DETERMINENTS OF PROFITABILITY OF COMMERCIAL BANKS IN SRI LANKA

The performance of the Sri Lankan commercial banks, measured by the Return on Assets (ROA) and the Return on Equity (ROE) ratios, appeared to be stronger in the recent past compared to the other SARRC counties. This paper examined the impact of bank specific and macroeconomic determinants on the profitability of commercial banks in Sri Lanka. The study uses quarterly data relating to the bank specific and macroeconomic indicators during the period 2001-2011by carrying out a multiple panel regression. According to the empirical results, it was observed that the large banks are recorded more profits due to economic of scale than the banks which are well sound with a higher regulatory capital ratio. Further, the results from the panel regression suggest that the liquidity and operating cost efficiency banks were negatively related to the commercial bank profitability in Sri Lankan. In addition, interest rate found to be having a significant impact on the bank profitability with a negative relationship between the Return on Assets of a bank implying that lower interest rate scenario would accounted a higher level of profitability with the expansion of banking activities