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The
soundness of a country’s economy has a close connection with its banking
system. If banks are not capable of providing funds or capital towards small potential
businesses, they are unable to spread their influence at a higher level which
potentially will help with economic growth. Thus, failure of the banking system
would also mean the failure of the economy to grow higher due to insufficient
of funds. The purpose of this paper is to
investigate the relationship between internal factors and bank profitability
that is aimed specifically at local commercial banks located in Malaysia within the period of 8 years, from 2009-2016. This research paper
involves eight local banks listed in the
Bursa Malaysia. There are five independent variables consistings
of internal factors,
and the dependent variables
are measured by using the
return on asset (ROA) and return on equity (ROE). Data are tested
by using the Spearman Rank correlation analysis, and the
result shows that
the variables are insignificant with dependent variables. The
limitation of this paper is time series of data used which
are not sufficient to find any significant relationship between
variables in this research. The result could probably be significant if the
study is conducted at
within
a longer period of time.

Keywords:
Bank Profitability, Commercial bank,
Internal Factors, Augmented-Dickey Fuller test, Bursa Malaysia.

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1.    
Introduction

The
banking industry plays a pivotal role in providing capitals whereby the
financial intermediaries would be channelling the funds
to companies or institutions that is
are
in dire need of funds to expand their businesses.
Presence of the banking sector has helped decrease the
unemployment rate as well. The banking sector is well known for giving
financial advices to their customers regarding funding,
and it also creates job opportunities towards
for
the Malaysian citizens itself. It is important for banks to be sustainable
in terms of their profitability performance as it acts as an indicator of
success of the management,
and it is also one of the attractive sights that investors would look for.

The
purpose of this paper is to investigate the relationship between internal
factors and bank profitability that is aimed specifically at local commercial
banks located in Malaysia in the period of 8 years,
from 2009-2016. This research paper involves eight local banks listed in Bursa
Malaysia.

This
paper highlights the
relationships
between five independent variables consistings of internal factors and dependent
variable,
which is the bank profitability which
that
are measured by using return on asset (ROA) and return on equity
(ROE). Data are then being tested by using Augmented Dickey-Fuller (ADF) for unit root test and Shapiro-Wilk to test the normality of
variables. To test correlation analysis between variables, Spearman Rank
Correlation was used to investigate and the relationship between two
quantitative and continuous variables.

2.    
Review of
literature

As financial intermediaries, banks profitability play a significant
role in the economic activities and growth of most nations. The banking sector profitability contributes
in economies and makes economies to
endure negative and external financial shocks and contribute in
financial system stability (Athanasoglou et al., 2005). For banks profitability, ROA is a common measure to analyse and
evaluate the ability of banks to generate return from its sources of funds to
produce profit. ROE represents the effectiveness of bank management in handling
the shareholders’ funds to generate profits.

Capital adequacy shows the strength of banks and
sufficiency amount of banks’ equity to absorb any shocks that the banks may experience and reflects the
ability of the banks
to withstand losses or financial risks.
According to Hassan and Bashir (2003), capital adequacy indicates a negative
relationship with bank performance.

Bank size is one of
the important factors that influence bank profitability. Based on Dietrich and
Wanzenried (2011), there is
a positive and statistically significant relationship between bank
size and bank profitability because large banks have high degree of loans and
product diversifications
compared to small and medium banks.

Previous study by
Sufian and Habibullah (2009) found a negative relationship between operating
efficiency with ROA,
and it is not not
a significant correlation. Operating efficiency does not
contribute to bank profitability as much as other independent variables, but it
reflects the ability of bank management.

Banks rely
significantly on customer deposits to allocate credits to other customers. Menicucci
and Paolucci (2015),
shows that the deposit variable has a
positive and significant impact on bank profitability. Thus, banks will be able to provide more loan
opportunities to customers and generate more profits if they are able to gain
high deposits.

Loan loss provision is
an indicator to measure the effect of a
bank’s asset quality on profitability. The bank will experience
high default risk if bank’s asset quality is bad as it is directly reducinged
the interest income and loan provision will be higher. Therefore, it can affect
the banks’ profitability. Menicucci
and Paolucci (2015) found that there are
is
a significant but negative relationship between Loan Loss
Provision and bank profitability.

The hypotheses are as
below:

      i.        
Capital Adequacy

H0: There is no significant relationship between
capital adequacy and commercial bank profitability.

H1: There is a significant relationship
between capital adequacy and commercial bank profitability.

     ii.        
Bank Size

H0: There is no significant relationship
between bank size and commercial bank profitability.

H1: There is a significant relationship
between bank size and commercial bank profitability.

 

   iii.        
Operating Efficiency

H0: There is no significant relationship
between operating efficiency and commercial bank profitability.

H1: There is a significant relationship
between operating efficiency and commercial bank profitability.

   iv.        
Deposit

H0: There is no significant relationship
between deposit and commercial bank profitability.

H1: There is a significant relationship
between deposit and commercial bank profitability.

     v.        
Loan Loss Provision

H0: There is no significant relationship
between loan loss provision and commercial bank profitability.

H1: There is a significant relationship
between loan loss provision and
commercial bank profitability.

 

 

 

 

 

 

 

3.    
Research Design
and Methodology

This research paper
involves eight local commercial banks listed in Bursa Malaysia. The data used
are secondary data that were collected from annual reports
of each banks over the period of 8 years from 2009-2016.
As this paper are
studyingstudies
group of banks, the best sampling types
is purposive sampling because it is a
non-probability sampling method. Local commercial banks are being
selected as sampling population because this study only focuses on local commercial banks that are listed
in Bursa Malaysia.

