Saint mary’s university

Bank profitability: this is measured by the return on assets (ROA) and is calculated as the net income divided by total assets. The higher ROA, the higher the profitability will be. Bank profitability can be seen as indicator of the (in) efficiency of the banking system (Naceur and Orman, 2008).

Return on Equity (ROE)

ROE is also another major ratio that indicates the profitability of a bank. It is a ratio of Income to its total asset (Khrawish, 2011). It measures the ability of the bank management to generate income by utilizing company assets at their disposal. In other words, it shows how efficiently the resources of the company are used to generate the income. It further indicates the efficiency of the management of a company in generating net income from all the resources of the institution (Khrawish, 2011). Wen (2010), state that a higher ROE shows that the company is more efficient in using its resources. Independent variables

Bank specific variables

As explained above, the internal factors are bank specific variables which influence the profitability of specific bank. These factors are within the scope of the bank to manipulate them and that they differ from bank to bank. These include capital size, size of deposit liabilities, size and composition of credit portfolio, interest rate policy, labour productivity, and state of information technology, risk level, management quality, bank size, ownership and the like.


Size (LTA)
As with many variables, the impact of size on bank performance is hotly debated among researchers. We use several proxies for bank-specific characteristics as follows: Bank size. This variable is set to be equal to the logarithm of total bank assets in millions of Birr. Size might be an important determinant of bank performance if there are increasing returns to scale in banking. However size could have a negative impact when banks become extremely large owing to bureaucratic and other reasons.