Comparative Analysis of Financial Performance Using Financial Ratios: Evidence from Private Commercial Banks in Ethiopia

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This study examines the comparative financial performance of selected private commercial banks in Ethiopia using panel data from eight banks covering the period 2013–2022. A quantitative research approach was employed, and a random effects regression model was applied for analysis. Return on Assets (ROA) was used as a proxy for financial performance, while capital adequacy, asset quality, management efficiency, earnings ability, and liquidity were examined under the CAMEL framework. The findings indicate that capital adequacy, earnings ability, and liquidity have a positive and statistically significant effect on financial performance. Conversely, asset quality and management efficiency show a negative and significant relationship with financial performance. The results further reveal that most selected banks performed in line with the standards set by the National Bank of Ethiopia (NBE). The study recommends that bank managers focus on key bank-specific factors to enhance profitability and sustain financial performance. Financial Performance Private Commercial Banks CAMEL Model Ratio Analysis Ethiopia Introduction 1.1 Background of the study Background of the Study The financial sector plays a crucial role in the economic development of a country by facilitating efficient financial intermediation and promoting sustainable economic growth. A strong financial system mobilizes savings, allocates resources efficiently, reduces transaction and information costs, and supports trade and investment activities. Research indicates that the efficiency of the financial system significantly influences investment decisions, savings rates, innovation, and overall economic growth. Among financial institutions, the banking industry serves as a central pillar of the financial system. Commercial banks provide essential financial services, including deposit mobilization, credit provision, and payment facilitation, which contribute to the production of goods and services and improve living standards. A profitable and stable banking sector is better positioned to withstand economic shocks and enhance financial system stability (Athanasoglou et al., 2008). Moreover, banking sector development supports economic growth by financing investment opportunities, facilitating transactions, and processing business-related information (Rushchyshyn & Vasyltsiv, 2021). A competitive banking system further enhances efficiency and contributes to economic growth (Northcott, 2004). Financial performance evaluation is an important mechanism for assessing the efficiency and effectiveness of banks. It provides valuable information to stakeholders such as depositors, investors, managers, and regulators (Sun, 2011). Financial ratio analysis is widely used to measure and compare performance across banks and over time (Lin et al., 2005). In banking studies, the CAMEL framework covering capital adequacy, asset quality, management efficiency, earnings ability, and liquidity is commonly applied to evaluate financial performance. Following the fall of the Derg regime in 1991, Ethiopia adopted a market-oriented economic system (Geda, 2008). The introduction of the Monetary and Banking Proclamation No. 83/1994 and the Licensing and Supervision of Banking Business Proclamation No. 84/1994 established the legal foundation for modern banking operations and strengthened the regulatory role of the National Bank of Ethiopia. Since then, the private banking sector has expanded significantly. As of June 2022, about 26 private commercial banks were operating in Ethiopia under the supervision of the National Bank of Ethiopia. Private commercial banks play an increasingly important role in supporting Ethiopia’s growing service sector and overall economic development. Although many of these banks are relatively young and smaller in asset size, they contribute significantly to financial intermediation and economic activities. Given their growing importance, evaluating their financial performance is essential to assess their stability, profitability, and efficiency. Therefore, this study aims to analyze the financial performance of selected private commercial banks in Ethiopia using financial ratio analysis under the CAMEL framework to provide insights for managers, investors, regulators, and policymakers. Statement of the Problem The financial system enhances economic productivity by channeling funds from surplus units to deficit units, thereby supporting investment and economic growth. Commercial banks play a central role in this intermediation process. To ensure financial stability and withstand economic shocks, it is essential to examine the factors influencing the financial performance of banks. The development of the banking sector reflects the overall development of the economy (Misra & Aspal, 2013). Therefore, evaluating bank performance is a key indicator of the soundness and efficiency of a country’s economic activities. Several empirical studies have assessed the performance of Ethiopian commercial banks using the CAMEL framework. Anteneh, Arega, and Yonas (2011) found that public banks performed better in capital adequacy, while private banks showed stronger performance in asset quality, management efficiency, and earnings ability; liquidity was strong for both groups. Mulualem (2015) reported that capital adequacy, asset quality, and management efficiency negatively affected profitability, whereas earnings and liquidity had a positive relationship. Dakito (2015) found that NIB demonstrated good overall performance, while Ermias (2016) concluded that bank-specific factors under the CAMEL model explained 67.5% of profitability variations among private banks. Gudata (2015) also revealed variations in performance rankings among selected banks. However, despite these studies, limited research has comprehensively examined private commercial banks in recent periods, and findings remain inconsistent due to differences in methodology, time coverage, and explanatory variables. These inconsistencies and gaps indicate the need for further investigation into the financial performance of private commercial banks in Ethiopia. Issues such as low efficiency, inadequate profitability, poor asset quality, and liquidity challenges require detailed analysis. Therefore, this study aims to examine and compare the financial performance of selected private commercial banks in Ethiopia using the CAMEL framework and assess their performance in relation to regulatory standards set by the National Bank of Ethiopia. 1.3 Objectives of the Study 1.3.1 General Objective The general objective of this study is to compare the financial performance of selected private commercial banks in Ethiopia based on their financial characteristics using the CAMEL framework. 1.3.2 Specific Objectives The specific objectives of the study are: To examine capital adequacy, asset quality, management efficiency, earnings ability, and liquidity (CAMEL components) of the selected private commercial banks in Ethiopia. To analyze the impact of capital adequacy ratio, asset quality ratio, management efficiency ratio, earnings ratio, and liquidity ratio on the financial performance of private commercial banks, as measured by Return on Assets (ROA). Literature Review 2.1 Theoretical Review of Banking Banks are financial institutions that accept deposits from surplus units and extend credit to deficit units, thereby performing the essential function of financial intermediation. By channeling funds from savers to investors, banks ensure efficient resource allocation and contribute to economic productivity (Goosen et al., 1999). Their primary source of income is interest earned on loans, which exceeds the interest paid on deposits, generating net income and maximizing shareholder value. In most countries, commercial banks operate under strict regulation and licensing requirements, including minimum capital standards, capital adequacy ratios, and “fit and proper” criteria for management and ownership. These regulations aim to ensure financial stability and protect depositors. The banking sector plays a significant role in economic development. Banks mobilize savings, finance productive investments, facilitate payment systems, and provide credit to individuals, businesses, and corporations (Rose, 2002; Saunders & Cornett, 2003). Beyond traditional deposit and lending services, banks also create money through deposit liabilities, manage payment systems, act as dealers in foreign exchange, serve as information agents, and fill financial market gaps (Fourie et al., 1998; Valdez, 2000). Despite diversification of services, lending remains the core banking function, as loan portfolio management directly influences profitability and financial stability (Wei-shong & Kuo-chung, 2006). In Ethiopia, modern banking began in 1905 with the establishment of the Bank of Abyssinia. Over time, the banking system evolved through different political and economic regimes. During the state-controlled economic period (1974–1991), financial institutions were nationalized and operated under central planning. Following the policy shift in 1991 toward a market-oriented economy, the introduction of Proclamation No. 83/1994 marked a new era, allowing the establishment of private banks. Currently, the banking industry operates under Banking Business Proclamation No. 592/2008 and is regulated by the National Bank of Ethiopia, which oversees monetary stability, sets reserve requirements, issues directives, and supervises banking operations. Although the Ethiopian banking sector has over a century of history, it remains in a developing stage, striving to improve service delivery, technological advancement, and competitiveness while maintaining financial stability. 