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Domestic and Foreign Banks’ Profitability:Differences and Their Determinants

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Author Info

  • Muhammad AZAM

    (Department of Business Administration, Iqra University, Pakistan)

  • Sana SIDDIQUI

    (Finance & Planning Division, First Women Bank Ltd. Head Office, Karachi, Pakistan.)

Abstract

The purpose of this study to analyze and compare the profitability of domestic (Public & Private) and foreign banks operating in the Pakistan Banking market between 2004 and 2010 on quarterly basis. Total 36 Commercial Banks of Pakistani Industry have represented our sample. To control for the effect of bank ownership on performance, we split the sample into three categories: (1) domestic banks with Government Control, (2) domestic banks with Private control, and (3) foreign banks. This study also finds that foreign banks are more profitable than all domestic banks regardless of their ownership structure by applying regression analysis. This may suggest that it is better for a multinational bank to establish a subsidiary/branch rather than acquiring an “existing player” in the host country. We also found that domestic and foreign banks have different profitability determinants, i.e. factors that are important in shaping domestic banks’ profitability are not necessary important for the foreign banks and vice versa. Empirical results show that foreign banks are less affected by the macroeconomic factors of the host country than domestic banks and they have a higher profitability margin in Pakistan.

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Bibliographic Info

Article provided by Econjournals in its journal International Journal of Economics and Financial Issues.

Volume (Year): 2 (2012)
Issue (Month): 1 ()
Pages: 33-40

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Handle: RePEc:eco:journ1:2012-01-5

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Related research

Keywords: Domestic and Foreign Banks; Ownership Structure; Banks’ Profitability;

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References

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  1. Grosse, Robert & Goldberg, Lawrence G., 1991. "Foreign bank activity in the United States: An analysis by country of origin," Journal of Banking & Finance, Elsevier, Elsevier, vol. 15(6), pages 1093-1112, December.
  2. Joe Peek & Eric S. Rosengren & Faith Kasirye, 1998. "The poor performance of foreign bank subsidiaries: were the problems acquired or created?," Working Papers, Federal Reserve Bank of Boston 98-3, Federal Reserve Bank of Boston.
  3. Hultman, Charles W. & Randolph McGee, L., 1989. "Factors affecting the foreign banking presence in the U.S," Journal of Banking & Finance, Elsevier, Elsevier, vol. 13(3), pages 383-396, July.
  4. Goddard, John & Molyneux, Phil & Wilson, John O S, 2004. "Dynamics of Growth and Profitability in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 36(6), pages 1069-90, December.
  5. Janek Uiboupin, 2004. "Effects Of Foreign Banks Entry On Bank Performance In The Cee Countries," University of Tartu - Faculty of Economics and Business Administration Working Paper Series, Faculty of Economics and Business Administration, University of Tartu (Estonia) 33, Faculty of Economics and Business Administration, University of Tartu (Estonia).
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Cited by:
  1. Muhamad Muda & Amir Shaharuddin & Abdelhakim Embaya, 2013. "Comparative Analysis of Profitability Determinants of Domestic and Foreign Islamic Banks in Malaysia," International Journal of Economics and Financial Issues, Econjournals, Econjournals, vol. 3(3), pages 559-569.
  2. Vincent Okoth Ongore & Gemechu Berhanu Kusa, 2013. "Determinants of Financial Performance of Commercial Banks in Kenya," International Journal of Economics and Financial Issues, Econjournals, Econjournals, vol. 3(1), pages 237-252.

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