Role of Asset Quality in explaining the profitability of Commercial Banks in Pakistan

Abstract

The study examines productivity indicators for traditional banking industry of Pakistan, with special focus on their place on asset quality. After the implementation of stricter banking regulatory norms, that factor became increasingly important. The study included micro-financial output variables. Over period 20132018, for balanced test panel data containing 18 commercial banks, the study used a panel least square approach. Results linked to ROAA and ROAE, metrics of competitiveness, revealed that the low quality of assets and the cost to income ratio had a substantial negative effect. Capital adequacy ratio, liquidity ratio, and income diversification showed a significant positive impact on profitability of commercial banks operating in Pakistan.