Impacts of risk and competition on the profitability of banks: Empirical evidence from Pakistan

Abstract

The purpose of this paper is to investigate the impact of risk and competition on the profitability of the Pakistani banking industry. Data are retrieved from the annual statements of banks, the Ministry of finance Pakistan and the World Bank covering the period of (2007–2017). Two steps Generalized Method of Moments (GMM) with the collapse command is used as an estimation technique to overcome endogeneity, unobserved heterogeneity and autocorrelation problems. The results of the study showed that the liquidity risk has positive while credit risk, insolvency risk and competition hurt negatively the profitability of Pakistani banks. The results of the study also revealed that capitalization, size, taxation and GDP growth rate positively affect the Banks’ profits while banking sector development and infrastructure negatively affect banking profitability in Pakistan. The operational cost management positively affects net interest margins but negatively affects ROA and PBT in the Pakistani banking industry.