2.1.2 Conceptual Framework (CAMEL Model) The CAMEL model is a widely used supervisory and analytical framework for evaluating the financial performance and soundness of banks. It was originally developed by U.S. bank regulators and later adopted internationally as a standard tool for bank performance evaluation. The acronym CAMEL represents five key dimensions of banking performance: Capital adequacy, Asset quality, Management efficiency, Earnings ability, and Liquidity . Capital Adequacy (C) measures the bank’s ability to absorb potential losses and protect depositors. It reflects the bank’s financial strength and is commonly measured using the Capital Adequacy Ratio (CAR). A higher capital adequacy ratio indicates greater stability and lower risk exposure. Asset Quality (A) evaluates the quality of a bank’s loan portfolio and investment assets. It mainly focuses on non-performing loans (NPLs) and credit risk management. Poor asset quality may reduce profitability and threaten financial stability. Management Efficiency (M) assesses how effectively management utilizes bank resources to generate income and control costs. It reflects operational efficiency and strategic decision-making capability. Earnings Ability (E) measures the bank’s capacity to generate sustainable profits. It is often evaluated using indicators such as Return on Assets (ROA) and Return on Equity (ROE). Strong earnings enhance capital growth and long-term sustainability. Liquidity (L) examines the bank’s ability to meet short-term obligations and withdrawal demands. Adequate liquidity ensures operational continuity and maintains public confidence. In this study, Return on Assets (ROA) is used as a proxy for financial performance, while capital adequacy ratio, asset quality ratio, management efficiency ratio, earnings ratio, and liquidity ratio are treated as explanatory variables under the CAMEL framework. The model assumes that bank-specific factors significantly influence the financial performance of private commercial banks in Ethiopia.Bottom of Form 2.1 Empirical Literature Review Numerous empirical studies have examined bank performance using the CAMEL framework, which evaluates Capital adequacy, Asset quality, Management efficiency, Earnings ability, and Liquidity. The CAMEL model is widely recognized as an effective tool for assessing financial soundness and profitability (Baral, 2005). Studies such as Elyor (2009) and Uzhegova (2010) successfully applied the model to analyze determinants of bank profitability. In Ethiopia, the National Bank of Ethiopia also adopts the CAMEL framework as a supervisory tool for evaluating bank performance. Empirical findings show mixed results regarding the impact of CAMEL components on profitability. Mulualem (2015), using panel data from 14 Ethiopian commercial banks (2010–2014), found that capital adequacy, asset quality, and management efficiency negatively affected profitability, while earnings and liquidity had a positive and statistically significant relationship with ROA and ROE. Similarly, Dakito (2015) reported a positive relationship between capital adequacy and bank performance. Ermias (2016) concluded that bank-specific factors under the CAMEL model explained about 67.5% of the variation in profitability among private commercial banks in Ethiopia. Other international studies, such as Pasiouras and Kosmidou (2007) and Trujillo-Ponce (2012), emphasized that management efficiency often measured by the cost-to-income ratio is a key determinant of profitability. Asset quality and credit risk management are repeatedly identified as crucial determinants of bank stability. Poor asset quality and high levels of non-performing loans (NPLs) have been linked to bank failures (Olweny & Shipo, 2011). According to IMF (2009), non-performing loans are those with payments overdue by more than 90 days, and they significantly affect capital strength and profitability. Studies also provide conflicting evidence regarding liquidity. Some researchers (Chandani et al., 2014; Jha & Hui, 2012) found a negative relationship between liquidity and profitability, while Dang (2011) reported a positive association, suggesting that adequate liquidity enhances stability and profitability. Although several studies have analyzed bank performance using the CAMEL framework, findings remain inconsistent, particularly regarding the effects of capital adequacy, asset quality, and liquidity. Moreover, most Ethiopian studies were conducted during earlier periods and often combined public and private banks, limiting focused analysis on private commercial banks. Few studies have provided a recent comparative performance analysis of private commercial banks in Ethiopia using updated panel data and comprehensive explanatory variables. Therefore, this study seeks to fill this gap by examining the financial performance of selected private commercial banks in Ethiopia and assessing the impact of CAMEL components on profitability in a more recent and comparative context. RESEARCH METHODOLOGY Summary of Research Methodology This study focuses on a comparative analysis of the financial performance of selected private commercial banks in Ethiopia, namely Awash Bank, Bank of Abyssinia, Cooperative Bank of Oromia, Dashen Bank, Nib International Bank, Oromia Bank, United Bank, and Wegagen Bank. A descriptive research design with a quantitative approach was adopted. The study utilized panel data covering a ten-year period from 2013 to 2022 to evaluate financial performance using the CAMEL framework. Out of 26 private commercial banks operating in Ethiopia as of June 2022, eight banks were purposively selected using a non-probability sampling technique. The selection criteria included years of operation (more than 15 years), availability of complete financial statements, capital strength, profitability, branch network, and overall contribution to the economy. Secondary data were collected from audited annual financial statements, including balance sheets, income statements, and cash flow statements obtained from published reports and the National Bank of Ethiopia database. The study applied ratio analysis under the CAMEL model—Capital adequacy, Asset quality (NPL ratio), Management efficiency (cost-to-income ratio), Earnings ability, and Liquidity ratio—to compare the banks’ financial performance. Descriptive statistics (mean values) and regression analysis were employed to assess differences and examine the impact of bank-specific variables on financial performance, measured by Return on Assets (ROA). The regression model was estimated using STATA 15, while preliminary calculations were performed in Excel. The findings aim to determine the relative strengths and weaknesses of the selected banks and evaluate their performance against regulatory standards set by the National Bank of Ethiopia. Model Specification and Variable Description The study examines the effect of bank-specific factors on financial performance using the following regression model: ROAi=β0+β1CARi+β2NPLi+β3C/Ii+β4LRi+ϵi\text{ROA}_i = \beta_0 + \beta_1 \text{CAR}_i + \beta_2 \text{NPL}_i + \beta_3 \text{C/I}_i + \beta_4 \text{LR}_i + \epsilon_iROAi=β0+β1CARi+β2NPLi+β3C/Ii+β4LRi+ϵi Where: ROA = Return on Assets (dependent variable, proxy for financial performance) β₀ = constant term β₁–β₄ = coefficients of explanatory variables CAR = Capital Adequacy Ratio (Total Capital ÷ Total Assets) NPL = Non-Performing