made his scheduled payments for at least 90 days. A nonperforming loan is either in default or close to being in default. City Banks NPL is highest at 2013, this is the highest NPL ratio among all the five banks, and lowest at 2011. Brac Banks NPL is highest at 2012 and lowest at 2011. NPL is almost same at year 2010, 2011 and 2014. NPL of UCBL and EBL is lowest, which indicates their condition is good than other Banks. Prime Banks NPL is very high at 2014 compared to other years.

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4.5 Graph 5: Capital Structure:

Figure 5- Capital Structure

Interpretation: This graph is showing capital structure of five different banks of five consequent years from 2010 to 2014. The capital structure is how a firm finances its overall operations and growth by using different sources of funds. Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings. Short-term debt such as working capital requirements is also considered to be part of the capital structure. Capital structure is highest of Brac Bank at the year 2012 and lowest at 2014, UCBLs’ capital structure is highest at 2010 and lowest at 2011. Prime Banks capital structure is very high. Highest capital structure was at year 2012 and lowest was at 2010. EBLs’ capital structure is consequently lower than Brac, UCBL and Prime but good than City Bank. EBLs’ highest capital structure is at year 2012 and lowest at 2010.

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CHAPTER 5: REGRESSION ANALYSIS

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1. Regression Analysis for ROA to Bank Size: SUMMARY OUTPUT Regression Statistics Multiple R 0.567954847 R Square 0.322572708 Adjusted R 0.293119347 Square Standard Error 0.00499222 Observations 25 Dependent Variable Y- ROA Independent Variable X- Bank Size R-Square is a statistical measure of how close the data are to the fitted regression line. It also known as the coefficient of determination or the coefficient of multiple determinations for multiple regression. Here R-Square= 32% which indicate that Depend variable (ROA) can be 32% changed by influence of Independent variable (Bank Size). ANOVA Table ANOVA df Regression Residual Total

1 23 24

SS

MS

F

Significance F 0.000273 0.000273 10.95198 0.003060316 0.000573 2.49E-05 0.000846

Dependent Variable Y- ROA Independent Variable X- Bank Size Significance F indicates how the model is significant or valid If significance F value is less than .5 that means significance. If the result is significant, it means the result likely did not happen by chance. If the Significance F value is less, it indicates that the model will be better and more valid. If the Significance F value is more then it indicates that the model will not be valid. Here the Significance F = .0030, F value is less. So, the model is better and more valid.

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Coefficient: Coefficients Intercept

0.293022332

Standard Error 0.084426

X Variable 1

-0.010823984

0.003271

t Stat

P-value

3.470751

0.00207

-3.30938

0.00306

Dependent Variable Y- ROA Independent Variable X- Bank Size A correlation coefficient is a statistical measure of the degree to which change to the value of one variable predict change to the value of another. A coefficient of positive indicates if one variable increase then, another variable will also be increased. A coefficient of negative indicates if one variable increase then, another variable will be decreased. Here the X Variable 1= -0.010823984 which indicate the negative relationship, if the Bank Size increase, then the ROA will be decreased. If the P-Value is less than 0.05 it indicate that the model is valid and quite significant. Here P-Value=0.00306 which is less than 0.05. so, its indicate this model is valid and quite significant.

2. Regression Analysis for ROA to Loan to Deposit Ratio: SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations

0.513954 0.264148 0.232155 0.005203 25

Dependent Variable Y- ROA Here R-Square= 51% which indicate that Depend variable (ROA) can be 51% changed by influence of Independent variable (Loan to Deposit).

