History and background:

Rapid changes in financial service industries make it important to determine the profitability of financial institution. Banks plays an important role in financial market of a country and for this it is very important to evaluate that bank operates in efficient manner and also what are the factors which affect the profitability of banks.

A bank generates profit from the differential between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities. Historically, profitability from lending activities has been dependent on the needs and strengths of customers. In recent history, investors have demanded a more stable revenue stream and banks have therefore placed more emphasis on transaction fees, primarily loan fees but also including service charges on an array of deposit activities and other services (international banking, foreign exchange, insurance, investments, wire transfers, etc.). Lending activities, however, still provide the bulk of a commercial bank's income. In the past 10 years banks have taken many measures to ensure that they remain profitable while responding to increasingly changing market conditions.

Pakistan's financial sector consists of Scheduled Commercial Banks. Scheduled Banks are regulated by the State Bank of Pakistan's Regulations, through different wings, and are subject to different SBP regulatory requirements such as capital and liquidity reserve requirements.

The banks and the financial sector analysts are projecting “higher profitability” in 2008. This projection is because State Bank of Pakistan has raised its discount rate in which the banks can invest to earn a good return. The rising lending rates will also contribute considerably to ensuring an increased profitability.

Factors that affect the profitability of Commercial Banks are both Endogenous and Exogenous. Endogenous factors are within the Control of Management such as quality of management and its policies, efficiency of management in generating revenues and controlling costs, bank capitalization and location.

Exogenous factors are outside management control, especially macro economic indices such as Interest rates, Exchange rates, Inflation, and other regulatory and market constraints.

The banking sector has been a source of stability for this country, because as you have seen in many countries, the banking sector has weakened and outright nationalization has taken place in some countries. However, the reforms that have taken place in Pakistan banking sector over the past 8 to 10 years have given stability and strength to this sector. There are some ratios by which we can measure the strength of a banking sector, and the most important amongst those ratios is Capital Adequacy; our country's average capital adequacy is 8 percent some banks have less or some banks have more.

Macro stability takes some time to trickle down, it's not something that happens over a month or two, because macro stability causes improvement in the confidence and this improvement causes investment decisions to become positive.

Pakistan is really a very important country today. Pakistan is not facing those problems that some of the other countries of the world are facing now.

As our banking sector is stable. The country was not very export-dependent either, which is why the global decrease in trade has not had a big impact on Pakistan.

Pakistan have the potential to achieve self-sufficiency over a period of time and create a major surplus for agriculture. Many countries of the world do not possess this potential.

Banks in Pakistan over the last eight to 10 years have been more selective in the client base, apart from the consumer side, because the consumer loans are only 14 percent of the total loans unlike a lot of other countries, where it is 70 to 90 percent. So yes we have faced some problems in the consumer loans, especially those banks that had become too aggressive in this sector, but the rest whether it is corporate or agriculture have remained stable.

Growth of Banking Sector:

Profitability of the banking sector has been breaking its own record year after year during this ongoing decade. The commercial banking sector in Pakistan is regulated by the state bank of Pakistan. SBP introduced several structural changes. Beside higher standards of corporate governance at management and board level, the banks are adhering to SBP prudential regulations, consistent with BIS standards.

  • 36 Commercial Banks (26 local banks and 10 foreign banks) of which 22 were listed on stock exchange.
  • Many merger/acquisition took place.
  • Asset of banking sector registered a increase to reach at Rs. 3.7 trillion (2005) with annual growth rate of 15.2% that outpaced economic growth (2005-06)
  • 85 % of banking sector is in private hands.

Earning and Profitability

Strong earnings and profitability profile of banks reflects the ability to support present and future operations. More specifically, this determines the capacity to absorb losses, finance its expansion programs, pay dividend to its shareholders and build up adequate level of capital. Being front line of defense against erosion of capital base from losses, the need for high earnings and profitability can hardly be overemphasized. Although different indicators are used to serve the purpose, the best and most widely used indicator is return on assets (ROA). Net interest margin is also used.

