Impact of bank-specific internal factors on the profitability of state-owned commercial banks in Bangladesh

Bank is a financial institution authorized to get deposits and make loans (Islam and Rana, 2017). The main element in a financial system is banks. They work as an intermediary between funds provider and those in needs of funds contributing to economic growth. Banks also play a role in the implementation of a country monetary policy. Thus, profitable banks will ensure the continuity of economic growth as well as the stability of the financial system (Al-Harbi, 2019). However, to maintain financial stability and sustain negative shocks, it is important to understand the factors that influence the profitability of banks (Rehman et al., 2018). On the other hand, banking business is directly associated with trust factor Abstract


INTRODUCTION
Bank is a financial institution authorized to get deposits and make loans (Islam and Rana, 2017). The main element in a financial system is banks. They work as an intermediary between funds provider and those in needs of funds contributing to economic growth. Banks also play a role in the implementation of a country monetary policy. Thus, profitable banks will ensure the continuity of economic growth as well as the stability of the financial system (Al-Harbi, 2019). However, to maintain financial stability and sustain negative shocks, it is important to understand the factors that influence the profitability of banks (Rehman et al., 2018). On the other hand, banking business is directly associated with trust factor (Babu & Choudary, 2014). Moreover, for arresting negative shocks and maintaining financial stability, it is important to understand the determinants that mostly affect the profitability of banking sector of Bangladesh (Mizan et al., 2013).
The factors that affect banks' profitability are categorized into two groups: Endogenous and exogenous elements. Endogenous means internal and exogenous means external. Capital adequacy, loans, deposits, foreign ownership, overhead costs, off-balance sheet (OBS) activities, etc., are example of internal or endogenous factors. On the other hand, external factors include GDP growth, per capita GDP, real interest rates, and regulations and financial structure, which may affect bank's profitability (Al-Harbi, 2019).
Banks profitability refers to the difference between the profit amount obtained from the assets and expense of the liabilities. However, bank profitability is also described as a function of both micro-and macrodeterminants. Microvariables are related to balance sheet and income statement of banks. Therefore, they are also termed as bank-specific variables or factor. Although macrovariables are not linked to the internal practices of the banks, these variables affect profitability of banks' greatly. Size of bank, capital adequacy, risk management, operating expense, marketable securities, and NPL are generally considered as microvariables. Inflation, interest rate, GDP growth, and tax rate are used as macrovariables (Yuksel et al., 2018).

OBJECTIVES OF THE STUDY
The objectives of the study are as follows: • Investigating the effect of NPL on state-owned commercial banks' profitability in Bangladesh. • Identifying the effect of liquidity ratio on the SOCB's profitability of Bangladesh. • Evaluating the influence of solvency ratio on the SOCB's profitability of Bangladesh. • Describing the impact of leverage ratio on the SOCB's profitability of Bangladesh. • Analyzing the power of bank size on the SOCB's profitability of Bangladesh.

JUSTIFICATION OF THE STUDY
Several researchers together with Jaber and Al-Khawaldeh (2014) Lee and Iqbal (2018), Hossain and Khalid (2018), and Hassan and Ahmed (2019). However, there is hardly any study about effect of bank-specific internal factors on the profitability of stateowned commercial banks of Bangladesh. Therefore, this study is undertaken to provide some empirical evidence on the effect of bank-specific internal factors on the profitability of state-owned commercial banks of Bangladesh. The study uses return on assets (ROA) as an alternative for bank's profitability.

LITERATURE REVIEW
Worldwide, a number of researchers have worked on the factors affecting commercial banks profitability. In this section, we will amalgamate these factors that affecting banks profitability. Literature reviews are shown in Table A.

METHODOLOGY Population and Sample Size
According to Schedule Banks Statistics, Bangladesh bank, there are 59 scheduled banks in Bangladesh. These 59 banks are considered as population of the study. Among this population, we have purposively selected a total of five state-owned commercial banks as sample for the period of 5 years (from 2014 to 2018). The sample banks are Sonali, Janata, Agrani, Rupali, and Basic Bank Limited.

Data Source and Nature
The study applied explanatory research design and carried out based on secondary data only. The main source of data is annual reports (audited financial statements) of the respective banks. For literature review purposes, relevant article has also been consulted.

Variables
The study used both dependent variable (ROA) and independent variables (NPLR, LQR, SR, LR, and BS) which are described in Table 1.

Model and Tools Applied
In this study, multiple regression models and various tools such as statistical tools (mean and one-way ANOVA) and MS Excel version 13 have been used for data analysis.

Research Period
The research has been carried out for the period of 5 consecutive years starting from December 31, 2014, to December 31, 2018.

Research Hypothesis
Five hypotheses have been developed for the study. A hypothesis will be completely accepted if the coefficient estimated is statistically significant and its sign is found as our expectation. It will be partially accepted if the coefficient estimated is slightly insignificant, but the sign is as predicted. Otherwise, a hypothesis will be rejected (Hassan and Ahmed, 2019).

