The

soundness of a country’s economy has a close connection with its banking

system. If banks are not capable of providing funds or capital towards small potential

businesses, they are unable to spread their influence at a higher level which

potentially will help with economic growth. Thus, failure of the banking system

would also mean the failure of the economy to grow higher due to insufficient

of funds. The purpose of this paper is to

investigate the relationship between internal factors and bank profitability

that is aimed specifically at local commercial banks located in Malaysia within the period of 8 years, from 2009-2016. This research paper

involves eight local banks listed in the

Bursa Malaysia. There are five independent variables consistings

of internal factors,

and the dependent variables

are measured by using the

return on asset (ROA) and return on equity (ROE). Data are tested

by using the Spearman Rank correlation analysis, and the

result shows that

the variables are insignificant with dependent variables. The

limitation of this paper is time series of data used which

are not sufficient to find any significant relationship between

variables in this research. The result could probably be significant if the

study is conducted at

within

a longer period of time.

Keywords:

Bank Profitability, Commercial bank,

Internal Factors, Augmented-Dickey Fuller test, Bursa Malaysia.

1.

Introduction

The

banking industry plays a pivotal role in providing capitals whereby the

financial intermediaries would be channelling the funds

to companies or institutions that is

are

in dire need of funds to expand their businesses.

Presence of the banking sector has helped decrease the

unemployment rate as well. The banking sector is well known for giving

financial advices to their customers regarding funding,

and it also creates job opportunities towards

for

the Malaysian citizens itself. It is important for banks to be sustainable

in terms of their profitability performance as it acts as an indicator of

success of the management,

and it is also one of the attractive sights that investors would look for.

The

purpose of this paper is to investigate the relationship between internal

factors and bank profitability that is aimed specifically at local commercial

banks located in Malaysia in the period of 8 years,

from 2009-2016. This research paper involves eight local banks listed in Bursa

Malaysia.

This

paper highlights the

relationships

between five independent variables consistings of internal factors and dependent

variable,

which is the bank profitability which

that

are measured by using return on asset (ROA) and return on equity

(ROE). Data are then being tested by using Augmented Dickey-Fuller (ADF) for unit root test and Shapiro-Wilk to test the normality of

variables. To test correlation analysis between variables, Spearman Rank

Correlation was used to investigate and the relationship between two

quantitative and continuous variables.

2.

Review of

literature

As financial intermediaries, banks profitability play a significant

role in the economic activities and growth of most nations. The banking sector profitability contributes

in economies and makes economies to

endure negative and external financial shocks and contribute in

financial system stability (Athanasoglou et al., 2005). For banks profitability, ROA is a common measure to analyse and

evaluate the ability of banks to generate return from its sources of funds to

produce profit. ROE represents the effectiveness of bank management in handling

the shareholders’ funds to generate profits.

Capital adequacy shows the strength of banks and

sufficiency amount of banks’ equity to absorb any shocks that the banks may experience and reflects the

ability of the banks

to withstand losses or financial risks.

According to Hassan and Bashir (2003), capital adequacy indicates a negative

relationship with bank performance.

Bank size is one of

the important factors that influence bank profitability. Based on Dietrich and

Wanzenried (2011), there is

a positive and statistically significant relationship between bank

size and bank profitability because large banks have high degree of loans and

product diversifications

compared to small and medium banks.

Previous study by

Sufian and Habibullah (2009) found a negative relationship between operating

efficiency with ROA,

and it is not not

a significant correlation. Operating efficiency does not

contribute to bank profitability as much as other independent variables, but it

reflects the ability of bank management.

Banks rely

significantly on customer deposits to allocate credits to other customers. Menicucci

and Paolucci (2015),

shows that the deposit variable has a

positive and significant impact on bank profitability. Thus, banks will be able to provide more loan

opportunities to customers and generate more profits if they are able to gain

high deposits.

Loan loss provision is

an indicator to measure the effect of a

bank’s asset quality on profitability. The bank will experience

high default risk if bank’s asset quality is bad as it is directly reducinged

the interest income and loan provision will be higher. Therefore, it can affect

the banks’ profitability. Menicucci

and Paolucci (2015) found that there are

is

a significant but negative relationship between Loan Loss

Provision and bank profitability.

The hypotheses are as

below:

i.

Capital Adequacy

H0: There is no significant relationship between

capital adequacy and commercial bank profitability.

H1: There is a significant relationship

between capital adequacy and commercial bank profitability.

ii.

Bank Size

H0: There is no significant relationship

between bank size and commercial bank profitability.

H1: There is a significant relationship

between bank size and commercial bank profitability.

iii.

Operating Efficiency

H0: There is no significant relationship

between operating efficiency and commercial bank profitability.

H1: There is a significant relationship

between operating efficiency and commercial bank profitability.

iv.

Deposit

H0: There is no significant relationship

between deposit and commercial bank profitability.

H1: There is a significant relationship

between deposit and commercial bank profitability.

v.

Loan Loss Provision

H0: There is no significant relationship

between loan loss provision and commercial bank profitability.

H1: There is a significant relationship

between loan loss provision and

commercial bank profitability.

3.

Research Design

and Methodology

This research paper

involves eight local commercial banks listed in Bursa Malaysia. The data used

are secondary data that were collected from annual reports

of each banks over the period of 8 years from 2009-2016.

As this paper are

studyingstudies

group of banks, the best sampling types

is purposive sampling because it is a

non-probability sampling method. Local commercial banks are being

selected as sampling population because this study only focuses on local commercial banks that are listed

in Bursa Malaysia.