Loan Ratio (Non-performing Loans ÷ Total Loans) C/I = Cost-to-Income Ratio (Operational Cost ÷ Total Income, proxy for management efficiency) LR = Liquidity Ratio (Liquid Assets ÷ Total Deposits) εᵢ = regression residuals All estimations were performed in STATA 15, while descriptive calculations were done in Excel. Variable Description Capital Adequacy (CAR): Measures a bank’s ability to absorb losses and remain solvent. Higher CAR indicates stronger financial stability. Asset Quality (NPL): Evaluates the quality of the bank’s loan portfolio. High NPL reduces profitability and indicates credit risk. Management Efficiency (C/I Ratio): Assesses how effectively management uses resources to generate income. Lower C/I ratio indicates better performance. Earnings Ability (ROA): Reflects the bank’s profitability and operational efficiency in generating returns from total assets. Liquidity (LR): Measures the bank’s ability to meet short-term obligations. Higher liquidity ensures stability and depositor confidence.These variables collectively capture the key internal determinants of bank performance and enable a comparative evaluation of private commercial banks in Ethiopia. DATA ANALYSIS AND DISCUSSION Table 4.1 Summary of descriptive statistics Descriptive statistics are used to summarize and present data, providing insights into the current status of a phenomenon without making inferences beyond the data itself (J. Toby Mordkoff, 2016). According to Brockington (2003, cited in Solomon, 2011, p. 24), this method helps describe what exists regarding variables or conditions and answers questions such as who, what, where, when, and how. In this study, tools such as mean, standard deviation, minimum, and maximum values were employed. The mean represents the central tendency of the variables, while the standard deviation shows the degree of variation from the mean, with higher values indicating more dispersion and lower values showing data clustering. Minimum and maximum values provide the range of the observations, marking the lowest and highest points in the dataset The analysis of selected private commercial banks in Ethiopia shows that profitability, measured by return on assets (ROA), averaged 2.6% with a low variation of 0.71%, indicating that most banks consistently earned modest profits over the study period. Capital adequacy, assessed as total equity to total assets, averaged 12% with higher variability (7.8%), reflecting differences across banks and years. Asset quality, measured by loan loss provisions to total loans, had a mean of 1.7% and moderate dispersion (8.5%), suggesting generally healthy loan portfolios with some variation. Operational efficiency, indicated by the cost-to-income ratio, averaged 26.13% but showed substantial fluctuation, highlighting differences in management efficiency. Earning ability, measured as net profit before tax to total capital, averaged 21.8% with moderate dispersion (0.85%), implying relatively stable income generation. Liquidity, evaluated by the loan-to-deposit ratio, averaged 24.45%, exceeding the regulatory minimum of 15%, though it varied across banks and years (10.33%), indicating differences in the capacity to meet short-term obligations. Overall, these indicators reveal that Ethiopian private commercial banks maintained stable profitability and liquidity, with variability in capital adequacy, operational efficiency, and asset quality across the sector. Table 4.2 Correlation Result The correlation analysis of the selected private commercial banks in Ethiopia indicates that return on assets (ROA), as the measure of profitability, is positively associated with capital adequacy, earning ability, management capability, and liquidity, while negatively correlated with asset quality. Specifically, the correlation between ROA and capital adequacy is 0.2299, suggesting that increases in profitability are linked to stronger capital positions. Asset quality, measured by non-performing loans, shows a negative correlation of -0.3600 with ROA, indicating that higher profitability may coincide with a slight decline in asset quality. Management capability exhibits a strong positive correlation of 0.5775 with ROA, reflecting that banks with better profitability tend to have more efficient management practices. Similarly, earning ability, represented by net profit before tax to total capital, is positively correlated at 0.2604 with ROA, implying that banks with higher earnings ratios generally achieve better asset returns. Liquidity, measured by liquid assets to total deposits, is also positively correlated with ROA at 0.2605, showing that banks maintaining higher liquidity levels tend to record higher profitability. Overall, these relationships suggest that Ethiopian private commercial banks’ profitability is strongly influenced by capital adequacy, management efficiency, earning ability, and liquidity, while careful monitoring of asset quality is essential to ensure sustainable financial performance. Table 4.3: Regression Results for Variables Affecting Financial Performance The regression analysis of the selected private commercial banks in Ethiopia reveals the impact of bank-specific factors on financial performance, measured by return on assets (ROA). The estimated model is expressed as ROA = 0.0210849 + 0.0845676 CA – 0.3292474 AQ – 0.0316069 MC + 0.0205582 EA + 0.0210849 LIQ + e, where CA is capital adequacy, AQ is asset quality, MC is management capability, EA is earning ability, and LIQ is liquidity. The model’s R-squared value of 0.563 indicates that 56.3% of the variation in ROA is explained collectively by these independent variables, demonstrating that capital adequacy, asset quality, management efficiency, earning capacity, and liquidity are meaningful determinants of financial performance in the Ethiopian private banking sector, while the remaining 43.7% of variation is attributable to other factors not included in the study. Among the variables, capital adequacy, earning ability, and liquidity were found to have statistically significant positive effects on ROA at the 5% significance level, suggesting that banks with stronger capital bases, higher earnings relative to assets, and sufficient liquidity tend to achieve higher profitability. Conversely, asset quality and management capability exhibited negative coefficients, indicating that increases in non-performing loans or higher operational costs relative to income are associated with lower ROA, even though these effects were not statistically significant in this analysis. Overall, the results highlight that maintaining adequate capital, enhancing earning capacity, and ensuring liquidity are critical for the financial stability and profitability of Ethiopian private commercial banks, while monitoring asset quality and improving management efficiency are essential for sustaining long-term performance. These findings provide a comprehensive understanding of how bank-specific factors interact to influence performance and can guide policymakers and bank management in formulating strategies to strengthen the sector. Bottom of Form Source: STATA 15 output, 2023 The regression analysis of the selected Ethiopian private commercial banks indicates that capital adequacy (CA), earning ability (EA), and liquidity (LIQ) have a positive and statistically significant impact on financial performance, measured by return on assets (ROA), while asset quality (AQ) and management capability (MC) exhibit a negative, though largely insignificant, effect. The overall model explains 56.3% of the variation in ROA, suggesting that these bank-specific factors collectively provide a satisfactory explanation of financial performance, while the remaining 43.7% is attributed to other external or macroeconomic variables not included in the study. The positive influence of capital adequacy aligns with prior research, including Athanasoglou et al. (2008) and Ahsan (2016), indicating that banks with higher equity ratios are better positioned to absorb losses and support growth, resulting in higher profitability. Similarly, the positive effect of earning ability confirms previous findings that profitability and productivity of assets are critical for sustainable growth, while the positive correlation of liquidity with ROA supports studies such as Sinkey (1998), showing that adequate liquid resources enable banks to meet obligations and seize profitable opportunities. In contrast, asset quality, although negatively associated with ROA, was not statistically significant, which partially contradicts prior studies suggesting that higher non-performing loans directly reduce bank profitability. Likewise, management