Determinants of Bank Profitability on the Example of a Commercial Bank in Ethiopia

Purpose: The purpose of this study is to investigate determinants of banks profitability in CBE by using time series data of CBE from year2003 to 2015. Design/methodology/approach: The research has econometric research design. The study used quantitative research approach and secondary financial data are analyzed by using Vetcor Auto Regressive Model (VAR), for the bank profitability was measureed by Return on Asset (ROA). OLS method was applied to investigate the impact of bank size, managerial efficiency, liquidity, credit risk, real GDP growth rate, and annual inflation rate. Findings: The empirical results shows that bank specific factors; bank size, managerial efficiency, credit risk and macro-economic factors; level of GDP and annual inflation rate have a strong influence on the profitability of banks. The empirical study shows that, all explanatory variables in this study have negative effect on the profitability measure except GDP and inflation rate. In addition to this, without liquidity all explanatory variables are statistically significant. Practical implications: Management bodies of CBE should strive to strengthen the bank specific factors like capital position, managerial efficiency, credit risk, asset quality, and bank size. Because, The competition become tough since increase in new entrant to the market, banks are increasingly being substituted by the general public as a source of funds by new share companies being established in a variety of sectors, and the micro-finance industry continues to show rapid growth. Originality/value: The banking industry is crucial source of financing different business segments that is operated in a given country.