H1
The NPL ratio affects profitability negatively and significantly.

H2
The liquidity ratio affects profitability negatively and significantly.

H3
The solvency ratio affects profitability positively and significantly.

H4
The leverage ratio affects profitability negatively and significantly.

H5
The bank size affects profitability positively and significantly.

RESULTS AND DISCUSSION
Some important descriptive statistics of variables used in the study are described in Table 3. The table shows profitability measure, ROA, and five bank-specific internal factors which are ratio of NPL to gross loan, liquidity ratio (investment to deposits), solvency ratio (equity to assets), leverage ratio (debt to equity), and bank size (natural logarithm of total assets). ROA has a minimum value of 7.49% and a maximum value of 1.00% with a standard deviation of 1.75% which is the evidence that profitability among state-owned commercial banks varies greatly.
On the other hand, the NPL ratio among state-owned commercial banks in Bangladesh is varied from 11.69% to 57.15% with the mean and standard deviation of 27.72% and 15.08%, respectively, which indicates a high volatility among state-owned commercial banks' ability in credit risk management. In addition, minimum liquidity ratio is 9.83%. Similarly, solvency ratio and leverage ratio show a high volatility. However, bank size has minimum value of 0.13 and maximum value 14.08 with a very low standard deviation of 0.53.
Moreover, we have conducted ANOVA test to verify the applicability of the model. Table 5 shows the ANOVA test results for our dataset.
Based on the ANOVA test results, we cannot accept the null hypothesis, i.e., bank-specific internal factors affect the profitability of state-owned commercial banks of Bangladesh. The multiple regression models show the following output.
It is shown in Table 6 that value of correlation coefficient R=0.825 means that there is a strong linear relationship between dependent variable ROA and independent variables. On the other hand, the value of R square is 0.682 which indicates that 68.20% of the variations in the dependent variable ROA are explained by the independent variables. Moreover, Table 6 represents the beta coefficient (β) of five independent variables with P value. It is shown in Table 6 that beta coefficient for the beta coefficient of intercept, NPL to total loans and advances ratio (NPLR), and investments to deposits ratio (LQR) are negative to ROA. It states that when NPL and LQR of state-owned commercial banks are raised in one unit, ROA (profitability) of stateowned commercial banks is decreased by 0.073 units and 0.085 units, respectively, keeping other independent variables constant.
However, the beta coefficient of equity to assets ratio (SR), debt to equity ratio (LR), and bank size (BS) are positive to ROA which implies that larger the beta coefficient of   SR, LR, and BS higher would be ROA. According to the estimation, we found that the intercept, NPLR, LQR, and BS are statistically significant at a level of 5%. On the other hand, as P-value of solvency ratio and leverage ratio is more than 0.05, these results are statistically insignificant. Table  7 summarizes the acceptance or rejection of hypotheses on the multiple regression models assessment.

Multicollinearity Test
VIF test is performed to measure multicollinearity problem among predictor variables (bank-specific internal factors) of the study. According to Suganya and Kengatharan (2018), cutoff value of VIF and tolerance statistics is 10.0 and 0.10, respectively. As per results of Table 8, VIF for each independent variable is <10 (cutoff VIF) and the mean value of VIF is about 2. On the other hand, tolerance value of each independent is <0.10 (cutoff tolerance statistics). Therefore, independent variables of this study are free from the multicollinearity problem.

CONCLUSION
Profitability is critical to the long-term survival of commercial banks, especially in the changing environment of banking industry in the context of Bangladesh (Lee and Iqbal, 2018). To date, studies on the effect of internal and external factors on the profitability of banking sectors in Bangladesh are numerous. On the other hand, effect of bank-specific internal factors on the profitability of stateowned commercial banks of Bangladesh is relatively scarce.
The aim of the study is to investigate the effect of bankspecific internal factors on the profitability of state-owned commercial banks of Bangladesh. This study examined the performance of five state-owned commercial banks of Bangladesh during the period of 2014-2018. The five bank-specific internal factors that are examined consist of NPL ratio (NPL to gross loan), liquidity ratio (investment to deposits), solvency ratio (equity to assets), leverage ratio (debt to equity), and bank size (natural logarithm of total assets). To examine the significant relationship between profitability and those potential bank-specific internal factors, the study used the multiple regression model analysis (MRMA).
The results show that there is a significant and negative relationship between ROA and NPLR and ROA and investment-deposit ratio. On the other hand, ROA and bank size have significant positive relationship. However, debt/ equity and equity/assets have statistically insignificant relationship with ROA. Hence, it is said that among five bank-specific internal factors, NPL, liquidity, and bank size are the most important factors of bank profitability.
The study did not include macroeconomic variables which might affect the state-owned commercial banks profitability. Hence, there is a scope of further investigation for stateowned commercial banks of Bangladesh. Nevertheless, we believe that this study shall provide the regulators, managements, depositors, and other concerned parties an important insight about state-owned commercial banks profitability and enhance the performance thereby.

CONFLICT OF INTEREST
The authors declare no conflict of interest.