Micro and macroeconomic determinants of profitability of conventional banks and stock performance using Tobin’s Q ratio: Evidence from the banking sector of Pakistan

Abstract

The financial sector is the key player to enhance sustainable economic growth. Commercial banks play an important role to improve the performance of the financial sector of the economy and their profitability is closely connected to the soundness of the entire economy. The purpose of this study is to determine the internal determinants (bank-specific) and external determinants (macro-economic) of profitability. In this regard, the study adopted a quantitative research design by using the panel data of 17 commercial banks of Pakistan over the period of 2014-2018. Internal factors analyzed in this study were Liquidity, Size, and Capital Adequacy. While external factors were Gross Domestic Product (GDP) and Inflation. The data was analyzed by using simple OLS regression and Tobin’s Q ratio. The analysis showed that GDP has a significant impact on profitability. However, inflation has no impact on profitability. Tobin’s Q ratio of most of the banks is increasing which depicted their equilibrium position. Based on the findings, the study recommended some policies that will encourage banks to reduce credit risk and minimize their liquidity holdings. Moreover, the Government should take the proper initiatives to enhance the confidence of investors towards the stock market.