Pressure on earnings was most visible in case of foreign banks in 1998. The stress on earnings and profitability was inevitable despite the steps taken by the SBP to improve liquidity. Not only did liquid assets to total assets ratio declined sharply, earning assets to total assets also fell. T-Bill portfolio of banks declined considerably, as they were less remunerative. Foreign currency deposits became less attractive due to the rise in forward cover charged by the SBP. Banks reduced return on deposits to maintain their spread. However, they were not able to contain the decline in ROA due to declining stock and remuneration of their earning assets.


Research on the determinants of bank profitability has focused on the returns of bank assets and equity, and net interest rate margins. It has traditionally explored the impact on bank performance of bank-specific factors, such as risk, market power, and regulatory costs.

Many researchers have focused on the impact of macroeconomic factors on bank performance and profitability.

According to Mark J Flennery,(2000) tests the hypothesis that market rate fluctuations adversely affect commercial bank profits. The findings responses of revenue and cost of fund to market rate changes then determine whether regulators should take pains to stabilize market conditions. Market rate levels emerge as a prominent influence on intermediary costs and revenues, but the effects of market rate changes effectively cancel one another for most large banks. The research finds significant sensitivity to interest rate and it's unstable over the time.

By Brick John R the estimates of market risk, interest rate risk, and foreign exchange risk continue to be unstable. The estimates of risk differ by bank type and period. As interest rate risk declines, foreign exchange increases; in result, suggests that the market continues to reflect changes in the economic and regulatory situation of commercial banks in the pricing of bank stocks. The adverse impact of Interest Rate fluctuations on the profitability of Commercial Banks can be hedge with sound application of modern interest rate risk management theories and tools.

Using accounting decompositions, as well as panel regressions, Al-Haschimi (2007) studies the determinants of bank net interest rate margins in 10 Sub Saharan African countries. He finds that credit risk and operating inefficiencies explain most of the variation in net interest margins across the region. Macroeconomic risk has only limited effects on net interest margins in the study.

Using bank level data for 80 countries in the 1988-95 periods, Demirgüç-Kunt and Huizinga (1998) analyze how bank characteristics and the overall banking environment affect both interest rate margins and bank returns. In considering both measures, this study provides a decomposition of the income effects of a number of determinants that affect depositor and borrower behavior, as opposed to that of shareholders. Results suggest that macroeconomic and regulatory conditions have a pronounced impact on margins and profitability. Lower market concentration ratios lead to lower margins or profits, while the effect of foreign ownership varies between industrialized and developing countries. In particular, foreign banks have higher margins and profits compared to domestic banks in developing countries, while the opposite holds in developed countries.

Gelos (2006) studies the determinants of bank interest margins in Latin America using bank and country level data. He finds that spreads are large because of relatively high interest rates because of macroeconomic risk, including from inflation, less efficient banks, and higher reserve requirements.

In a study of United States banks for the period 1989-93, Angbazo (1997) finds that net interest margins reflect primarily credit. In addition, there is evidence that net interest margins are positively related to core capital, non-interest bearing reserves, and management quality, but negatively related to liquidity risk.

Saunders and Schumacher (2000) apply the model of Ho and Saunders to analyze the determinants of interest margins in six countries of the European Union and the US during the period 1988-95. They find that macroeconomic volatility and regulations have a significant impact on bank interest rate margins. Their results also suggest an important trade-off between ensuring bank solvency, as defined by high capital to asset ratios, and lowering the cost of financial services to consumers, as measured by low interest rate margins.

Athanasoglou etal.(2006) study the profitability behavior of the south eastern European banking industry over the period 1998-2002. The empirical results suggest that the enhancement of bank profitability in those countries requires new standards in risk management and operating efficiency, which, according to the evidence presented in the paper, crucially affect profits. A key result is that the effect of market concentration is positive, while the picture regarding macroeconomic variables is mixed.

Athanasoglou, et al. (2006b) apply a dynamic panel data model to study the performance of Greek banks over the period 1985-2001, and find some profit persistence, a result that signals that the market structure is not perfectly competitive. The results also show that the profitability of Greek banks shaped by bank-specific factors and macroeconomic control variables, which are not under the direct control of bank management. Industry structure does not seem to significantly affect profitability.

