Short Run and Long Run Determinants of Financial Performance: Evidence from a Panel of 29 Listed Commercial Banks in Bangladesh

Abstract

As the most important and indispensable sector of Bangladesh, banking sector has to perform efficiently by developing sustainable profit base to operate better in a highly competitive environment. This study attempts to evaluate the performance of a panel of 29 listed commercial banks of Bangladesh. The long run and short run analyses have been conducted using the data set from 2005-2015 for each bank to find out the impact of key factors namely investment in government securities and shares, loan and advances, human resource, and number of branches on financial performance of banks. From the estimated results of panel VEC model, it has been found that short run bidirectional causality exists between net profit and number of branches and short run unidirectional causality exists from investment to loan and advances, human resource to loan and advances, net profit to human resource, and number of branches to human resource. The test results suggest the existence of long run relationship among the variables in equation (2). In the long run, more loan and advances and more investment in government securities and shares unlike more branches and employees will give more boost to the performance of the banking sector even though the impacts of investment in government securities and shares, human resource, and number of branches on performance are insignificant. It has been found that loan and advances have significant positive impact on performance both in the short run and in the long run.