Latest To

THE EFFECT OF FOREIGN EXCHANGE TRANSACTIONS ON BANK PROFITABILITY IN ANGELES CITY ii
HOLY ANGEL UNIVERSITY
Holy Angel University
School of Business and Accountancy
Angeles City
The Effect of Foreign Exchange Transactions on Bank Profitability in Angeles City
Submitted to:
Mr. Jon Bryan B. Pamintuan, CPA
Submitted by:
Alegre, Chelsea Minette S.
Calma, Christiana Jade A.
Dela Cruz, Carl Johannes Q.
Lacson, Jeanae J.
Pasion, Kathleen M.
A- 435
TABLE OF CONTENTS
CHAPTER I – INTRODUCTION
1. Background of the Study……………………………………………………………..…. 3
2. Statement of the Problem……………………………………………………………..…. 4
3. Significance of the Study……………………………………………………….……….. 4
4. Operational Definition of Terms …………………………………………………………5
CHAPTER II
1. Research Literature………………………………………………….…..…………
2. Related Studies ………………………………………….…………………...…………
3. Conceptual Framework …………………………………………………....……………
CHAPTER III – RESEARCH METHODOLOGY
1. Research Design …………………………………………………….…..…………….
2. Respondents of the Study …………………………………...…………………………
3. Methods of Data Gathering …………………………………………....………………
4. Statistical Treatment ……………………………………………………………………
5. Ethical Consideration ………………………………………………………...…………
REFERENCES ……………………………………………………………….………….. ……
CHAPTER I
INTRODUCTION
Background of the Study
Foreign exchange market is a form of exchange for the global decentralized trading of
international currencies. Financial centers around the world function as anchors of trading
between a wide range of different types of buyers and sellers around the clock. In a typical
foreign exchange transaction, a party purchases some quantity of currency by paying some
quantity of another currency. The modern foreign exchange market began forming during the
1970s after three decades of government restrict on foreign exchange transaction when countries
gradually switched to floating exchange rate from previous exchange rate regime
(https://iproject.com.ng, 2016).
In an article written in www.researchgate.net (2015), banks have expanded
internationally by establishing foreign subsidiaries and branches or by taking over established
banks. The internationalization of the banking section has been spurred by the lateralization of
financial market worldwide. Developed and developing countries alike now increasingly allow
banks to be foreign owned and allow foreign entry on a nation treatment basis. Domestic banks
may incur costs they have to compete with larger international bank with better reputation. Local
entrepreneurs may receive less chess to financial service since foreign generally concentrate on
multinational firms and government may find their control of the economy diminished since
foreign banks tend to be less sensitive to their wishes.

Profitability depends on bank-specific factors and market on which it operates. Bank
factors such as business strategies are reflected in the structure of bank assets and liabilities and
this can affect profitability. Market factors such as market growth and market capitalization can
significantly influence long-term profitability (Bucevska, 2017).
Statement of the Problem
This study aims to provide answers to the following questions:
1. How can banks be described in terms of:
1.1 Types
1.2 Size
1.3 Performance
2. How can the foreign exchange transactions can be described in terms of:
2.1 Amounts
2.2 Currency
2.3 Time
3. How can the profitability of banks be described in terms of:
3.1 Return on Assets (ROA)
3.2 Return on Equity (ROE)
3.3 Profit after Tax
Significance of the Study
The findings generated in this study would be of great help in the following:
Bank Investors or Owners – This study will assist in the decision-making process faced by the
potential investors of a bank. Current and potential investors will have the knowledge and
understanding on how foreign exchange effects the success of the industry.
Bank Managers – The findings of this study will provide significant information to the
managers of various banks to guide them with their management decisions following the changes
in the exchange rate. It will also equip them with the essential knowledge for taking the
necessary action to protect the performance of their organization.
Accounting or Business Management Instructors – The outcome of this study will facilitate
the instructors to study and discuss to their students what will be the effect of foreign exchange
on bank profitability.
Accounting or Business Management Students – This study will be important in providing
students the material for reference and knowledge about the effects of foreign exchange on bank
profitability. This will also be significant to students who want to carry out further research on
the area of study.
Researchers – This study will enable the researchers improve their understanding of foreign
exchange and will know the effect of this form of exchange, to the profitability of bank
industries. This will also help the future researchers who will undertake the same research topic
as their reference or related literature.