More recently, a number of studies have emphasized the relation between macroeconomic variables and bank risk. Saunders and Allen (2004) survey on pro-cyclicality in operational, credit, and market risk exposures. Such cyclical effects mainly results from systematic risk originate from common macroeconomic influences or from interdependencies across firms as financial markets and institutions consolidate internationally. It ultimately exacerbates business cycle fluctuations due to adverse effects on bank lending capacity.

Using equity returns data over the period 1973-2003, Allen and Bali (2004) examine the disastrous risk of financial institutions. Results suggest evidence of pro-cyclicality in both tragic and operational risk measurements, implying that macroeconomic, systematic, and environmental factors play a considerable role in determining the risk and returns of financial institutions.

Pi and Timme (1993) investigated the relationship of concentration of decision management and control in one person on the cost efficiency level of the bank and return on assets. On the basis of their study they found that the banks whose Chairman and CEO were same person had significantly less efficiency than those banks that possessed not similar governance structure and show that performance was affected by top management structure.

Isik and Hassan (2002b) estimated cost, allocate, technical, pure technical and scale efficiency of Turkish banking industry from 1988 to 1996. This study consider capital, loan able funds as bank short-term loans, long-term loans, risk adjustment off balance sheet items and other earning assets as output of bank.

Thistle et al (1989) have found that (a) balance sheet composition depends on both the level and change in interest rates , (b) banks response to changes in interest rates in different, depending on whether rates are rising or falling.

Samy Ben Naceur (2005) investigates the impact of banks' characteristics, financial structure and macroeconomic indicators on banks' net interest margins and profitability in the Tunisian banking industry for the 1980-2000 periods. The study finds individual bank characteristics explain a substantial part of the within-country variation in bank interest margins and profitability. High interest margin and profitability tend to be associated with banks that hold a relatively high amount of capital, and with large overheads. The paper finds that the inflation has a positive impact on banks' net interest margin; while economic growth has no incidence. Another factor is financial structure and its impact on banks' interest margin and profitability, find that concentration is less beneficial to the Tunisian commercial banks than competition. Stock market development has a positive effect on bank profitability. This reflects the complementarities between bank and stock market growth. The study found that the disintermediation of the Tunisian financial system is favorable to the banking sector profitability.

C. K. Staikouras (2003) researches on banking of south European region, the determinants of bank interest margins adopt two alternative modeling frameworks: a dealership approach and a micro-model of the banking-firm approach, study found bank as a dynamic dealer, setting interest rates on loans and deposits to balance the asymmetric arrival of loan demands and deposit supplies. The bank interest margins are shown to be fees charged by banks for the provision of liquidity. The alternative approach is the micro-model of the banking firm, this study found the banking firm in a static way, setting where demands and supplies of deposits and loans simultaneously clear both markets.

Choi, Elyasiani, and Kopecky (1992) estimate a multi-index model that measures market risk, interest sensitivity, and exchange rate risk of commercial bank stock returns. Dummy models are used to divide the period of pre- and post-October 1979 and to separate the results attributable to money center banks from other banks. A significant exchange rate effect occurs for money center banks after October 1979, while interest sensitivity is stronger before October 1979. The exchange rate effect is attributing to increased unhedged foreign loan exposure of money center banks.

In the literature, bank profitability, typically measured by the return on assets (ROA) and/or the return on equity, is usually expressed as a function of internal and external determinants. Internal determinants are factors that are mainly influenced by a bank's management decisions and policy objectives. Such profitability determinants are the level of liquidity, provisioning policy, capital adequacy, expenses management, and bank size. On the other hand, the external determinants, both industry and macroeconomic related, are variables that reflect the economic and legal environments where the financial institution operates.

By Bourke (1989) determines; Liquidity risk, arising from the possible inability of a bank to accommodate. Decreases in liabilities or to fund increases on the assets' side of the balance sheet, is considered an important determinant of bank profitability. The loans market, especially credit to households and firms, is risky and has a greater expected return than other bank assets, such as government securities. That would expect a positive relationship between liquidity and profitability.

