The Impact of the Covid-19 Pandemic and the Post-Pandemic Economic Crisis on the Profitability of Sri Lankan Commercial Banks

Purpose: The purpose of this study is to uncover the impact of recent crises on the primary profitability of domestic commercial banks in Sri Lanka. We consider the return on assets (ROA) to be the profitability indicator, and the Covid-19 health crisis (from 2020 to 2021) and the post-pandemic economic crisis (from 2022 to 2023) as the recent crises. We are motivated to consider the ROA because it is a key profitability measure for banks, and recent studies have missed it as a variable.Design/Methodology/Approach: We use annual data from 2011 to 2023 for ten leading domestic private and public commercial banks. The results are obtained by performing a panel regression and mean comparison tests. We use bank size, capital ratio and deposit ratio as firm-specific control variables and real GDP growth rate and inflation rate as macroeconomic control variables in the panel regression.Findings: The findings of our study show that ROA is lower during crises than pre-crisis period. The additional analysis shows that the negative impact of both crises recovered during the second crisis year. Further, the results show that no crisis is superior to each other, indicating that the transformation of the crisis from a health crisis to an economic crisis has not made the situation better or worse. The panel regression results show that the negative impact of crises is weak because its statistical significance disappears when controlled for bank-specific and economic conditions. This finding indicates that domestic commercial banks have maintained profitability by managing the crisis incident effectively with the support of the Central Bank of Sri Lanka.Originality: This study is the first research that uncovers the influence of both the Covid 19 health crisis and the post pandemic economic crisis on the profitability of commercial banks.