Scope and Delimitations

The scope of this research limits only to bank profitability in foreign exchange and does not
include other ways the bank profits. This research also aims to identify the effects of foreign
income to the banks. The research limits its coverage to the banks operating in Angeles City,
Pampanga.
Operational Definition of Terms
Foreign Exchange - the conversion of one currency into another currency; over-the-counter
market for the trading of currencies;
Affect - have an effect on; make a difference to;
Bank - financial institution that accepts deposits from the public and creates credit; an
organization where people and businesses can invest or borrow money
Profitability - measurement of efficiency; ability of a business to produce a return on an
investment; Problems - a question raised for inquiry, consideration, or solution; a situation that
needs to be dealt with or solved;
Face - confront and deal with or accept; to meet and accept a situation with self-assurance;
Effect - a change which is a result or consequence of an action or other cause; cause (something)
to happen; bring about;
Exchange Rates - the value of one currency for the purpose of conversion to another; the value
of a nation's currency in terms of the currency of another nation or economic zone.

Fluctuations - an irregular rising and falling in number or amount; a variation; to shift back and
forth uncertainly;
Engaging - tending to draw favorable attention or interest; Pleasing to the eye or mind;
Foreign Currency – currency of another country
Transactions - a business deal; the act or process of doing business with another person;
Performance - the act of doing a job;
Risk - possibility of loss; the chance that an investment will lose value;
Gain – is the increase in net profit resulting from something other than the day to day earnings
from recurrent operations and are not associated with investments or withdrawals.
Profit - money that is made in a business, through investing after all the costs and expenses are
paid; net income usually for a given period of time.

CHAPTER II
Review of Related Literature
According to the article of Amoguis and Reusora (2017), a depreciating peso does not
significantly affect banks. BDO Unibank, Inc. (BDO) said that an orderly and limited peso
depreciation should have a neutral effect on the banking sector. This view was shared by BPI’s
Messrs. Paner and Neri, who said that at best, the effect would be “slightly positive” on banks
and they said that the more competitive peso has improved the purchasing power of the relatives
of OFWs, helping consumer demand to remain brisk, thereby boosting the working capital
requirements of BPI’s clients. Then added, “Unlike before, the negative impact of the
depreciation has been muted as regulations on foreign currency exposure had been tightened
while banks and corporation have learned their lessons from past currency crisis episodes.”
East West Banking Corp. (EastWest Bank) President and Deputy Chief Executive Officer
Jesus Roberto S. Reyes said for his part, “I think it’s not a big factor, but it’s definitely good for
some sectors.” Then added, “I’d say it’s marginally beneficial”
The banks’ exposure to foreign exchange risk is limited, because of the stringent
guidelines provided by the BSP with the central bank liberalizing its foreign exchange rules since
2007. BPI’s Messrs. Paner and Neri said that the peso’s depreciation and the easing of
regulations on foreign exchange has also given banks the opportunity to help clients hedge their
exposures, take advantage of business opportunities in global trade, and enhance personal
investments. And added, “The bank’s corporate lending business has been affected by the
currency swings as foreign exchange liberalization has allowed clients to hedge their transactions
amidst currency fluctuations,”
For Ruben Carlo O. Asuncion, Union Bank of the Philippines’ chief economist, he sees a
“weakened” peso in the near- to medium-term. With the impending interest rate hike from the
US, he said that peso depreciation would lead to competitiveness sector. Then he added that
“More investors are likely to go into the export sector which leads for possible bank loans.
Weaker peso would then support the shift of the banks to loan business,”
As stated on the article from export.gov (2018), the BSP allows Philippine residents and
non-residents to purchase foreign exchange (FX) from authorized agent banks (AABs) and/or
banks’ subsidiary/affiliate foreign exchange corporations (AAB-forex corps) and from non-bank
entities operating as foreign exchange dealers (FXDs) and/or money changers (MCs) to fund
legitimate foreign exchange obligations, subject to the provision of information and/or
documents. The sale of FX by AABs and AAB-forex corps is governed by the Manual of
Regulations on Foreign Exchange Transactions, issued under Circular No. 645 in February 2009,
as amended. The sale of FX by FXDs/MCs is governed by Circular No. 471, issued in January
2005, as amended.