Duca andMcLaughlin (1990) studied that variations in bank profitability are largely attributable to variations in credit risk, since increased exposure to credit risk is normally associated with decreased firm profitability.

Miller and Noulas (1997) suggest that the more financial institutions are exposed to high risk loans, the higher the accumulation of unpaid loans and the lower the profitability. Even though leverage (capitalization) has been demonstrated to be important in explaining the performance of financial institutions, its impact on bank profitability is ambiguous. As lower capital ratios suggest a relatively risky position, one might expect a negative coefficient on this variable.

Molyneux and Thornton (1992) observed a positive relationship, suggesting that high profits earned by firms be appropriated in the form of higher payroll expenditures paid to more productive human capital. It should be appealing to identify the dominant effect, in a developing banking environment like Malaysia.

Bank size is generally used to capture potential economies or diseconomies of scale in the banking sector. This variable controls for cost differences and product and risk diversification according to the size of the financial institution. The first factor could lead to a positive relationship between size and bank profitability, if there are significant economies of scale (Akhavein et al., 1997; Bourke, 1989; Molyneux and Thornton, 1992; Bikker and Hu, 2002; Goddard et al., 2004), while the second to a negative one, if increased diversification leads to lower credit risk and thus lower returns.

Other researchers, however, discuss that marginal cost savings can be achieved by increasing the size of the banking firm, especially as markets develop (Berger et al., 1987; Boyd and Runkle, 1993; Miller and Noulas, 1997; Athanasoglou et al., 2008). Eichengreen and Gibson (2001) suggest that the effect of a growing bank's size on profitability may be positive up to a certain limit. Beyond this point, the effect of size could be negative due to bureaucratic and other reasons.

Bank profitability is sensitive to macroeconomic conditions despite the trend in the industry towards greater geographic diversification and larger use of financial engineering techniques to manage risk associated with business cycle forecasting. Generally, higher economic growth encourages bank to lend more and permits them to charge higher margins, as well as improving the quality of their assets.

The Determinants of Bank Performance:

Studies on the determinants of bank's interest margin and profitability have focused

Whether on a particular country (Berger, 1995; Guru et al., 2002; Barajas et al., 2001; Ben Naceur and Goaied, 2001) and on a panel of countries (Abreu and Mendes, 2002; Demerguç- Kunt and Huizingha, 1999).

Single country studies

As most of the studies on bank performance are conducted in the US and emerging markets, we will divide our presentation in two parts: US evidence and emerging market studies.

Neeley and Wheelock (1997) explore the profitability of a sample of insured commercial banks in the US for the 1980-1995 periods. The researcher finds that bank performance is positively related to the annual percentage changes in the state's per capita income.

The main Studies on the determinants of bank's performance in emerging countries were carried out in Colombia (Barajas et al.,1999), Brasil (Afanasieff et al., 2002), Malaysia (Guruet al., 2002) and Tunisia (Ben Naceur and Goaied, 2001). Barajas et al. (1999) document significant effects of financial liberalization on bank's interest margins for the Colombian case. Although the overall spread has not declined after financial reform, the relevance of the different factors behind the bank spreads were affected by such measures. Another change linked with the liberalization process was the increase of the coefficient of loan quality after the liberalization.

Afanasieff et al. (2002) make use of panel data techniques to uncover the main determinants of the bank interest spreads in Brazil.

Ben Naceur and Goaied (2001) investigate the determinants of the Tunisian bank's performances during the period 1980-1995. The research indicates that the best performing banks are those who have struggled to improve labour and capital productivity, those who have maintained a high level of deposit accounts relative to their assets and finally, those who have been able to reinforce their equity.

Guru et al. (2002) attempt to identify the determinants of successful deposit banks in order to provide practical guides for improved profitability performance of these institutions. The study is based on a sample of 17 Malaysian commercial banks over the 1986-1995 period.

The profitability determinants were divided in two main categories, internal determinants (liquidity, capital adequacy and expenses management) and the external determinants (ownership, firm size and external economic conditions). The findings of this study revealed that efficient expenses management was one of the most significant in explaining high bank profitability. Among the macro indicators, high interest ratio was associated with low bank profitability and inflation was found to have a positive effect on bank performance.

