CHAPTER 1

INTRODUCTION

Production or gain from a financial institution is depending on some issues whether the external control or the internal control. External control refer to the environment in our country like economy growth and inflation that effect the purchasing power of customer as the price of goods increases, customer demand will increase too. The Malaysian economy actually moves together with strong financial system. Strong financial system of a country will contribute to economic growth. Economic growth of a country like Malaysia is measured in terms of real GDP. According to Travel Document Systems (1996) ,since independent on 1957 until 2005, Malaysian economy had grew by 6.5% per year automatically it become the best country in Asia at that time.

Banks nowadays struggled to maintain a good performance in order to fulfill its objectives of satisfying their customers, employees, depositors and government according to Askari Commercial Bank ( 2006 ). The evolution of financial system in Malaysia has been significant. 7.2 per cent economic growth registered by the country last year was the highest achievement over 10 years and was driven by the two stimulus packages as well as the management of country’s financial and banking system by Bank Negara said the Prime Minister Datuk Seri Najib Tun Razak (2011) .

1.1 BACKGROUND OF STUDY

Profit is the major focus of why everybody struggles to make sure their business going well as profit is the important sources of funds. This paper will measure financial performance of Maybank Bhd and determinant of data by identifying the profitability performance of Maybank Bhd. It is important to understand the profitability of commercial bank after considering certain factors that may contribute to the profitability. The research is based on the performance of Maybank from 2001 to 2010.

1.2 PROBLEM STATEMENT

A financial institution is a profit-seeking organization owned by shareholders who expect to gain return with the risk associated that they have to face. There are many factors that contribute to bank profitability. According to Bankers’ Journal Malaysia, for Malaysian Banks, more than 80% of their total income is attributed to interest income. Previous studies have also found that interest income and non-interest income have a positive effect on bank profitability. However besides those banking characteristics of internal variables, there are some external variable that may affect the bank’s profitability performance that cannot be overemphasized like inflation and GDP.

Earlier studies by Al-Hajji, Mohsen (2003) have found positive relationship between the GDP and bank profitability. When GDP increases, profitability of the bank will increase too. Adverse result was found about relationship between inflation and bank profitability. This study will answer the question of how interest income, non-interest income, GDP and inflation rate relate with bank profitability also how is well is the performance of Maybank Bhd during the period of study.

RESEARCH QUESTION

Dependent and independent variables are studied to find solution about the profitability performance of Maybank Berhad. Factors affecting performance of Maybank Berhad can be comprises into external and internal factors. The criteria that will be evaluated are interest income, non-interest income , interest expenses, Gross Domestic Product (GDP) and inflation rate. The intent of this study is to examine the effect of all this factors towards performance of Maybank Berhad. This research problem leads to questions concerning relationship between selected criteria.

In this research, there are few question were asked as listed below :

1.3.1 To what extend inflation rate effect the performance of Maybank

Berhad?

What are the relationship between dependent variable and

independent variables ?

1.3.3 What is the factor that most effect profitability ratio of Maybank Berhad?

1.4 OBJECTIVE OF STUDY

The main objective of this study is to study the factors attributes to the profitability performance of Maybank Bhd. comprises of interest income, non-interest income ,Gross Domestic Product (GDP), and inflation rate. The study also will determine the profitability performance of bank for 10 years period.

Apart from that, there are few supporting objectives to support the main purpose were listed below :

To study the relationship between internal variables and bank profitability.

To identify whether bank cost and bank revenues will contribute to

profitability performance of Maybank Bhd.

To determine which factors contribute the most to profitability of Maybank

Bhd.

To analyze the trend of Maybank profitability over 10years and

identify Maybank’s strength and weaknesses using certain profitability ratios.

SIGNIFICANT OF THE STUDY

Bank profits refer to the return on invested capital and it is important to company as well as the shareholder. Bank profits can be considered as benefit to depositors as it shows stronger, safer and efficient banking system in the increases in revenues and services improvements. Indirectly borrowers also will get the benefits since the bank lending rate depends of ability of bank’s capital accounts. This paper will focus on some categories as follows:

Facilitate researcher to find out the major factors contributing to the profitability performance of commercial banks especially Maybank Bhd.

