DETERMINANTS OF COMMERCIAL BANK PERFORMANCE IN PAKISTAN: THE ROLE OF CREDIT RISK, LIQUIDITY, AND CAPITAL ADEQUACY

Abstract

This study examines the determinants of commercial bank performance in Pakistan, with particular emphasis on credit risk, liquidity risk, and capital adequacy. The analysis considers bank performance from three complementary dimensions—return on assets, return on equity, and net interest margin—to capture differences in the profitability implications of bank-specific risks. Using panel data for fifteen Pakistan Stock Exchange-listed commercial banks covering 2014–2023, the study employs fixed-effects and random-effects panel regression models selected through the Hausman specification test. System Generalised Method of Moments is additionally employed as a robustness approach to account for dynamic relationships and potential endogeneity. The empirical findings demonstrate that credit risk is the most consistent determinant of bank performance. The non-performing loan ratio has a significant negative association with return on assets and net interest margin, indicating that deterioration in loan quality is associated with weaker asset-based profitability and interest-based earnings. In contrast, the loan-to-deposit ratio and cash-to-assets ratio do not exhibit statistically significant relationships with the principal performance measures in the preferred panel estimations, indicating that liquidity positions did not generate substantial differences in profitability across the sampled banks during the study period. Capital adequacy displays a differentiated relationship with performance, exhibiting a positive and significant association with net interest margin but no statistically significant relationship with return on assets, while its negative association with return on equity is not statistically significant. The System Generalised Method of Moments results provide additional evidence that the effects of credit risk and capital adequacy vary across alternative measures of bank performance. The findings highlight the importance of strengthening credit risk management, maintaining adequate regulatory capital, and aligning risk-management practices with profitability objectives. The study provides relevant implications for the State Bank of Pakistan, commercial bank management, auditors, and financial analysts concerning credit quality, capital planning, and sustainable banking performance.