capability, measured through cost-to-income ratio, showed a negative but insignificant effect, deviating from research that identifies management efficiency as a significant driver of performance; this may reflect specific operational, regulatory, or market conditions in Ethiopia that mitigate the impact of cost management on overall profitability. Overall, the study confirms that capital strength, earnings capacity, and liquidity are key determinants of financial performance for Ethiopian private commercial banks, while the influence of asset quality and management efficiency appears weaker or context-dependent, highlighting the importance of local factors in shaping bank performance outcomes. Conclusion and Recommendation The study of eight Ethiopian private commercial banks over 2013–2022 using the CAMEL framework revealed that while all banks met regulatory standards, their performance varied across key areas. WB and NIB showed strong capital adequacy, UB and DB had excellent asset quality, and DB and OB led in earnings ability. In contrast, CBO lagged in capitalization and asset quality, and DB and AIB exhibited higher cost-to-income ratios, indicating less efficient management. Liquidity was generally adequate, with CBO and WB strongest and UB and BOA slightly lower but above the minimum requirement. Regression results indicated that capital adequacy, earnings ability, and liquidity positively influenced financial performance, while asset quality and management efficiency had a smaller negative impact. Based on these findings, Ethiopian private banks should prioritize strengthening weaker areas to enhance overall performance. Banks like CBO need to boost capital and improve credit risk management, while those with high operating costs, such as DB and AIB, should focus on cost control and efficiency improvements. Diversifying income, optimizing loan and investment portfolios, and maintaining adequate liquidity are also essential for sustainable profitability. By benchmarking against top performers and adopting best practices, private banks can increase resilience, competitiveness, and their contribution to the country’s financial sector development Recommendation Based on the analysis of Ethiopian private commercial banks, the key recommendation is for banks to strengthen capital adequacy, manage credit risk, and improve operational efficiency. Banks with low capital, like Commercial Bank of Oromia, should raise equity or retain earnings to absorb potential losses, while banks with high non-performing loans must enhance credit appraisal and collection practices. Operational efficiency should be improved by controlling costs and investing in automation, especially for banks with high cost-to-income ratios such as Dashen Bank and Awash International Bank. Additionally, maintaining liquidity near regulatory minimums, diversifying income, and optimizing loan and investment portfolios are crucial for sustainable profitability and resilience. By focusing on these core areas, private banks can strengthen performance, competitiveness, and their role in Ethiopia’s financial sector development. Declarations Author Contribution approved the version to be published References ADB (2002) ). ADB, 2002.Guidelines for the Financial Governance and Management of Investment Projects Financed by the. Ahmed MB (2009) (). Measuring the Performance of Islamic Banks by Adapting Conventional Ratios German University in Cairo Faculty of Management Technology Working Paper No. 16 pp 1–26. Alam HM (2011) R. A. (). A financial performance comparison of public vs private banks: The case of commercial banking sector of. Int. J. Bus. Soc. Sci., 2(11): 56–64. Pakistan ASPACHS ON (2005) Liquidity, Banking Regulation and the Macroeconomy. Evidence on bank liquidity holdings from a panel of UK-resident banks. Bank of England Working Paper. England Athanasoglou PP (2008) B. S. (). Bank-specific, industry-specific and macroeconomic determinants of bank profitability. Int. Finan. Mark. Inst. Money, 18: 121–136. Athanasoglou PS (2005) (). Bank-specific, industry- specific and macroeconomic determinants of bank profitability. Working paper, Bank of Greece. 1(1), 3–4. Basle (2008) (). Committee on Banking Supervision Principles for Sound Liquidity Risk Management and Supervision. Basel: Bank for International Settlements. Basle (2008) (). JK, Health check-up of commercial banks in the framework of CAMEL: A case study of joint venture banks in Nepal, J. Nepalese Bus. Stud., 2(1): 41–55, (2005).). Büyüksalvarcı A (2011) Determinants of capital dequacy ratioin Turkish Banks: A panel data analysis. Afr J Bus Manag 527:11199–11209 c, N. ((2004)). Competition in banking: a review of the literature. Bank of Canada Working Papers, pp. 4–24. Caouette JB, A. E (1998) Managing Credit Risk: The Next Great Financial Challenge. John Wiley & Sons, Inc, New York Additional Declarations No competing interests reported. Cite Share Download PDF Status: Posted Version 1 posted You are reading this latest preprint version Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. As a division of Research Square Company, we’re committed to making research communication faster, fairer, and more useful. We do this by developing innovative software and high quality services for the global research community. Our growing team is made up of researchers and industry professionals working together to solve the most critical problems facing scientific publishing. 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A strong financial system mobilizes savings, allocates resources efficiently, reduces transaction and information costs, and supports trade and investment activities. Research indicates that the efficiency of the financial system significantly influences investment decisions, savings rates, innovation, and overall economic growth.\u003c/p\u003e\n\u003cp\u003eAmong financial institutions, the banking industry serves as a central pillar of the financial system. Commercial banks provide essential financial services, including deposit mobilization, credit provision, and payment facilitation, which contribute to the production of goods and services and improve living standards. A profitable and stable banking sector is better positioned to withstand economic shocks and enhance financial system stability (Athanasoglou et al., 2008). Moreover, banking sector development supports economic growth by financing investment opportunities, facilitating transactions, and processing business-related information (Rushchyshyn \u0026amp; Vasyltsiv, 2021). A competitive banking system further enhances efficiency and contributes to economic growth (Northcott, 2004).\u003c/p\u003e\n\u003cp\u003eFinancial performance evaluation is an important mechanism for assessing the efficiency and effectiveness of banks. It provides valuable information to stakeholders such as depositors, investors, managers, and regulators (Sun, 2011). Financial ratio analysis is widely used to measure and compare performance across banks and over time (Lin et al., 2005). In banking studies, the CAMEL framework covering capital adequacy, asset quality, management efficiency, earnings ability, and liquidity is commonly applied to evaluate financial performance. Following the fall of the Derg regime in 1991, Ethiopia adopted a market-oriented economic system (Geda, 2008). The introduction of the Monetary and Banking Proclamation No. 83/1994 and the Licensing and Supervision of Banking Business Proclamation No. 84/1994 established the legal foundation for modern banking operations and strengthened the regulatory role of the National Bank of Ethiopia. Since then, the private banking sector has expanded significantly. As of June 2022, about 26 private commercial banks were operating in Ethiopia under the supervision of the National Bank of Ethiopia.\u003c/p\u003e\n\u003cp\u003ePrivate commercial banks play an increasingly important role in supporting Ethiopia’s growing service sector and overall economic development. Although many of these banks are relatively young and smaller in asset size, they contribute significantly to financial intermediation and economic activities. Given their growing importance, evaluating their financial performance is essential to assess their stability, profitability, and efficiency.\u003c/p\u003e\n\u003cp\u003eTherefore, this study aims to analyze the financial performance of selected private commercial banks in Ethiopia using financial ratio analysis under the CAMEL framework to provide insights for managers, investors, regulators, and policymakers.