Bank size, capital

adequacy, operating efficiency, deposits and loan loss provision are independent

variables in this research paper while bank profitability

acts as the

dependent variable that are measured by using ROA and ROE.

Shapiro Wilk test is

used because the sample size is considered small and will be able to identify whether

the data are normally distributed or not. The

Ttest conducted for reliability test is

the Augmented Dickey-Fuller (ADF) test, where it is the simplest approach to

test for a unit root. ADF is utilized for a larger and more complicated

set of time series models. Spearman’s Rank correlation coefficient is used for

correlation analysis to identify and test the strength of a relationship between

two sets of data in this research paper.

4.

Findings

· Shapiro-Wilk

test

Variables

P-Value

ROA

ROE

Bank

Size

Operating

Efficiency

Capital

Adequacy

Deposit

Loan

Loss Provision

0.439

0.122

0.677

0.811

0.000

0.136

0.024

Table

1: Shapiro-Wilk test

Table

1 represents the normality test that have been conducted by using the

Shapiro-Wilk test in SPSS. This test is conducted in order to see whether or

not the data are normally distributed. Data are considered normally distributed

if the p-value is more than 0.05. Based on the table, it shows that the data

are normally distributed for all the other variables besides Capital Adequacy

and Loan loss provision where the p-value shows a result that is less than

0.05.

·

Augmented

Dickey-Fuller (ADF) Test

Level and Intercept

Probability

Bank

Size

0.2828

Capital Adequacy

0.1244

Operating

Efficiency

0.0000

Deposits

0.2249

Loan

Loss Provision

0.2249

Table 2: Augmented

Dickey-Fuller (ADF) Test

The

Augmented-Dickey Fuller test that can be observed in table 2 is conducted in

order to see whether or not the data used are stationary. If the result shows a

p value higher than 0.05, it can be concluded that the data are stationary.

Based on the findings, it can be observed that all variables are stationary

except for one which is Operating Efficiency.

·

Spearman Rank Correlation

Variables

N

Correlation Coefficient

Sig. (2-tailed)

ROA

Bank Size

Operating Efficiency

Capital Adequacy

Deposit

Loan Loss Provision

8

8

8

8

8

-0.571

0.024

-0.515

0.381

-0.310

0.139

0.955

0.192

0.352

0.456

ROE

Bank Size

Operating Efficiency

Capital Adequacy

Deposit

Loan Loss Provision

8

8

8

8

8

-0.143

0.167

0.072

-0.143

-0.563

0.736

0.693

0.866

0.736

0.146

Table

3: Spearman Correlation

The

table above denotes the Spearman Correlation result on the independent

variables which are tested on both the dependent variables ROA and ROE. The

significant 2 tailed result shows whether or not the variables are significant

or not in comparison with the dependent variables. Based on the significant

value between dependent variables and independent variables, it shows that our

variables are considered insignificant,

and we have failed to reject null hypothesis as mentioned previously in our review of literature, where we say that there is no

significant relationship between independent variables and ROA.

·

Descriptive Statistics

Variables

N

Minimum

Maximum

Mean

Std. Deviation

Dependent Variables

ROA

ROE

8

8

9.4322

0.9466

14.5233

1.2176

12.492113

1.096863

1.8259930

0.1115284

Independent

Variables

Bank Size

Operating

Efficiency

Capital Adequacy

Deposit

Loan Loss

Provision

8

8

8

8

8

139372354.13

0.0838

0.0127

0.7120

0.0014

288400839.63

0.2028

0.0153

0.8295

0.0067

216728291.28

0.104350

0.014088

0.791725

0.002938

55569250.7

0.0403218

0.0008425

0.0380923

0.0017517

Table

4: Descriptive Statistics

Table 4 represents

the result that is obtained from running a descriptive statistic on both the

dependent and independent variables. The N denotes the sample size of our

research, and there is a total of 8 sets of data collected from 2009 –

2016. The bank profitability is measured by ROA and ROE and based on the mean

value of both variables, it shows that ROA has a mean score of 12.492113 while

the ROE is 1.096863. The standard deviation is 1.8259930 and 0.1115284 for both

ROA and ROE respectively. There are five independent variables that are used in

this study. The Bank Size shows a mean of 216728291.28 with a standard

deviation of 55569250.7 while the Operating Efficiency shows a mean of 0.104350

and a standard deviation of 0.0403218. Meanwhile, the mean for the other three

variables, Capital Adequacy, Deposits, and Loan Loss Provisions are 0.014088, 0.791725,

and 0.002938 respectively. The standard deviation follows with 0.0008425, 0.0380923,

and 0.0017517 for Capital Adequacy, Deposits, and Loan Loss Provisions.

5.

Conclusions

WithIn

regards to the soundness of the economy, it can be observed from a healthy

financial sector which can be seen from the profitability of the local banks of

the country itself. The purpose of this research is to investigate the

relationship between internal factors and bank profitability that is aimed

specifically at local commercial banks located in Malaysia.

This research

focuses on local commercial banks,

and the research findings reveals

that there are no significant relationships

between bank profitability towards the independent variables which are Bank

Size, Capital Adequacy, Operating Efficiency, Deposit, and Loan Loss Provision.

The limitation of

this research would be the small sample size that have been observed from the

year 2009 – 2016. Perhaps in future research, in order to widen the sample

size, the sample size could be increased by comparing the performances of local commercial banks and

foreign commercial banks that

to investigate the factors that lead to banks

profitability.