BANK-SPECIFIC DETERMINANTS OF PROFITABILITY: EVIDENCE FROM SRI LANKAN DOMESTIC COMMERCIAL BANKS

Abstract

This study aims to examine the bank-specific determinants that influence the profitability of domestic commercial banks in Sri Lanka, offering insights into which internal factors most significantly affect their financial performance. A balanced panel dataset comprising 70 observations from 10 domestic commercial banks over the period 2018-2024 was analysed using fixed effects regression. Return on Assets (ROA) was employed as the measure of profitability. The study evaluated the impact of key bank-specific variables such as bank size, capitalisation, asset structure, financial structure, asset quality, operational efficiency, revenue diversification, and liquidity. The findings revealed that capitalisation, asset quality, operational efficiency, and revenue diversification positively influence bank profitability. In contrast, bank size and liquidity have a negative impact. No statistically significant relationship was found between profitability and the variables of asset structure and financial structure. This study contributes to the limited body of empirical research focusing on the Sri Lankan banking sector by using recent data and a robust econometric approach to identify internal drivers of profitability. The findings offer practical implications for bank management and policymakers in optimising operational strategies to improve profitability.