\u003c/p\u003e\n\u003col\u003e\n \u003cli\u003e\u003cstrong\u003eStatement of the Problem\u003c/strong\u003e\u003c/li\u003e\n\u003c/ol\u003e\n\u003cp\u003eThe financial system enhances economic productivity by channeling funds from surplus units to deficit units, thereby supporting investment and economic growth. Commercial banks play a central role in this intermediation process. To ensure financial stability and withstand economic shocks, it is essential to examine the factors influencing the financial performance of banks. The development of the banking sector reflects the overall development of the economy (Misra \u0026amp; Aspal, 2013). Therefore, evaluating bank performance is a key indicator of the soundness and efficiency of a country’s economic activities. Several empirical studies have assessed the performance of Ethiopian commercial banks using the CAMEL framework. Anteneh, Arega, and Yonas (2011) found that public banks performed better in capital adequacy, while private banks showed stronger performance in asset quality, management efficiency, and earnings ability; liquidity was strong for both groups. Mulualem (2015) reported that capital adequacy, asset quality, and management efficiency negatively affected profitability, whereas earnings and liquidity had a positive relationship. Dakito (2015) found that NIB demonstrated good overall performance, while Ermias (2016) concluded that bank-specific factors under the CAMEL model explained 67.5% of profitability variations among private banks. Gudata (2015) also revealed variations in performance rankings among selected banks. However, despite these studies, limited research has comprehensively examined private commercial banks in recent periods, and findings remain inconsistent due to differences in methodology, time coverage, and explanatory variables. These inconsistencies and gaps indicate the need for further investigation into the financial performance of private commercial banks in Ethiopia. Issues such as low efficiency, inadequate profitability, poor asset quality, and liquidity challenges require detailed analysis. Therefore, this study aims to examine and compare the financial performance of selected private commercial banks in Ethiopia using the CAMEL framework and assess their performance in relation to regulatory standards set by the National Bank of Ethiopia.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e1.3 Objectives of the Study\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e1.3.1 General Objective\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eThe general objective of this study is to compare the financial performance of selected private commercial banks in Ethiopia based on their financial characteristics using the CAMEL framework.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e1.3.2 Specific Objectives\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eThe specific objectives of the study are:\u003c/p\u003e\n\u003col\u003e\n \u003cli\u003eTo examine capital adequacy, asset quality, management efficiency, earnings ability, and liquidity (CAMEL components) of the selected private commercial banks in Ethiopia.\u003c/li\u003e\n \u003cli\u003eTo analyze the impact of capital adequacy ratio, asset quality ratio, management efficiency ratio, earnings ratio, and liquidity ratio on the financial performance of private commercial banks, as measured by Return on Assets (ROA).\u003c/li\u003e\n\u003c/ol\u003e"},{"header":"Literature Review","content":"\u003cp\u003e\u0026nbsp; \u0026nbsp; \u0026nbsp; 2.1 Theoretical Review of Banking\u003c/p\u003e\n\u003cp\u003eBanks are financial institutions that accept deposits from surplus units and extend credit to deficit units, thereby performing the essential function of financial intermediation. By channeling funds from savers to investors, banks ensure efficient resource allocation and contribute to economic productivity (Goosen et al., 1999). Their primary source of income is interest earned on loans, which exceeds the interest paid on deposits, generating net income and maximizing shareholder value. In most countries, commercial banks operate under strict regulation and licensing requirements, including minimum capital standards, capital adequacy ratios, and \u0026ldquo;fit and proper\u0026rdquo; criteria for management and ownership. These regulations aim to ensure financial stability and protect depositors.\u003c/p\u003e\n\u003cp\u003eThe banking sector plays a significant role in economic development. Banks mobilize savings, finance productive investments, facilitate payment systems, and provide credit to individuals, businesses, and corporations (Rose, 2002; Saunders \u0026amp; Cornett, 2003). Beyond traditional deposit and lending services, banks also create money through deposit liabilities, manage payment systems, act as dealers in foreign exchange, serve as information agents, and fill financial market gaps (Fourie et al., 1998; Valdez, 2000). Despite diversification of services, lending remains the core banking function, as loan portfolio management directly influences profitability and financial stability (Wei-shong \u0026amp; Kuo-chung, 2006).\u003c/p\u003e\n\u003cp\u003eIn Ethiopia, modern banking began in 1905 with the establishment of the Bank of Abyssinia. Over time, the banking system evolved through different political and economic regimes. During the state-controlled economic period (1974\u0026ndash;1991), financial institutions were nationalized and operated under central planning. Following the policy shift in 1991 toward a market-oriented economy, the introduction of Proclamation No. 83/1994 marked a new era, allowing the establishment of private banks. Currently, the banking industry operates under Banking Business Proclamation No. 592/2008 and is regulated by the National Bank of Ethiopia, which oversees monetary stability, sets reserve requirements, issues directives, and supervises banking operations. Although the Ethiopian banking sector has over a century of history, it remains in a developing stage, striving to improve service delivery, technological advancement, and competitiveness while maintaining financial stability.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e2.1.2 Conceptual Framework (CAMEL Model)\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eThe CAMEL model is a widely used supervisory and analytical framework for evaluating the financial performance and soundness of banks. It was originally developed by U.S. bank regulators and later adopted internationally as a standard tool for bank performance evaluation. The acronym CAMEL represents five key dimensions of banking performance: \u003cstrong\u003eCapital adequacy, Asset quality, Management efficiency, Earnings ability, and Liquidity\u003c/strong\u003e.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003eCapital Adequacy (C)\u003c/strong\u003e measures the bank\u0026rsquo;s ability to absorb potential losses and protect depositors. It reflects the bank\u0026rsquo;s financial strength and is commonly measured using the Capital Adequacy Ratio (CAR). A higher capital adequacy ratio indicates greater stability and lower risk exposure.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003eAsset Quality (A)\u003c/strong\u003e evaluates the quality of a bank\u0026rsquo;s loan portfolio and investment assets. It mainly focuses on non-performing loans (NPLs) and credit risk management. Poor asset quality may reduce profitability and threaten financial stability.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003eManagement Efficiency (M)\u003c/strong\u003e assesses how effectively management utilizes bank resources to generate income and control costs. It reflects operational efficiency and strategic decision-making capability.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003eEarnings Ability (E)\u003c/strong\u003e measures the bank\u0026rsquo;s capacity to generate sustainable profits. It is often evaluated using indicators such as Return on Assets (ROA) and Return on Equity (ROE). Strong earnings enhance capital growth and long-term sustainability.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003eLiquidity (L)\u003c/strong\u003e examines the bank\u0026rsquo;s ability to meet short-term obligations and withdrawal demands. Adequate liquidity ensures operational continuity and maintains public confidence.