In this chapter, there are some brief review of relevant literature that done by previous researcher. According to the earlier chapter, in this research we are focusing on few variables that will affect the bank’s profitability. Those variables can be divided into internal or external variables. Internal variables including Capital Adequacy and Liquidity Risk whereas the external variables are Interest Rate Risk and Inflation Risk. Thus, the relevant research that have been reviewed through this chapter will provide a clearer picture on the bank’s profitability.
Bank profitability is defined by Rose (2002) as the net after-tax income or net earnings of a bank (usually divided by a measure of bank size). There are various way to measure the bank profitability. According to Mamatzakis and Remoundos (2002), in order to measure the bank profitability, the ratios return on assets (ROA) and return on equity (ROE) can be used. Moreover, this is supported by Mamatzakis and Remoundos (2003). This study examined the determinants of the Greek commercial banks performance and discovered that financial ratios are excellent in explaining the bank profitability.
Financial ratios allows the investor to analyse and interpret the financial data from the banks which provide the investor a deeper understanding about the financial situation of the particular bank. Based on Vasiliou and Frangouli (2000) support the view that financial ratios are important determinants of banks’ profitability. Moreover, Staikouras and Wood (2003) stated that financial ratios are the main determinants of the bank’s internal variables. A study from Najjar (2013) supporting the view that banking institutions should use ratio analysis to prevent unpredicted financial problems and take corrective measures or provisions to avoid such events for financial institutions.