The relationship between banks’ investing activities and profitability

Abstract

The objective of this study is to examine the relationship between the investing activities of banks and overall bank profitability. This is undertaken across 4 profitability-driven variables: (i) Profit After Tax; (ii) Return on Equity; (iii) Return on Assets; and (iv) Efficiency Ratio (Cost to Income Ratio). The research ascertains the effect on overall profit carried by investing variables which include investments in Property, Plant and Equipment, Intangible Assets and Cash flow from Investing Activities and Investments in Associates. A panel regression model was employed to analyse the relationship between profitability-driven variables and investing activities, incorporating external and internal control variables. . The study analysed a sample of banks from various developing country regions over an eight-to-ten-year period. The study found that the relationship between investing activities and overall profitability was not statistically significant. Furthermore, the study found that Gross Domestic Product (GDP), growth, inflation, and interest rates had a significant impact on profitability, supporting previous literature.