According to another article from export.gov (2016), one of the risks that is associated
with foreign trade is the uncertainty of future exchange rates. The relative values of the two
currencies could change between the time the deal is concluded and the time payment is
received. A devaluation or depreciation of the foreign currency could cause you to lose money if
you are not properly protected. For example, if the buyer has agreed to pay €500,000 for a
shipment, and the euro is valued at $0.85, you would expect to receive $425,000. If the euro later
decreased in value to $0.84, payment under the new rate would be only $420,000, meaning a loss
of $5,000 for you. If the foreign currency increased in value, however, you would get a windfall
in extra profits. Nevertheless, most exporters prefer to avoid risks and are not interested in
speculating on foreign exchange fluctuations.
According to the article from nibusinessinfo.co.uk (2018), businesses which import or
export goods need to bear in mind a number of key issues when making transactions in foreign
currencies:
▪ Foreign currency transactions are sensitive to fluctuations in the exchange rate. A price
you agree with a customer or supplier on one day could rise or fall if the exchange rate
changes.
▪ If you're exporting, you must decide whether it's best to price your goods or services in
the local currency of the country with which you're trading. The decision will depend on
individual circumstances and on factors such as how you want to present yourself in that
market and how your competitors set their prices.
▪ If you're importing components priced in a foreign currency that form part of goods
you're selling in sterling, you'll need to decide how to price those goods to reflect the
exchange rate.
▪ If you are trading with companies in the eurozone (ie the European Union member states
that use the euro) there are many practices and standards to make life easier.
As stated on the article of Fenech (2018), over the past few months, investors have been
witnessing volatility in foreign exchange markets, primarily brought about political instability, in
addition to economic shortcomings.
There are two sides to this issue. The first is the risk of financial contagion. Contagion is
extremely subjective and therefore, hard to project. A few things increase systemic risk, from
reaction loops to leverage, but overall few reliable predictions can be made on border cases such
as the lira.
A more "concrete" matter is the effect of foreign exchange price movements on the
individual microeconomics of a business.
So when it comes to dealing with Forex, there are, amongst others, three simple questions
to ask: is the currency problem translational or transactional?
Translational means that the currency move simply alters your reported profit, but the
fundamental economics stay intact. Transactional means that the currency move impacts your
costs, but not your revenues or vice-versa. Thus, it alters the fundamental economics of your
business.
Both are actual risks, but transactional risk is of much greater importance than
translational.
If you have income in one currency, but expenses in another, then you can have a
mismatched cost and debt structure - transactional risk. On the other hand, if you have matched
income and expenses, but you report in a third currency, then your operations will function well,
but the reported bottom-line in your home currency might be distorted.
According to the article of bsp.gov.ph (2018), the floating exchange rate system was
adopted by BSP in 1970 because the government considered that occasional, large fluctuations—
typical of the fixed exchange rate system—are more costly, destabilizing and disruptive to the
economy than the more frequent but more gradual changes that may occur in a free float. The
floating rate system is consistent with the current regime's national strategy of achieving external
competitiveness through efficiency, which is also a central theme of the foreign exchange
liberalization efforts. In terms of exchange rate policy, such efficiency is injected into the
economy by basically leaving exchange rate determination to the market forces of supply and
demand.
Stated in the article bsp.gov.ph (2018), A weak peso can improve the external price
competitiveness of Philippine products, thereby increasing the country’s export earnings. The
peso equivalent of remittances in foreign currencies will also increase as the peso depreciation
will mean more pesos in exchange of one foreign currency unit (e.g., US$1). Moreover, tourism
and investment activities will increase as it will be less costly and more desirable for foreigners
to travel and invest in the Philippines. However, peso depreciation can also increase inflationary
pressures as it would cost more pesos to buy imported products and raw materials such as oil and
rice.
According to the article from tradechakra.com (2014), the Bangko Sentral ng Pilipinas
(BSP) maintains a floating exchange rate system. The exchange rates are determined on the basis
of supply and demand in the foreign exchange market. The role of the Bangko Sentral ng
Pilipinas in the foreign exchange market is primarily to ensure orderly conditions in the market.
The market-determination of the exchange rate is consistent with the Government’s commitment
to market-oriented reforms and outward-looking strategies of accomplishing competitiveness
through price stability and efficiency.
