Banking Sector Profitability, Before, During and After Global Financial Crisis: Evidence from a Developing Economy

Abstract

This study grants empirical support to the fact that profitability of the Pakistani banking sector was reduced during 2008-2009 and among other factors this reduction was attributed to the global financial crisis and resulting increased investments portfolio in total assets. We have used panel data of all Pakistani scheduled banks during 2005-2012. We proved theoretically and empirically that fixed effects model is appropriate for this study. Second stage analysis confirms the above results and shows that the profitability of Pakistani banking sector was higher in pre and post crisis years than, in financial crisis period. Profitability was relatively lower in the after crisis years then in before crisis years because of the residual effects of the global financial crisis. In third stage analysis we found that private and foreign banks were more affected by financial crisis than public sector, specialized and Islamic banks. Our results are robust to alternate measures of profitability. In context of developing countries this study will help bank managers and the regulators to stay better prepared to face any financial crisis in future.