Determinants of return on asset : the case of local conventional banks in Malaysia

The topic of what factor determines financial performance of bank has always gain interest from many parties such as investor, central bank regulator and among bankers itself. Figures from financial statement not only contain bank’s information from the past but also could provide hint on their likely future performance hence the purpose of this study is to identify the determinants of the financial performance of local banks in Malaysia where financial performance is measured by using return on asset. Independent variables included in this study are non-interest expense to total asset ratio (expense management), impairment ratio, risk appetite, gross domestic product, and inflation. By employing fixed effect panel data regression on data period of year 2002 – 2016, the results suggested that non-interest expense to total asset ratio, impairment ratio, and risk appetite have significant relationship with return on asset. This therefore indicates that the impact of external determinants such as gross domestic product and inflation on return on asset is not as great as the impact of internal determinants such as expense management, impairment ratio, and risk appetite. In line with initiative of Financial Sector Blue Print 2011 – 2020 issued by Bank Negara Malaysia, this study helps to strengthen the stability of financial institution by identifying key risk factor that would cause deterioration of financial performance together with mitigation plan of such risk.