In the Philippines, peso-dollar trading among Bankers Association of the Philippines
(BAP) member-banks and between these banks and the BSP are done through the Philippine
Dealing System (PDS). Most of the BAP-member banks which participate in the peso-dollar
trading use an electronic platform called the Philippine Dealing and Exchange Corp. (PDEx).
The BAP appointed PDEx as the official service provider for the US Dollar (USD) / Philippine
Peso (PHP) spot trading (which involve the purchase or sale of the US dollar for immediate
delivery, i.e., within one day for US dollars), and Reuters, as the exclusive distributor of all
PDEx data. Trading through the PDEx allows nearly instant transmission of price information
and trade confirmations. Meanwhile, banks which do not subscribe to PDEx can continue to deal
peso-dollar spot transactions through their Reuters Dealing screens.
Commercial banks in the Philippines are allowed to engage in spot, outright forward, and
swap transactions in Philippine pesos/US dollar and other third currency transactions. Interbank
trading is led among member-banks of the BAP, and between these banks and the BSP. Member-
banks of the PDS can also deal through brokers. At present, there are two foreign exchange
brokers in the Philippines, Tulett Prebon (Philippines), Inc. and ICAP Philippines Inc. For third
currency trading, most commercial banks use the Reuters Dealing and the Bloomberg Financial
Services.
According to Segal (2019), the greatest volume of currency is traded in the interbank
market. This is where banks of all sizes trade currency with each other and through electronic
networks. Big banks account for a large percentage of total currency volume trades. Banks
facilitate forex transactions for clients and conduct hypothetical trades from their own trading
desks. When banks act as dealers for clients, the bid-ask spread represents the bank's profits.
Speculative currency trades are executed to profit on currency fluctuations. Currencies can also
provide diversification to a portfolio mix.
While Central banks, which represent their nation's government, are extremely important
players in the forex market. Open market operations and interest rate policies of central banks
influence currency rates to a very large extent. A central bank is responsible for fixing the price
of its native currency on forex. This is the exchange rate regime by which its currency will trade
in the open market. Exchange rate regimes are divided into floating, fixed and pegged types.
Any action taken by a central bank in the forex market is done to stabilize or increase the
competitiveness of that nation's economy. Central banks (as well as speculators) may engage in
currency interventions to make their currencies appreciate or depreciate. For example, a central
bank may weaken its own currency by creating additional supply during periods of long
deflationary trends, which is then used to purchase foreign currency. This effectively weakens
the domestic currency, making exports more competitive in the global market.
According to Aydemir (2018), the different types of credit inflows appear to have
different impacts on profitability. It shows that long-term banking industry credit inflow
generates more non-interest income compared to interest income while the short-term credit
inflows have no significant effect on general profitability. Additionally, long-term credit inflow
has more impact on ROE than on ROA and NIM. Also, we show that the exchange rate has
significant and negative impact on ROA and ROE and has insignificant effect on NIM.
As stated by Lare-Lantone (2016), this paper investigated the impact differences in
exchange rate regime exerted on profitability in nine sub-Saharan countries banking sectors. It
linked banking sector’s production, structure, and efficiency variables along with
macroeconomic variables to their ROA, ROE, and interest spread. The variable is used to control
for difference in exchange rate regimes. Generally, the results differed with the ROA, the ROE,
and interest spread as dependent variable. Consistently, interest spread as a measure of
profitability provided the best results suggesting that banks profitability in these countries is
mainly interest related. On one hand, Banks assets, liabilities, and management quality are
statistically significant determinants of their spread. On the other hand, the elasticity of the
demand for banks assets with respect to their rate of interest, efficiency, and management quality
are statistically significant determinants of their ROA while none of the variable is revealed
statistically significant with the ROE.
According to Agbeja (2016), sound credit with exchange rate management requires a
clear, well-articulated and accessible policy document which spells out the philosophy of lending
and repayment. This will ensure that loan losses are reduced to the barest minimum via a
programme which permits constant supervision of the projects being financed, easy identification
of delinquent loans and instituting effective corrective measures. In conclusion, the results from
hypotheses tested have confirmed that the following should be accepted: nonperforming loans
have an inverse and negative relationship with profitability of deposit money banks in Nigeria;
exchange rate risk has positive and direct effect on performance of deposit money banks in
Nigeria; and impairment on loans has some effect on profitability of deposit money banks in
Nigeria.