\u003c/p\u003e\n\u003cp\u003eIn this study, Return on Assets (ROA) is used as a proxy for financial performance, while capital adequacy ratio, asset quality ratio, management efficiency ratio, earnings ratio, and liquidity ratio are treated as explanatory variables under the CAMEL framework. The model assumes that bank-specific factors significantly influence the financial performance of private commercial banks in Ethiopia.Bottom of Form\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e2.1 Empirical Literature Review\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eNumerous empirical studies have examined bank performance using the CAMEL framework, which evaluates Capital adequacy, Asset quality, Management efficiency, Earnings ability, and Liquidity. The CAMEL model is widely recognized as an effective tool for assessing financial soundness and profitability (Baral, 2005). Studies such as Elyor (2009) and Uzhegova (2010) successfully applied the model to analyze determinants of bank profitability. In Ethiopia, the National Bank of Ethiopia also adopts the CAMEL framework as a supervisory tool for evaluating bank performance.\u003c/p\u003e\n\u003cp\u003eEmpirical findings show mixed results regarding the impact of CAMEL components on profitability. Mulualem (2015), using panel data from 14 Ethiopian commercial banks (2010\u0026ndash;2014), found that capital adequacy, asset quality, and management efficiency negatively affected profitability, while earnings and liquidity had a positive and statistically significant relationship with ROA and ROE. Similarly, Dakito (2015) reported a positive relationship between capital adequacy and bank performance. Ermias (2016) concluded that bank-specific factors under the CAMEL model explained about 67.5% of the variation in profitability among private commercial banks in Ethiopia. Other international studies, such as Pasiouras and Kosmidou (2007) and Trujillo-Ponce (2012), emphasized that management efficiency often measured by the cost-to-income ratio is a key determinant of profitability.\u003c/p\u003e\n\u003cp\u003eAsset quality and credit risk management are repeatedly identified as crucial determinants of bank stability. Poor asset quality and high levels of non-performing loans (NPLs) have been linked to bank failures (Olweny \u0026amp; Shipo, 2011). According to IMF (2009), non-performing loans are those with payments overdue by more than 90 days, and they significantly affect capital strength and profitability. Studies also provide conflicting evidence regarding liquidity. Some researchers (Chandani et al., 2014; Jha \u0026amp; Hui, 2012) found a negative relationship between liquidity and profitability, while Dang (2011) reported a positive association, suggesting that adequate liquidity enhances stability and profitability. Although several studies have analyzed bank performance using the CAMEL framework, findings remain inconsistent, particularly regarding the effects of capital adequacy, asset quality, and liquidity. Moreover, most Ethiopian studies were conducted during earlier periods and often combined public and private banks, limiting focused analysis on private commercial banks. Few studies have provided a recent comparative performance analysis of private commercial banks in Ethiopia using updated panel data and comprehensive explanatory variables. Therefore, this study seeks to fill this gap by examining the financial performance of selected private commercial banks in Ethiopia and assessing the impact of CAMEL components on profitability in a more recent and comparative context.\u003c/p\u003e"},{"header":"RESEARCH METHODOLOGY","content":"\u003cp\u003e\u003cstrong\u003eSummary of Research Methodology\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eThis study focuses on a comparative analysis of the financial performance of selected private commercial banks in Ethiopia, namely Awash Bank, Bank of Abyssinia, Cooperative Bank of Oromia, Dashen Bank, Nib International Bank, Oromia Bank, United Bank, and Wegagen Bank. A descriptive research design with a quantitative approach was adopted. The study utilized panel data covering a ten-year period from 2013 to 2022 to evaluate financial performance using the CAMEL framework. Out of 26 private commercial banks operating in Ethiopia as of June 2022, eight banks were purposively selected using a non-probability sampling technique. The selection criteria included years of operation (more than 15 years), availability of complete financial statements, capital strength, profitability, branch network, and overall contribution to the economy. Secondary data were collected from audited annual financial statements, including balance sheets, income statements, and cash flow statements obtained from published reports and the National Bank of Ethiopia database.\u003c/p\u003e\n\u003cp\u003eThe study applied ratio analysis under the CAMEL model—Capital adequacy, Asset quality (NPL ratio), Management efficiency (cost-to-income ratio), Earnings ability, and Liquidity ratio—to compare the banks’ financial performance. Descriptive statistics (mean values) and regression analysis were employed to assess differences and examine the impact of bank-specific variables on financial performance, measured by Return on Assets (ROA). The regression model was estimated using STATA 15, while preliminary calculations were performed in Excel. The findings aim to determine the relative strengths and weaknesses of the selected banks and evaluate their performance against regulatory standards set by the National Bank of Ethiopia.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003eModel Specification and Variable Description\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eThe study examines the effect of bank-specific factors on financial performance using the following regression model:\u003c/p\u003e\n\u003cp\u003eROAi=β0+β1CARi+β2NPLi+β3C/Ii+β4LRi+ϵi\\text{ROA}_i = \\beta_0 + \\beta_1 \\text{CAR}_i + \\beta_2 \\text{NPL}_i + \\beta_3 \\text{C/I}_i + \\beta_4 \\text{LR}_i + \\epsilon_iROAi=β0+β1CARi+β2NPLi+β3C/Ii+β4LRi+ϵi\u0026nbsp;\u003c/p\u003e\n\u003cp\u003eWhere:\u003c/p\u003e\n\u003cul type=\"disc\"\u003e\n \u003cli\u003e\u003cstrong\u003eROA\u003c/strong\u003e = Return on Assets (dependent variable, proxy for financial performance)\u003c/li\u003e\n \u003cli\u003e\u003cstrong\u003eβ₀\u003c/strong\u003e = constant term\u003c/li\u003e\n \u003cli\u003e\u003cstrong\u003eβ₁–β₄\u003c/strong\u003e = coefficients of explanatory variables\u003c/li\u003e\n \u003cli\u003e\u003cstrong\u003eCAR\u003c/strong\u003e = Capital Adequacy Ratio (Total Capital ÷ Total Assets)\u003c/li\u003e\n \u003cli\u003e\u003cstrong\u003eNPL\u003c/strong\u003e = Non-Performing Loan Ratio (Non-performing Loans ÷ Total Loans)\u003c/li\u003e\n \u003cli\u003e\u003cstrong\u003eC/I\u003c/strong\u003e = Cost-to-Income Ratio (Operational Cost ÷ Total Income, proxy for management efficiency)\u003c/li\u003e\n \u003cli\u003e\u003cstrong\u003eLR\u003c/strong\u003e = Liquidity Ratio (Liquid Assets ÷ Total Deposits)\u003c/li\u003e\n \u003cli\u003e\u003cstrong\u003eεᵢ\u003c/strong\u003e = regression residuals\u003c/li\u003e\n\u003c/ul\u003e\n\u003cp\u003eAll estimations were performed in STATA 15, while descriptive calculations were done in Excel.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003eVariable Description\u003c/strong\u003e\u003c/p\u003e\n\u003col start=\"1\" type=\"1\"\u003e\n \u003cli\u003e\u003cstrong\u003eCapital Adequacy (CAR):\u003c/strong\u003e Measures a bank’s ability to absorb losses and remain solvent. Higher CAR indicates stronger financial stability.\u003c/li\u003e\n \u003cli\u003e\u003cstrong\u003eAsset Quality (NPL):\u003c/strong\u003e Evaluates the quality of the bank’s loan portfolio. High NPL reduces profitability and indicates credit risk.\u003c/li\u003e\n \u003cli\u003e\u003cstrong\u003eManagement Efficiency (C/I Ratio):\u003c/strong\u003e Assesses how effectively management uses resources to generate income. Lower C/I ratio indicates better performance.\u003c/li\u003e\n \u003cli\u003e\u003cstrong\u003eEarnings Ability (ROA):\u003c/strong\u003e Reflects the bank’s profitability and operational efficiency in generating returns from total assets.\u003c/li\u003e\n \u003cli\u003e\u003cstrong\u003eLiquidity (LR):\u003c/strong\u003e Measures the bank’s ability to meet short-term obligations. Higher liquidity ensures stability and depositor confidence.These variables collectively capture the key internal determinants of bank performance and enable a comparative evaluation of private commercial banks in Ethiopia.