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ANOVA Table: ANOVA Regression Residual Total

df 1 23 24

SS 0.000224 0.000623 0.000846

MS 0.000224 2.71E-05

F 8.256298

Significance F 0.008586072

Dependent Variable Y- ROA Independent Variable X- Loan to deposit Ratio Here the Significance F = .0.00858, F value is less. So, the model is better and more valid. Coefficient: Coefficients Intercept -0.01113 X Variable 0.0283 1

Standard Error 0.008686 0.009849

t Stat

P-value

-1.28183 2.873377

0.212675 0.008586

Dependent Variable Y- ROA Independent Variable X- Loan to Deposit Ratio Here the X Variable 1= 0.0283, which indicate the positive relationship, if the Loan to Deposit Ratio increase, then the ROA will be increase. If the P-Value is less than 0.05 it indicate that the model is valid and quite significant. Here P-Value= 0.008586 which is less than 0.05. so, its indicate this model is valid and quite significant. 3. Regression Analysis for ROA to Non- performing Loan Ratio: SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations

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0.779167 0.6071 0.590018 0.003802 25

Dependent Variable Y- ROA Here R-Square= 60% which indicate that Depend variable (ROA) can be 60% changed by influence of Independent variable (Non- performing loan ratio). ANOVA Table: ANOVA df Regression 1 Residual 23 Total 24

SS MS F Significance F 0.000514 0.000514 35.53914 4.44961E-06 0.000332 1.45E-05 0.000846

Dependent Variable Y- ROA Independent Variable X- Non- performing loan Ratio Here the Significance F = 4.44961E-06, F value is very small. So, the model is valid and significant. Coefficient: Coefficients Intercept X Variable 1

0.023342 -0.2201

Standard Error 0.001796 0.03692

t Stat

P-value

12.99841 -5.96147

4.41E-12 4.45E-06

Dependent Variable Y- ROA Independent Variable X- Non-Performing Loan Ratio Here the X Variable 1= -0.2201, which indicate the negative relationship, if the Non- Performing Loan increase, then the ROA will be decreased. If the P-Value is less than 0.05 it indicate that the model is valid and quite significant. Here P-Value= 4.45E-06 which is less than 0.05. so, its indicate this model is valid and significant. 4. Regression Analysis for ROA to Capital Structure: SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square

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0.421401 0.177579 0.141821

Standard Error Observations

0.005501 25

Dependent Variable Y- ROA Independent Variable X- Capital Structure Here R-Square= 17 % which indicate that Depend variable (ROA) can be 17% changed by influence of Independent variable (Capital Structure). ANOVA Table: ANOVA df

SS

MS

F

Regression Residual

1 23

0.00015 0.000696

0.00015 3.03E05

4.966205

Total

24

0.000846

Significance F 0.035908

Dependent Variable Y- ROA Independent Variable X- Capital structure Here the Significance F = 0.032436791, F value is small. So, the model is valid and significant. Coefficients: Coefficients Intercept X Variable 1

Standard t Stat P-value Error 0.098563011 0.038121969 2.58546488 0.016538826 -0.09459864 0.042449497 -2.2284984 0.035907682

Dependent Variable Y- ROA Independent Variable X- Capital Structure Here the X Variable 1= -0.09459864, which indicate the negative relationship, if the Capital structure increase, then the ROA of bank will be decrease. If the P-Value is less than 0.05 it indicate that the model is valid and quite significant. Here P-Value= -0.9459864 which is less than 0.05. so, its indicate this model is valid and significant. Page 27

CHAPTER 6: RECOMMENDATION & CONCLUSION

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Recommendation: Banking industry is an important sector which would improve the business condition of an economy. International business like export, import etc. are mostly depends on banks to complete the transactions. So banking sector of an economy should be in a profitable situation. From my analysis I found some problem that indicates that banking industry should improve more in some cases. The following steps should be taken to facilitate the increased earning of the selected Banks:  Banks mainly gain profit from loan so whenever it provide loan it should check out the details of that client who are getting the loan. Then it can avoid non-performing loan.  Loans should be provided to the companies and entrepreneurs considering their track record.  Incentives should be provided to the bank officials for good recovery of bad loans.  Responsibility of the Directors of both private and nationalized banks in non-repayment of loans should be evaluated.  Willful defaulters must be given exemplary punishment.  More profitability may be ensured by investing in utilized fund and at the same time maintaining optimum liquidity of the bank.  To avoid the fraud and imitation, all banks should be more alert and follow rationalization for the services.  Stability and continuity of the policies and correction of inadequacies in the existing laws are required to overcome the loan default problem.  Practically, management needs to be more cost conscious, of alert in granting advances to viable projects, and more prompt in recovery of funds.  Monitoring and follow-up of loans should be strengthened and the borrowers should be given early signals before the problem goes out of controls.  The banks should think for introducing the ancillary services of the emerging growth & development of entrepreneurship to improve its profitability over years.