To assist the researcher to be more alert on how to manage and overcome problems that could come together with independent variables and provide guides on how to improve profitability performance.

Also provide information on bank’s profitability strength and weaknesses that could be use by the customers as an evaluation of banks performance.

The researcher may also view the performance trend of Maybank Bhd. during this 10 years from 2001 to 2010.

1.6 SCOPE OF STUDY

This research paper will focus on the financial performance of Maybank Berhad based on bank’s profitability. The factors that will be evaluate are divided into 2 which are external factors (Gross Domestic Product, and inflation) and internal factors ( interest income, non-interest income ).

1.7 LIMITATION OF STUDY

The limitations of this study is the data only for 10years starting 2001 to 2010. Furthermore the data come from secondary data and sometimes may be adequate or accurate. Besides most of the data were gathered from journals, BNM – Maybank annual reports , and articles.

1.8 DEFINITION OF TERMS

1.8.1 Profit

According to Wikipedia, profit can be considered as the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise or in a simple word it means money gained in business.

1.8.2 Interest Income

Companies sometimes keep their cash in short-term deposit investments such as certificates or deposit with maturities up to twelve months, savings account, and money market funds. The cash placed in these accounts earn interest for the business, which is recorded on the income statement as interest income. Interest income will fluctuate each year with the amount of cash a company keeps on hand and the general level of interest rates as set by the Federal Reserve.

(Source: Joshua Kennen – Investing for beginners guide )

1.8.3 Operating profit

The profit earned from a firm’s normal core business operations. This value does not include any profit earned from the firm’s investments (such as earnings from firms in which the company has partial interest) and the effects of interest and taxes. It is also known as “earnings before interest and tax” (EBIT).

(Source:http://www.investopedia.com/terms/o/operating_profit.asp)

1.8.3 Profitability Analysis

Analysis that assigns revenues and costs to major customers or groups of customers rather than to organizational units, products, or other objects. The results may direct organizational resources toward more profitable uses. It is an application of segmented reporting in which a customer group is treated as a segment. It is especially helpful when combined with an activity-based costing approach that determines which activities are performed for each group and assigns costs based on appropriate drivers. (Source : http://www.answers.com)

1.8.4 Inflation

Inflation is An increase in the amount of currency in circulation, resulting in a relatively sharp and sudden fall in its value and rise in prices: it may be caused by an increase in the volume of paper money issued or of gold mined, or a relative increase in expenditures as when the supply of goods fails to meet the demand. (Source : Webster’s New Universal Unabridged Dictionary)

1.8.5 Financial Ratios

Ratios that measure a firm’s ability to meet its short-term financial obligations on time, such as the ratio of current assets to current liabilities. (Source : The Free Dictionary by Farlex )

1.8.6 Gross Domestic Product

Gross domestic product (GDP) refers to the market value of all goods and services produced within a country in a given period. It is often considered an indicator of a country’s standard of living. Gross domestic product is related to national accounts, a subject in macroeconomics. ( Source : http://erbwikipedia.org/wiki/Gross_domestic_product ).

Interest Expense

Interest expense is a non-operating or “other” expense for the cost of borrowed money or other credit. The amount of interest expense appearing on the income statement is the cost of the money that was used during the time interval shown in the heading of the income statement, not the amount of interest paid during that period of time. (Source : Accounting Couch)

SUMMARY

In this chapter, we have discussed about the influence of factors affecting profitability performance of Maybank Berhad and the question that need to be answered in this paper. This research examined the bank profitability which focused on both the returns on bank assets and equity, net interest rate margins and net operating margin. High performance comes from effort given by bank management to produce high profit while facing risk related. Firm need to generate income as much as possible as banking institution is a profit-orientation company.

CHAPTER 2

LITERATURE REVIEW

INTRODUCTION

Bank performance depends on the profitability measurement of bank’s financial statement. It is recognized that the growth of the banking system is dependent on a strong and stable economic development.