\u003c/li\u003e\n\u003c/ol\u003e"},{"header":"DATA ANALYSIS AND DISCUSSION","content":"\u003cp\u003eTable 4.1 Summary of descriptive statistics\u003c/p\u003e\n\u003cp\u003eDescriptive statistics are used to summarize and present data, providing insights into the current status of a phenomenon without making inferences beyond the data itself (J. Toby Mordkoff, 2016). According to Brockington (2003, cited in Solomon, 2011, p. 24), this method helps describe what exists regarding variables or conditions and answers questions such as who, what, where, when, and how. In this study, tools such as mean, standard deviation, minimum, and maximum values were employed. The mean represents the central tendency of the variables, while the standard deviation shows the degree of variation from the mean, with higher values indicating more dispersion and lower values showing data clustering. Minimum and maximum values provide the range of the observations, marking the lowest and highest points in the dataset\u003c/p\u003e\n\u003cp\u003e\u003cimg src=\"https://myfiles.space/user_files/69519_bce2c0439cd956a6/69519_custom_files/img1773865411.png\"\u003e\u003c/p\u003e\n\u003cp\u003eThe analysis of selected private commercial banks in Ethiopia shows that profitability, measured by return on assets (ROA), averaged 2.6% with a low variation of 0.71%, indicating that most banks consistently earned modest profits over the study period. Capital adequacy, assessed as total equity to total assets, averaged 12% with higher variability (7.8%), reflecting differences across banks and years. Asset quality, measured by loan loss provisions to total loans, had a mean of 1.7% and moderate dispersion (8.5%), suggesting generally healthy loan portfolios with some variation. Operational efficiency, indicated by the cost-to-income ratio, averaged 26.13% but showed substantial fluctuation, highlighting differences in management efficiency. Earning ability, measured as net profit before tax to total capital, averaged 21.8% with moderate dispersion (0.85%), implying relatively stable income generation. Liquidity, evaluated by the loan-to-deposit ratio, averaged 24.45%, exceeding the regulatory minimum of 15%, though it varied across banks and years (10.33%), indicating differences in the capacity to meet short-term obligations. Overall, these indicators reveal that Ethiopian private commercial banks maintained stable profitability and liquidity, with variability in capital adequacy, operational efficiency, and asset quality across the sector.\u003c/p\u003e\n\u003cp id=\"_Toc136578005\"\u003eTable 4.2 Correlation Result\u003c/p\u003e\n\u003cp\u003eThe correlation analysis of the selected private commercial banks in Ethiopia indicates that return on assets (ROA), as the measure of profitability, is positively associated with capital adequacy, earning ability, management capability, and liquidity, while negatively correlated with asset quality. Specifically, the correlation between ROA and capital adequacy is 0.2299, suggesting that increases in profitability are linked to stronger capital positions.\u003c/p\u003e\n\u003cp\u003e\u003cimg src=\"https://myfiles.space/user_files/69519_bce2c0439cd956a6/69519_custom_files/img1773865423.png\"\u003e\u003c/p\u003e\n\u003cp\u003eAsset quality, measured by non-performing loans, shows a negative correlation of -0.3600 with ROA, indicating that higher profitability may coincide with a slight decline in asset quality. Management capability exhibits a strong positive correlation of 0.5775 with ROA, reflecting that banks with better profitability tend to have more efficient management practices. Similarly, earning ability, represented by net profit before tax to total capital, is positively correlated at 0.2604 with ROA, implying that banks with higher earnings ratios generally achieve better asset returns. Liquidity, measured by liquid assets to total deposits, is also positively correlated with ROA at 0.2605, showing that banks maintaining higher liquidity levels tend to record higher profitability. Overall, these relationships suggest that Ethiopian private commercial banks\u0026rsquo; profitability is strongly influenced by capital adequacy, management efficiency, earning ability, and liquidity, while careful monitoring of asset quality is essential to ensure sustainable financial performance.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003eTable 4.3: Regression Results for Variables Affecting Financial Performance\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eThe regression analysis of the selected private commercial banks in Ethiopia reveals the impact of bank-specific factors on financial performance, measured by return on assets (ROA). The estimated model is expressed as ROA = 0.0210849 + 0.0845676 CA \u0026ndash; 0.3292474 AQ \u0026ndash; 0.0316069 MC + 0.0205582 EA + 0.0210849 LIQ + e, where CA is capital adequacy, AQ is asset quality, MC is management capability, EA is earning ability, and LIQ is liquidity. The model\u0026rsquo;s R-squared value of 0.563 indicates that 56.3% of the variation in ROA is explained collectively by these independent variables, demonstrating that capital adequacy, asset quality, management efficiency, earning capacity, and liquidity are meaningful determinants of financial performance in the Ethiopian private banking sector, while the remaining 43.7% of variation is attributable to other factors not included in the study. Among the variables, capital adequacy, earning ability, and liquidity were found to have statistically significant positive effects on ROA at the 5% significance level, suggesting that banks with stronger capital bases, higher earnings relative to assets, and sufficient liquidity tend to achieve higher profitability. Conversely, asset quality and management capability exhibited negative coefficients, indicating that increases in non-performing loans or higher operational costs relative to income are associated with lower ROA, even though these effects were not statistically significant in this analysis. Overall, the results highlight that maintaining adequate capital, enhancing earning capacity, and ensuring liquidity are critical for the financial stability and profitability of Ethiopian private commercial banks, while monitoring asset quality and improving management efficiency are essential for sustaining long-term performance. These findings provide a comprehensive understanding of how bank-specific factors interact to influence performance and can guide policymakers and bank management in formulating strategies to strengthen the sector.\u003c/p\u003e\n\u003cp\u003e\u003cimg src=\"https://myfiles.space/user_files/69519_bce2c0439cd956a6/69519_custom_files/img1773865440.png\"\u003e\u003c/p\u003e\n\u003cp\u003eBottom of Form\u003c/p\u003e\n\u003cp\u003eSource: STATA 15 output, 2023\u003c/p\u003e\n\u003cp\u003eThe regression analysis of the selected Ethiopian private commercial banks indicates that capital adequacy (CA), earning ability (EA), and liquidity (LIQ) have a positive and statistically significant impact on financial performance, measured by return on assets (ROA), while asset quality (AQ) and management capability (MC) exhibit a negative, though largely insignificant, effect. The overall model explains 56.3% of the variation in ROA, suggesting that these bank-specific factors collectively provide a satisfactory explanation of financial performance, while the remaining 43.7% is attributed to other external or macroeconomic variables not included in the study. The positive influence of capital adequacy aligns with prior research, including Athanasoglou et al. (2008) and Ahsan (2016), indicating that banks with higher equity ratios are better positioned to absorb losses and support growth, resulting in higher profitability. Similarly, the positive effect of earning ability confirms previous findings that profitability and productivity of assets are critical for sustainable growth, while the positive correlation of liquidity with ROA supports studies such as Sinkey (1998), showing that adequate liquid resources enable banks to meet obligations and seize profitable opportunities. In contrast, asset quality, although negatively associated with ROA, was not statistically significant, which partially contradicts prior studies suggesting that higher non-performing loans directly reduce bank profitability. Likewise, management capability, measured through cost-to-income ratio, showed a negative but insignificant effect, deviating from research that identifies management efficiency as a significant driver of performance; this may reflect specific operational, regulatory, or market conditions in Ethiopia that mitigate the impact of cost management on overall profitability. Overall, the study confirms that capital strength, earnings capacity, and liquidity are key determinants of financial performance for Ethiopian private commercial banks, while the influence of asset quality and management efficiency appears weaker or context-dependent, highlighting the importance of local factors in shaping bank performance outcomes.