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Conclusion: In this analysis we use return on asset (ROA) as dependent variable, and Bank Size, Capital Structure, Loan to Deposit Ratio and Non-Performing Loan Ratio are independent variables has significant impact on profitability. I did regression analysis and show the relationship between dependent variable and independent variable. I did this analysis on the basis of only five years data, so there can be some limitations. We also show the graphical representation of dependent and independent variables, which shows the ups and downs of different variables of different banks in different years. There are several reasons for this ups and downs in banking sector. Main reason is some Governments decision regarding banking sectors and political instability. Also there are some causes like decline in profit are high cost of fund, increasing idle fund, lack of opportunity for profitable investment of available fund, unorganized security market, more dependence on non-interest income etc. The causes of changes in productivity are mainly decreased deposits for investment, lack of training and motivation of its own manpower, lack of welfare facilities and rationalization of cost etc. It can be concluded that the private commercial banks in Bangladesh show a greater fluctuation in profitability during 2010-2014.

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CHAPTER 7: REFERENCES

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References: Main reference of this report is Annual Report of 5 selected private commercial banks of last 5 years (2010 to 2014). Other than that some other references are used for the completion purpose of this report which is given below:

Journals:  Varde, V. and Sing, S. "Profitability of Commercial Bank," National Institute of Bank Management, Bombay, India.  World Bank (1999). “Reforming Banking Sector: World Bank‟s Recommendation”, The Bangladesh Observer, April 3, p. 19.  The financialexpress-bd.com,. 'SME Financing: Problems And Barriers'. N.p., 2015. Web. 16 Mar. 2015., M.Z "Trends of Profitability and Productivity of Commercial Banks in Bangladesh," Journal of IBS, Rajshahi, Bangladesh

Websites: Banking in Bangladesh - Wikipedia, the free encyclopedia Information on Mobile Banking Banking Industry of Bangladesh The Impact of Internal and External Factors on Commercial Bank Profitability in Jo Bangladesh-bank.org,. 'Bangladesh Bank Home’ 'Commercial Banking'. Commercial-banking.com, 'Institute Of national commercial Banking- Home'.

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Appendix:

City Bank

2010 2011 2012 2013 2014

Brac Bank

2010 2011 2012 2013 2014

UCBL

2010 2011 2012 2013 2014

Prime Bank

2010 2011 2012 2013

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ROA

Bank size 25

Loan To Deposit Non-Performing Ratio Loan Ratio 0.8948 0.0442

Capital Structure 0.8733

2.04 % 1.74 % 0.59 % 0.62 % 1.25 %

25

0.9164

0.0344

0.8457

26

0.8856

0.0748

0.8620

26

0.8361

0.0807

0.8744

26

0.9823

0.0588

0.8696

1.40 % 1.28 % 0.31 % 0.78 % 1.02 %

26

0.9563

0.0585

0.9210

26

0.8756

0.0577

0.9279

26

0.7696

0.0737

0.9415

26

0.9157

0.0649

0.9339

26

0.6144

0.0572

0.9132

1.68 % 1.74 % 0.76 % 1.35 % 1.38 %

26

0.8266

0.0131

0.9398

26

0.8281

0.0176

0.9055

26

0.7979

0.0369

0.9124

26

0.8040

0.0403

0.9094

26

0.8251

0.0462

0.9155

2.01 % 1.83 % 1.14 % 0.75 %

26

0.8723

0.0126

0.8905

26

0.8564

0.0144

0.9043

26

0.8838

0.0383

0.9122

26

0.7607

0.0509

0.9056

EBL

2014

0.94 %

26

0.7194

0.0761

0.9040

2010

2.96 % 2.14 % 1.55 % 1.63 % 1.22 %

25

1.0387

0.0199

0.8527

25

1.0826

0.0191

0.8775

26

1.0538

0.0317

0.8837

26

0.8788

0.0359

0.8831

26

1.0128

0.0436

0.8833

2011 2012 2013 2014

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