Bank size, capital
adequacy, operating efficiency, deposits and loan loss provision are independent
variables in this research paper while bank profitability
acts as the
dependent variable that are measured by using ROA and ROE.

Shapiro Wilk test is
used because the sample size is considered small and will be able to identify whether
the data are normally distributed or not. The
Ttest conducted for reliability test is
the Augmented Dickey-Fuller (ADF) test, where it is the simplest approach to
test for a unit root. ADF is utilized for a larger and more complicated
set of time series models. Spearman’s Rank correlation coefficient is used for
correlation analysis to identify and test the strength of a relationship between
two sets of data in this research paper.

4.    
Findings

 

·       Shapiro-Wilk
test

Variables

P-Value

ROA
ROE
Bank
Size
Operating
Efficiency
Capital
Adequacy
Deposit
Loan
Loss Provision

0.439
0.122
0.677
0.811
0.000
0.136
0.024

 

 

 

 

 

 

Table
1: Shapiro-Wilk test

Table
1 represents the normality test that have been conducted by using the
Shapiro-Wilk test in SPSS. This test is conducted in order to see whether or
not the data are normally distributed. Data are considered normally distributed
if the p-value is more than 0.05. Based on the table, it shows that the data
are normally distributed for all the other variables besides Capital Adequacy
and Loan loss provision where the p-value shows a result that is less than
0.05.

 

·      
Augmented
Dickey-Fuller (ADF) Test

Level and Intercept

 

Probability

Bank
Size

0.2828

Capital Adequacy

0.1244

Operating
Efficiency

0.0000

Deposits

0.2249

Loan
Loss Provision

0.2249

 
Table 2: Augmented
Dickey-Fuller (ADF) Test

 

The
Augmented-Dickey Fuller test that can be observed in table 2 is conducted in
order to see whether or not the data used are stationary. If the result shows a
p value higher than 0.05, it can be concluded that the data are stationary.
Based on the findings, it can be observed that all variables are stationary
except for one which is Operating Efficiency. 

 

·      
Spearman Rank Correlation

Variables

N

Correlation Coefficient

Sig. (2-tailed)

ROA
Bank Size
Operating Efficiency
Capital Adequacy
Deposit
Loan Loss Provision

 
8
8
8
8
8

 
-0.571
0.024
-0.515
0.381
-0.310

 
0.139
0.955
0.192
0.352
0.456

ROE
Bank Size
Operating Efficiency
Capital Adequacy
Deposit
Loan Loss Provision

 
8
8
8
8
8

 
-0.143
0.167
0.072
-0.143
-0.563

 
0.736
0.693
0.866
0.736
0.146

Table
3: Spearman Correlation

The
table above denotes the Spearman Correlation result on the independent
variables which are tested on both the dependent variables ROA and ROE. The
significant 2 tailed result shows whether or not the variables are significant
or not in comparison with the dependent variables. Based on the significant
value between dependent variables and independent variables, it shows that our
variables are considered insignificant,
and we have failed to reject null hypothesis as mentioned previously in our review of literature, where we say that there is no
significant relationship between independent variables and ROA.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

·      
Descriptive Statistics

Variables

N

Minimum

Maximum

Mean

Std. Deviation

Dependent Variables
ROA
ROE

 
8
8

 
9.4322
0.9466

 
14.5233
1.2176

 
12.492113
1.096863

 
1.8259930
0.1115284

Independent
Variables
Bank Size
Operating
Efficiency
Capital Adequacy
Deposit
Loan Loss
Provision

 
8
8
8
8
8

 
139372354.13
0.0838
0.0127
0.7120
0.0014

 
288400839.63
0.2028
0.0153
0.8295
0.0067

 
216728291.28
0.104350
0.014088
0.791725
0.002938

 
55569250.7
0.0403218
0.0008425
0.0380923
0.0017517

 

Table
4: Descriptive Statistics

 

Table 4 represents
the result that is obtained from running a descriptive statistic on both the
dependent and independent variables. The N denotes the sample size of our
research, and there is a total of 8 sets of data collected from 2009 –
2016. The bank profitability is measured by ROA and ROE and based on the mean
value of both variables, it shows that ROA has a mean score of 12.492113 while
the ROE is 1.096863. The standard deviation is 1.8259930 and 0.1115284 for both
ROA and ROE respectively. There are five independent variables that are used in
this study. The Bank Size shows a mean of 216728291.28 with a standard
deviation of 55569250.7 while the Operating Efficiency shows a mean of 0.104350
and a standard deviation of 0.0403218. Meanwhile, the mean for the other three
variables, Capital Adequacy, Deposits, and Loan Loss Provisions are 0.014088, 0.791725,
and 0.002938 respectively. The standard deviation follows with 0.0008425, 0.0380923,
and 0.0017517 for Capital Adequacy, Deposits, and Loan Loss Provisions.

 

5.    
Conclusions

WithIn
regards to the soundness of the economy, it can be observed from a healthy
financial sector which can be seen from the profitability of the local banks of
the country itself. The purpose of this research is to investigate the
relationship between internal factors and bank profitability that is aimed
specifically at local commercial banks located in Malaysia.

This research
focuses on local commercial banks,
and the research findings reveals
that there are no significant relationships
between bank profitability towards the independent variables which are Bank
Size, Capital Adequacy, Operating Efficiency, Deposit, and Loan Loss Provision.

The limitation of
this research would be the small sample size that have been observed from the
year 2009 – 2016. Perhaps in future research, in order to widen the sample
size, the sample size could be increased by comparing the performances of local commercial banks and
foreign commercial banks that
to investigate the factors that lead to banks
profitability.

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