\u003c/p\u003e"},{"header":"Conclusion and Recommendation ","content":"\u003cp\u003eThe study of eight Ethiopian private commercial banks over 2013–2022 using the CAMEL framework revealed that while all banks met regulatory standards, their performance varied across key areas. WB and NIB showed strong capital adequacy, UB and DB had excellent asset quality, and DB and OB led in earnings ability. In contrast, CBO lagged in capitalization and asset quality, and DB and AIB exhibited higher cost-to-income ratios, indicating less efficient management. Liquidity was generally adequate, with CBO and WB strongest and UB and BOA slightly lower but above the minimum requirement. Regression results indicated that capital adequacy, earnings ability, and liquidity positively influenced financial performance, while asset quality and management efficiency had a smaller negative impact. Based on these findings, Ethiopian private banks should prioritize strengthening weaker areas to enhance overall performance. Banks like CBO need to boost capital and improve credit risk management, while those with high operating costs, such as DB and AIB, should focus on cost control and efficiency improvements. Diversifying income, optimizing loan and investment portfolios, and maintaining adequate liquidity are also essential for sustainable profitability. By benchmarking against top performers and adopting best practices, private banks can increase resilience, competitiveness, and their contribution to the country’s financial sector development\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003eRecommendation\u0026nbsp;\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eBased on the analysis of Ethiopian private commercial banks, the key recommendation is for banks to strengthen capital adequacy, manage credit risk, and improve operational efficiency. Banks with low capital, like Commercial Bank of Oromia, should raise equity or retain earnings to absorb potential losses, while banks with high non-performing loans must enhance credit appraisal and collection practices. Operational efficiency should be improved by controlling costs and investing in automation, especially for banks with high cost-to-income ratios such as Dashen Bank and Awash International Bank. Additionally, maintaining liquidity near regulatory minimums, diversifying income, and optimizing loan and investment portfolios are crucial for sustainable profitability and resilience. By focusing on these core areas, private banks can strengthen performance, competitiveness, and their role in Ethiopia’s financial sector development.\u003c/p\u003e"},{"header":"Declarations","content":"\u003ch2\u003eAuthor Contribution\u003c/h2\u003e\u003cp\u003eapproved the version to be published\u003c/p\u003e"},{"header":"References","content":"\u003col\u003e\u003cli\u003e\u003cspan\u003eADB (2002) ). \u003cem\u003eADB, 2002.Guidelines for the Financial Governance and Management of Investment Projects Financed by the.\u003c/em\u003e\u003c/span\u003e\u003c/li\u003e \u003cli\u003e\u003cspan\u003eAhmed MB (2009) (). \u003cem\u003eMeasuring the Performance of Islamic Banks by Adapting Conventional Ratios German University in Cairo Faculty of Management Technology Working Paper No. 16 pp 1\u0026ndash;26.\u003c/em\u003e\u003c/span\u003e\u003c/li\u003e \u003cli\u003e\u003cspan\u003eAlam HM (2011) R. A. (). \u003cem\u003eA financial performance comparison of public vs private banks: The case of commercial banking sector of. Int. J. Bus. Soc. Sci., 2(11): 56\u0026ndash;64.\u003c/em\u003e Pakistan\u003c/span\u003e\u003c/li\u003e \u003cli\u003e\u003cspan\u003eASPACHS ON (2005) \u003cem\u003eLiquidity, Banking Regulation and the Macroeconomy. Evidence on bank liquidity holdings from a panel of UK-resident banks. Bank of England Working Paper.\u003c/em\u003e England\u003c/span\u003e\u003c/li\u003e \u003cli\u003e\u003cspan\u003eAthanasoglou PP (2008) B. S. (). \u003cem\u003eBank-specific, industry-specific and macroeconomic determinants of bank profitability. Int. Finan. Mark. Inst. Money, 18: 121\u0026ndash;136.\u003c/em\u003e\u003c/span\u003e\u003c/li\u003e \u003cli\u003e\u003cspan\u003eAthanasoglou PS (2005) (). \u003cem\u003eBank-specific, industry- specific and macroeconomic determinants of bank profitability. Working paper, Bank of Greece. 1(1), 3\u0026ndash;4.\u003c/em\u003e\u003c/span\u003e\u003c/li\u003e \u003cli\u003e\u003cspan\u003eBasle (2008) (). \u003cem\u003eCommittee on Banking Supervision Principles for Sound Liquidity Risk Management and Supervision. Basel: Bank for International Settlements.\u003c/em\u003e\u003c/span\u003e\u003c/li\u003e \u003cli\u003e\u003cspan\u003eBasle (2008) (). \u003cem\u003eJK, Health check-up of commercial banks in the framework of CAMEL: A case study of joint venture banks in Nepal, J. Nepalese Bus. Stud., 2(1): 41\u0026ndash;55, (2005).).\u003c/em\u003e\u003c/span\u003e\u003c/li\u003e \u003cli\u003e\u003cspan\u003eB\u0026uuml;y\u0026uuml;ksalvarcı A (2011) Determinants of capital dequacy ratioin Turkish Banks: A panel data analysis. Afr J Bus Manag 527:11199\u0026ndash;11209\u003c/span\u003e\u003c/li\u003e \u003cli\u003e\u003cspan\u003ec, N. ((2004)). \u003cem\u003eCompetition in banking: a review of the literature. Bank of Canada Working Papers, pp. 4\u0026ndash;24.\u003c/em\u003e\u003c/span\u003e\u003c/li\u003e \u003cli\u003e\u003cspan\u003eCaouette JB, A. E (1998) Managing Credit Risk: The Next Great Financial Challenge. John Wiley \u0026amp; Sons, Inc, New York\u003c/span\u003e\u003c/li\u003e\u003c/ol\u003e"}],"fulltextSource":"","fullText":"","funders":[],"hasAdminPriorityOnWorkflow":false,"hasManuscriptDocX":true,"hasOptedInToPreprint":true,"hasPassedJournalQc":"","hasAnyPriority":false,"hideJournal":true,"highlight":"","institution":"","isAcceptedByJournal":false,"isAuthorSuppliedPdf":false,"isDeskRejected":"","isHiddenFromSearch":false,"isInQc":false,"isInWorkflow":false,"isPdf":false,"isPdfUpToDate":true,"isWithdrawnOrRetracted":false,"journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true},"keywords":"Financial Performance, Private Commercial Banks, CAMEL Model, Ratio Analysis, Ethiopia","lastPublishedDoi":"10.21203/rs.3.rs-9003885/v1","lastPublishedDoiUrl":"https://doi.org/10.21203/rs.3.rs-9003885/v1","license":{"name":"CC BY 4.0","url":"https://creativecommons.org/licenses/by/4.0/"},"manuscriptAbstract":"\u003cp\u003eA sound financial position of banks is essential for depositors, shareholders, employees, and the overall economy. This study examines the comparative financial performance of selected private commercial banks in Ethiopia using panel data from eight banks covering the period 2013\u0026ndash;2022. A quantitative research approach was employed, and a random effects regression model was applied for analysis. Return on Assets (ROA) was used as a proxy for financial performance, while capital adequacy, asset quality, management efficiency, earnings ability, and liquidity were examined under the CAMEL framework. The findings indicate that capital adequacy, earnings ability, and liquidity have a positive and statistically significant effect on financial performance. Conversely, asset quality and management efficiency show a negative and significant relationship with financial performance. The results further reveal that most selected banks performed in line with the standards set by the National Bank of Ethiopia (NBE). The study recommends that bank managers focus on key bank-specific factors to enhance profitability and sustain financial performance.\u003c/p\u003e","manuscriptTitle":"Comparative Analysis of Financial Performance Using Financial Ratios: Evidence from Private Commercial Banks in Ethiopia","msid":"","msnumber":"","nonDraftVersions":[{"code":1,"date":"2026-03-18 20:25:15","doi":"10.21203/rs.3.rs-9003885/v1","editorialEvents":[{"type":"communityComments","content":0}],"status":"published","journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true}}],"origin":"","ownerIdentity":"e905c20d-0987-4f45-b192-3b0f3415a7fc","owner":[],"postedDate":"March 18th, 2026","published":true,"recentEditorialEvents":[],"rejectedJournal":[],"revision":"","amendment":"","status":"posted","subjectAreas":[],"tags":[],"updatedAt":"2026-03-23T07:27:37+00:00","versionOfRecord":[],"versionCreatedAt":"2026-03-18 20:25:15","video":"","vorDoi":"","vorDoiUrl":"","workflowStages":[]},"version":"v1","identity":"rs-9003885","journalConfig":"researchsquare"},"__N_SSP":true},"page":"/article/[identity]/[[...version]]","query":{"redirect":"/article/rs-9003885","identity":"rs-9003885","version":["v1"]},"buildId":"XKTyCvWXoU3ODBz1xrDgd","isFallback":false,"isExperimentalCompile":false,"dynamicIds":[84888],"gssp":true,"scriptLoader":[]}