Panel country studies

The panel country studies were focused on European companies (Molyneux and Thornton, 1992; Abreu and Mendes, 2002), MENA countries (Bashir, 2000), and developed and developing countries (Demerguç-Kunt and Huizingha 1999, 2001).

Molyneux and Thornton (1992) were the first to explore thoroughly the determinants of bank profitability on a set of countries. They use a sample of 18 European countries during the 1986-1989 period. They find a significant positive association between the return on equity and the level of interest rates in each country, bank concentration, and government ownership.

Abreu and Mendes (2002) investigate the determinants of bank's interest margins and profitability for some European countries in the last decade. They report that well capitalizedbanks face lower expected bankruptcy costs and this advantage “translate” into better profitability. Although with a negative sign in all regressions, the unemployment rate is relevant in explaining bank profitability. The inflation rate is also relevant.

Bashir (2000) examines the determinants of Islamic bank's performance across eight Middle Eastern countries for 1993-1998 period. A number of internal and external factor were used to predict profitability and efficiencies. Controlling for macroeconomic environment, financial market situation and taxation, the results show that higher leverage and large loans to asset ratios, lead to higher profitability. The paper also reports that foreign-owned banks are more profitable that the domestic one. There is also evidence that taxation impacts negatively bank profitability. Finally, macroeconomic setting and stock market development have a positive impact on profitability.

In a comprehensive study, Demerguç-Kunt and Huizingha (1999) examine the determinants of bank interest margins and profitability using a bank level data for 80 countries in the 1988- 1995 period. The set of variables includes several factors accounting for bank characteristics, macroeconomic conditions, taxation, regulations, financial structure, and legal indicators.

The research reports that a larger ratio of bank assets to GDP and a lower market concentration ratio lead to lower margins and profits. Foreign banks have higher margins and profits than domestic banks on developing countries, while the opposite prevail in developed countries.

On an another linked paper, Demerguç-Kunt and Huizingha (2001) present evidence on the impact of financial development and structure on bank profitability using bank level data for a large number of developed and developing countries over the 1990-1997 period. The paper finds that financial development has a very important impact on bank performance. The study reports that higher bank development is related to lower bank performance. Stock market development on the other hand, leads to increased profits and margins for banks especially at lower levels of financial development, indicating complementarities between bank and stock market.


The interest rate is assummed to be one of the most important factors that affect commercial banks profitability.

The issue which deals in the resarch is the affect of market interest rate fluactuation has adversly related to commercial bank profitability.

This research brings opportunity to establish a relationship between fluctuations in interest rates and the performance of commercial banks in Pakistan during the period of 2004 - 2008

The main purpose of this study is to determine the implication of fluctuations in market interest rates on the profitability of commercial banks in Pakistan. This study provide

-Major causes of interest rate fluctuations

-The extent to which commercial banks are set to manage interest rate related risks.

Major causes of Interest Rate Fluctuations are unstable government Policies, Unstable Economic Environment, unavailability of long-term funds, Inflation. The factors that affect the commercial bank profitability are significant mismatch in the maturity profiles of Assets and Liabilities, Frequent Interest Rate Fluctuations, under capitalization of banks, Poor Collateral of credits.

Pakistan's financial sector consists of Scheduled Commercial Banks which include nationalized, foreign, and private banks; and Non-banking Financial Institutions (NBFIs) which include Development Finance Institutions (DFIs), Investment Banks, leasing companies, modarabas, and housing finance companies.
Shedule bank are commercial bainks of Pakistan. Scheduled Banks are regulated by the State Bank of Pakistan's Regulations, through different wings, and are subject to different SBP regulatory requirements such as capital and liquidity reserve requirements.

The banks and the financial sector analysts are projecting “higher profitability” in 2008. This projection is because SBP has raised its discount rate in which the banks can invest to earn a good return. The rising lending rates will also contribute considerably to ensuring an increased profitability. This will be a continuation of four years of high banking growth and profits.

Factors that affect the profitability of Commercial Banks are both Endogenous and Exogenous. Endogenous factors are within the Control of Management such as quality of management and its policies, efficiency of management in generating revenues and controlling costs, bank capitalization and location.