PREVIOUS STUDY

This paper deals with performance of commercial bank, focuses on Maybank Berhad. Some of previous study that relate with this research are Masood et al. (2009) revealed that in case of calculating profitability in terms of ROE or ROA the most significant internal and external factors affecting Saudi banks are capital adequacy ratio, earning assets to deposits ratio, operational efficiency, growth rate in GDP, and banking sector development. He finds also that variables to do with credit risk, inflation rate and interbank offered rate are insignificant and have a low effect on all indicators of profitability. The results in the speech by Tan Sri Dato’ Ali Abu Hassan Bin Sulaiman, Governor of BNM, (23 September 1998), he stated that since the onset of the financial crisis, BNM had instituted a number of measures , amongst others included tighter loan classficication policy for non-performing loans and a limit on lending for the purchase of shares. Since then, the financial crisis adversely affected the real economy, resulting in real GDP contracting by 4.8% during the first half of 1998. Year 1998 was a difficult year for the banking system while 1year after that was the recovery year in the performance of banking system. (BNM 1999 Annual Report Press Conference).

Haslem (1968) defined profitability as the capacity to gain or profit, or to return a profit or income. Profit is the measured for productive capacity of a company. According to Orl and Yolalan(1990), profitability performance evaluation of a banks should be linked to decision model so as to associate the result obtained with the decision. Meanwhile, according to Bashir and Hassan , (2003) on their study on the factors influencing the profitability of Islamic banks in eight Middle Eastern countries for the period 1993–1998, they find that the higher leverage and large loans-to-asset ratios lead to higher profitability. This study also indicates a positive relationship between macroeconomic variables, stock market development and profitability of banks.

Ben Ben Naceur and Goaied (2006) they find that macroeconomic indicators like inflation, GDP, and market concentration ratio have no impact on banks’ interest margin and profitability. However, financial structure variables (stock market capitalization divided by total assets or GDP) do have a positive effect on the return on assets. Staikouras and Wood (2003) said that macroeconomic indicators (variability of interest rate, growth of GDP) had a negative impact on profitability. Chance and Lane [1980], and Sweeney and Warga [1986] find little evidence that supports the interest rate sensitivity of bank or financial institutions stock returns. On the other hand, studies such as Lynge and Zumwalt [1980], Booth and Officer [19851, Scott and Peterson [1986], and more recently Chaudry and Reichert [1999] suggest that the stock returns of financial institutions are highly sensitive to changes in interest rates. Different result from Kosmidou and Pasiouras (2007) which they examine how a bank’s specific characteristics and the overall banking environment affect the profitability of commercial domestic and foreign banks operating in the 15 EU countries and they found that the main determinants of profitability measured by ROAA, macroeconomic conditions (inflation, growth of GDP) and financial market structure (stock market capitalization to total assets or to GDP, total assets to GDP) are statistically significant and related to both domestic and foreign banks profitability.

Apart from that, Bourke (1989), Heggested (1977) using the consumer price index (CPI) as a proxy for inflation both of them made a research on relationship between profit and inflation and the result, both studies found that inflation had a significant relationship with profit. Earlier study from Revell (1980). believed that inflation could be a factor in the causation of variations in bank’s profitability. For studied on total expenses, items that fall within the control of bank management can be broadly divided into 3 categories: staff expenses, provision for loan losses, and other general expenses. Expenses, such as payment for income tax, are considered statutory expenses and hence beyond the control of management. Devinaga Rasiah (2010) .

THEORETICAL FRAMEWORK

In this study, 4 factors were chosen to be evaluated. They are return of unit trust fund, risk level of unit trust, diversification level and last but not least is risk-adjusted level.

Below is the relationship between dependent variable and independent variables.

Title : Investigation of The Financial Performance of Maybank Berhad

Bank interest income

Bank Non-Interest Income

GDP

Inflation rate

Bank Profitability

Interest Expense

DEPENDENT VARIABLE

INDEPENDENT VARIABLES

CHAPTER 3

METHODOLOGY AND DATA

3.0 INTRODUCTION

This study will analyze the relationship between dependent variable (profitability of Maybank Bhd) and independent variables (interest income, non-interest income, inflation rate and Gross Domestic Product (GDP) ).This study will covered 10 years data from 2001 until 2010 and will be done using Statistical Package For Social Science (SPSS). Furthermore, hypothesis will be tested whether it can be accepted or rejected. This will provide more understanding view among variables. The advantage of using profitability ratios is that they are inflation invariant that is they are not affected by changes in price levels. This is useful in a time series analysis such as this, where the real value of profits may be distorted by the time varying inflation rates as stated by Devinaga Rasiah (2010).

