Impact of liquidity on profitability of commercial banks in Armenia

Abstract

This study aims to investigate impact of liquidity on profitability level for the sample of commercial banks operating in Armenia. The 2008 crisis emphasized how important it is for banks to have an efficient liquidity management. New and stricter standards were defined by regulators to make financial system stable and resilient. On the other hand, it is a widely known problem faced by financial managers, whether funds should be invested in assets that boost more profit but result in slight liquidity, because of being long-term or in short-term assets that are less profitable but are highly liquid. The ultimate goal of this research is to find out whether liquidity management influences significantly profitability of commercial banks in Armenia. The study was implemented on 15 out of all 17 commercial banks operating at this point, for different periods depending on availability of the data. In order to analyze the variables and the relationship between them, descriptive statistics and multiple regression analysis were exploited. With one dependent variable (ROA) and 5 independent variables S1_1, S2_2 (liquidity ratios established by the Central Bank of Armenia), LDR, DAR, LLP/A results suggest that profitability is increased with the increase of high liquid assets, but diminished with increase of loan-loss provision amount kept by the banks. Although it is generally accepted, that liquidity was undervalued before the crisis, a tradeoff between liquidity and the opportunity cost of holding liquid but low-yielding assets should be considered as well. Thus, the way of efficient liquidity management and increasing profits is to be found by financial managers.