Exogenous factors are outside management control, especially macro economic indices such as Interest rates, Exchange rates, Inflation, and other regulatory and market constraints. Interest rate is come under this category.

Market Discount rate:

A bank holding multi period, fixed rate assets and liabilities will find that revenue and cost of fund responds to a change in discount rate. The rate of interest set by the State bank of Pakistan that member banks are charged when they borrow money through the SBP interest on an annual basis deducted in advance on a loan.

Bank Profitability:

A bank generates a profit from the differential between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities. Strong earnings and profitability profile of banks reflects the ability to support present and future operations, this determines the capacity to absorb losses, finance its expansion program, pay dividend to its shareholders and build up adequate level of capital. Although different indicators are used to serve the purpose, the best and most widely used indicator are return on assets (ROA), Net Income, and Net interest income.


The method for used in this research study is regression analysis through “Curve Estimation”, apply for determine discount rate fluctuation have a significant impact on bank profitability. This section provides information about sources of data, sample size, and discussion of variables.

This research used data analysis from secondary source. The study is base on data taken of financial statements from annual reports of commercial banks for 5 years 2004-2008.

The Sample

The total sample of commercial bank in Pakistan is 27 listed in Karachi stock exchange out of which the sample size of research is 12 Commercial Banks in Pakistan.

The market discount rate is independent variable and net income, net interest income are dependent variable which collect from annual reports during the sample period.

Regression (Curve Estimation) Analysis;

ΔNIt = α + β ΔIt +εt

Here, ΔNIt is the change of net income for a bank, computed by (Nit-Nit-1)/Nit-1 (It) is discount rate.

It indicates how capable the management of banks has been converting the bank's asset into net earnings.

ROA = Net Income/Total assets

The net interest margin measures how large spread between interest revenue and interest cost it can achieve by controlling the bank's earning asset.

ΔNII = α + β ΔIt +εt

Here, ΔNIIt is the change of net income for a bank, computed by (Niit-Niit-1)/Niit-1 (It) is discount rate.


Return On Asset:

Its an indicator of profitability measurement of a bank or company.ROA gives an ideaas to how efficientmanagement isat using its assets to generate earnings.Calculated by dividing a company's annual earnings by its total assets. ROAtells what earnings were generated from invested capital (assets). The ROA figure gives investors an ideaof how effectively the company is converting the moneyit hasto invest into net income. The higher the ROA number, the better, because the bank is earning more money on less investment.

Net Income:

Net income represents the amount of money remaining after all costs, depreciation, interest, taxes, and other expenses have been deducted from a company's total sales. Net income is also referred to as the bottom line, net profit, or net earnings. It is one of the most closely followed numbers a company can produce, and it plays a part in many other financial measures. It is important to understand that net income is not a measure of how much cash a company earned during a given period. It is also important to understand that changes in accounting methods can greatly influence net income figures, and in many cases these changes may have little to do with a company's actual operations.

Changes in net income are the subject of much analysis. In general, when a bank or company's net income is negative or is fairly low, this could suggest a myriad of problems, ranging from inadequacies in customer or expense management to unfavorable accounting methods. Some institutes strive to minimize taxes and will therefore intentionally attempt to minimize their reported net income.

Net interest Income:

Net interest income is a financial measure for banks, calculated by the amount of money the bank receives from interest on assets (commercial loans, personal mortgages, etc) minus the amount of money the bank pays out for interest on liabilities (personal bank accounts, etc). Although usually calculated for banks, this figure can also be calculated for other corporations, simply by subtracting the amount of interest paid on liabilities from the amount of interest earned from assets.


This study includes three indicators to measures of performance are used in the study: the return of assets (ROA), change in net income, and change in net interest income (NII). ROA have been used in most banks' performance studies. ROA measures the profit earned per dollar of assets and reflect how well bank management use the bank's real investments resources to generate profits while NI is focused on the profit earned on activities.

Variable Summary







Number of Positive values





Number of Zeros





Number of Negative values





Number of (user missing)





Missing values(system missing)





This study has identified the profitability indicators that explain the variation in interest rate to evaluate the impact of interest rate on commercial bank profitability. This research has used the regression analysis through curve estimation. The equation has been used in this study are Linear and Logarithmic regression to know the significance level of dependent variables.