3.1 DATA COLLECTION

Data was collected using annual reports of Maybank Bhd. The data collection was compiled from the financial statement also the balance sheets from Maybank’s annual reports for 10 years.. All the data will be evaluate accordingly to see the relationship between the dependent and independent variables also to test the hypothesis. Besides some of the data comes from Internet website like video on news and some articles which contain information about Maybank Bhd.

3.2 SAMPLING FRAME

10 years data was chosen as to see the latest profitability performance of Maybank Bhd. 10 years data is enough to show the flow of performance of bank to see whether it has consistent performance or not and factors which relate the most to bank’s performance can be determine.

3.3 SOURCES OF DATA

The data on Maybank Berhad financial statements and balance sheets were collected using secondary data which come from:

(BNM) Bank Negara Malaysia Annual Reports (2001 until 2010).

Bursa Malaysia

Internet Website.

Library books, articles and magazines.

3.4 VARIABLES AND MEASUREMENT

The variables used in this study can be categorized into two main types which are, the dependent and the independent variables.

3.4.1 Dependent Variables

The dependent variable for this study is the profitability performance of Maybank Bhd.

3.4.2 Independent Variables

There are 4 independent variables in this study which are interest income, non-interest income, inflation rate and Gross Domestic Product(GDP).

RESEARCH DESIGN

Research design involves a series of rational decision making choices. Various issues regarding the topic will be describe here including purpose of study, types of investigation to be make, time horizon and so on.

3.5.1 Purpose of the Study

The purpose of this study is to determine the profitability performance of Maybank Bhd from 2001 to 2010. Besides, this study attempt to analyze the factors relates with the performance of Maybank Bhd. and what are the factor that has the highest impact on Maybank Bhd performance.

3.5.2 Types of Investigation

This study involved the multiple regression study on the data from range of 2001 until 2010. This model was chosen because this study has more than 1 independent variable..

3.5.3 Unit of Analysis

Unit analysis for this study are interest income, non-interest income, inflation rate and GDP.

3.5.4 Time Horizon

This study will use range data from 2001 until 2010 of Maybank Bhd.

3.7 DATA ANALYSIS AND TREATMENT

This study use SPSS, multiple regression study as the statistical tool as to measure how all these variables will influence profitability performance of Maybank Bhd. The multiple regression study will be used to analyze the relationship between dependent variable, which is the profitability of Maybank Bhd and independent variables which includes interest income, inflation rate, GDP and non-interest income.

Multiple Linear Regression Model:

General Functions:

P = f( Inflation rate, interest income, Non-interest income , GDP, e )

Specific Form of Equation:

P = a + b1X1 + b2X2 + b3 X3 + b4GDP + b5INF +

Where;

P = profitability

a = Constant

b1, b2, b3, b4 = Coefficient Beta value

X1 = interest income

X2 = non- interest income

GDP = Gross Domestic Product

INF = Inflation

= Error

3.8 HYPOTHESIS STATEMENT

There are 5 hypotheses in this study which are:

Hypothesis 1

H0: There is no significant relationship between inflation rate and bank profitability.

Hypothesis 2

H0: There is no significant relationship between GDP and bank profitability.

Hypothesis 3

H0: There is no significant relationship between Interest Income and bank profitability.

Hypothesis 4

H0: There is significant relationship between Non-Interest Income and bank profitability.

SUMMARY

In this chapter, we have discussed about where the data comes from and how the data will be measures to evaluate the significances between dependent variable and the independent variables. The study is designed to examine 5main areas which are interest expense, interest income, non-interest income, inflation rate, and Gross Domestic Product (GDP). 10 years data from varieties of secondary sources like Bank Negara Malaysia and internet sources will be evaluated to explain the relationship between profitability performance and factors influence it.

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