AN EXPLORATORY FACTOR ANALYSIS ON VARIABLES AFFECTING THE PROFITABILITY OF SRI LANKAN LOCAL COMMERCIAL BANKS

The main purpose of this study is to investigate the relationship between bank-specific factors and the profitability of local commercial banks in Sri Lanka. Thus, finding the main internal and external characteristics for achieving higher profitability. In this research, Exploratory Factor Analysis (EFA) is used as an alternative approach to examine the relationships between bank-specific characteristics of bank’s profitability for a sample of 11 major Sri Lankan local banks during the 12 years period from 2006 to 2017. The findings reveal that assets base and size of branch network are the main determinants of banks’ profitability, by showing a significant relationship with all measures of profitability. Net profits of banks show a significant relationship with size of branch networks and total assets, but insignificant with deposit interest ratio. However, loan interest ratio and deposit interest ratio together have a significant effect on net interest margin thus leading an impact on banks’ profitability.