Sum of mean Square


Mean Square









































In this table there are results of two equations Linear and Logarithmic in ANOVA analysis. The table contains two sets of equations, which represents the mean, frequency, and significance level of the variables.

This table represents that Sig. (p value) = 0.047 As p < 0.05 the predictors are significantly better than would be expected by chance. The regression line predicted by the independent variables explains a significant amount of the variance in the dependent variable. It would normally be reported in a similar trend to other ANOVAs:

F (ROA, NI, NII) .325, .273, 3.063 are < 0.05

F (ROA, NI, NII) .205, .109, 4.101 are < 0.05

Dividing the Sum of squares by the degrees of freedom (df) gives us the Mean

Square It can see that the Regression explains significantly more variance than the error or Residual.

The next part of the output, the Coefficients table, shows which variables are individually significant predictors of our dependent variable. The significant predictor values are shaded.

ANOVA analysis uses the F statistic , which test if the means of the groups, formed by one independent variable or a combination of independent variables, are significantly different. It is based on the comparison of two estimate variances- one representing the variance within groups, often referred to as error variance; and the other representing variance due to differences in-group means. If the two variances do not differ significantly, one can believe that all the group means come from the same sampling distribution of means and there is no reason to claim that the group means differ. If, however, the group means differ more than can be accounted for due to random error, there is reason to belive that they were drawn from different sampling distributions of means.

F= variance due to difference between groups/ Error variance

The larger F - ratio, the greater is the difference between groups as compared to within group differences. An F- ratio equal to or less than one indicates that there is no significant difference between groups and the null hypothesis is correct. If the null hypothesis (that the group means do not differ significantly) is correct, then conclude that The Independent variable did not have an effect on dependent Variables.

However, the F test proves the null hypothesis to be wrong, multiple test are used to further explore the specific relationships among different groups.

ANOVA procedure can be used correctly if the following conditions are satisfied:

1. The dependent variables should be interval or ratio data type.

2. The populations should be normally distributed and the variance should be equal.


Un standardize Coefficients






Std Error








































Regression Coefficient is measure how independent variable predicts the dependent variables.

The Unstandardized Coefficients, gives the coefficients of the independent variables in the regression equation. The Standardized Beta Coefficient column shows the contribution that an individual variable makes to the model. The next largestvalue is for Study time, here p > 0.05. The Unstandardized Coefficients Std. Error column provides an estimate of the variability of the coefficient

Numerical value of the parameter estimate directly associated with an independent variable. The regression coefficient represents the amount of change in the dependent variable for a change in independent variable. In this study interest rate (discount rate) is independent variable and ROA, NI, NII are dependent variable.

In regression coefficients are partial coefficient because each variable takes into account this represents the relationship of interest rate with ROA, Net Income and Net Interest Income.

The coefficient is not limited in range, as it based on the degree of association and the scale unit of the independent variable.

In linear regression, the size of the coefficient for each independent variable gives the size of the effect that variable is having on dependent variable, and the sign on the coefficient (positive or negative) gives the direction of the effect. In regression with a single independent variable, the coefficient tells how much the dependent variable is expected to increase (if the coefficient is positive) or decrease (if the coefficient is negative) when that independent variable increases by one.


The analysis of the bank profitability against interest rate changes is important for investors, to measure Commercial bank profitability against interest rate risk. This research will find the sensitivity of Commercial bank profitability to changes of interest rate. This research helps to increase the commitment of managers of commercial banks to hold sound interest rate management policies and minimize their exposure to interest rate risks.

This study encourage the policy makers and bank regulators to implement fiscal and monetary policy regime that will ensure interest rate stability.


The above research shows that hypothesis is accepted interest rate fluctuation has adversely related with commercial bank profitability. The hypothesis tested by regression analysis through three dependent variables these are ROA, NI and NII.

This research used data analysis from secondary source. The study is base on data taken of financial statements from annual reports of commercial banks of Pakistan for 5 years 2004-2008.

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