Determinants of profitability of state-owned banks in Uzbekistan

The study investigates the determinants of state banks’ in comparison with joint stock commercial private banks’ profitability in Uzbekistan during the period 2010-2016; to the study selected 3 state, 11 joint stock and 7 private banks in Uzbekistan as a case study. The purpose was to determine the internal and external factors influencing profitability of state banks which caused lower profitability compared with joint stock commercial banks and private banks in Uzbekistan. Two basic categories of factors which are supported by previous studies and literature sources are used in this study: internal and external. For internal factors, six independent variables were selected: interest income, non-interest income, non-performing loans, deposit levels, liquidity ratio and capital adequacy ratio. For external factors, two independent variables were selected: GDP growth rate and inflation. Dependent variable in this study was profitability in terms of return on assets (ROA).Linear regression model was chosen as a statistical instrument to determine and analyze the impact of selected factors on profitability of commercial banks because previous studies have also utilized such approach to produce as good results as any other functional forms in time-series analysis.Results showed that non-performing loans as a measure of loan quality had a negative and significant impact on all three bank types. This means that bad loans reduce the profitability because it reduces the income and thus profitability. Deposits had a positive and significant impact on profitability of state banks. In state banks, lending rates remain high while deposit rates remain low (because they are perceived to be safer) and thus state banks enjoy higher profits. So, increase in deposits also increase their profitability and therefore, state banks should strive to attract more deposits as a source of funds.Liquidity ratio has a positive and significant impact on profitability of state banks. Therefore, higher liquidity will most likely improve the profitability of state banks. Capital Adequacy ratio has a positive and significant impact on state banks. The higher the ratio, the higher will be profitability. State banks with adequate CAR have less need for external funding and debt-side financing. Inflation has a negative and significant impact on profitability of state banks. An increase in inflation rate increases the cost of borrowing and reduces the interest income of state banks.The research made practical implications to the state banks in Uzbekistan. Firstly, it is necessary to reduce the level of non-performing loans in state banks. It is also recommended to update or improve bank’s loan quality management strategy. Secondly, state banks should attract more household deposits and improve the attractiveness of its deposit services in terms of interest rates, terms and guarantee. Thirdly, it is suggested that state banks should maintain the considerable amount of their liquid assets to earn a higher rate of profit. This requires more proactive than reactive measures to liquidity management. Fourthly, it is suggested that state banks should revise the strategy in capital management and avoid having too high or low CAR ratio in the future