As stated by Hoffman (2017), if the yield on foreign exchange reserves is significantly
below the average interest rate paid in liquidity-absorbing monetary policy operations, central
banks are at risk of losing money. The threat of losses may undermine the central bank’s
operational independence and reputation, thus also endangering its institutional independence.
This paper provides evidence that a threat to central banks’ financial strength is associated with
the use of low-remunerated or unremunerated reserve requirements to absorb surplus liquidity
from the banking system. Thus, central banks seem to prevent losses by engaging in less costly
absorption operations.
According to Yahaya (2016), the study revealed that exchange rate, inflation and credit
supply to private sector are significant factors responsible for NPLs in Nigeria. Although there
are many determinants of non-performing loans which can be macroeconomic, bank specific and
customer related factors. However, unfavorable macroeconomic factor can be said to be the most
important as it tends to influence all other factors and also that the factors are outside the control
of banks. That is to say macroeconomic influences on banks are sometimes not predictable.
As stated by Kutan (2014), they test whether trading volume of foreign investors is more
important than short-term external debt in explaining foreign exchange rate volatility. The
findings suggest that exchange rate volatility is sensitive to changes in the corporate short-term
foreign debt ratio; however, foreign stock trading volume ratio does not have a significant effect
on foreign exchange rate volatility. They also discuss the policy implications of the findings.
The “dirty floatation mechanism” is used. For more than five years, the central bank has
used its "dirty floatation mechanism" as its main strategy for exchange-rate policy. Under this
scheme, the exchange rate is a market-determined price, but the central bank intervenes, selling
or purchasing hard currency according to its goals. In the case of the Central Reserve Bank of
Peru, it has been purchasing US dollars for years to prevent an appreciation of the local currency
that might hurt the competitiveness of exports. It has simultaneously been able to accumulate a
sizable amount of foreign-exchange reserves. (http://search.ebscohost.com, 2014)
Review of Related Studies
The study of Domanovic et. al. (2018), investigate whether and why commercial bank
profitability varies in low- , medium-, and high- income countries, and whether bank profitability
ratios depend on income level and economic development of individual countries. It analyze how
bank profitability changes depending on bank assets, taking into account other factors that affect
profitability. The authors find that bank profitability, measured by return on assets (ROA),
increases with bank size, but at a declining rate.
Bank profitability is sensitive to macroeconomic conditions despite the trend in the
industry towards greater geographic diversification and the greater use of financial engineering
techniques to manage risk associated with business Bank profitability is sensitive to
macroeconomic conditions despite the trend in the industry towards greater geographic
diversification and the greater use of financial engineering techniques to manage risk associated
with business cycle forecasting (Chong, 2014).
Casey et. al. (2014) found that financial institutions are impacted by foreign currency
movements given the global nature of business and banking, in particular.
Most international business results in the exchange of one currency for another to make
payment. Since exchange rate fluctuates on daily basis, the cash outflows required to make
payments change accordingly. Consequently, the number of unit of a firm home currency needed
to purchase foreign supplies can change even if the suppliers have not adjusted their prices
(Ahmed, 2015).
Exchange rate volatility creates a risky business environment in which there are
uncertainties about future profits and payments. These are especially exacerbated in countries
where financial instruments for hedging against foreign exchange risk are not developed, which
is the case in many developing countries. Further, with increased transactions using foreign
currency, the fluctuations in exchange rates tend to pose significant foreign exchange risk.
Hence, the management of the foreign exchange risk ultimately affect the financial performance
of the bank (Limo, 2014).
Saeed (2014) mentioned in his study that ROA and ROE are most commonly used ratios
for measuring profitability in any organisation including banks and other financial institutions.
ROA indicates the profit generated per pound of assets and decides how bank used investment
resources over the year to generate profit. In addition, it also shows how a bank effectively
utilises its managerial efficiency to transform assets into earnings. The higher ROA ratio points
out higher performance whereas the lower ROA figure indicates inadequate managerial
efficiency of the banks. Different banks in the banking industry are also compared with each
other on the basis of ROA. ROE is measured as dividing the net income over shareholder’s
equity. Like ROA, ROE also indicates how well a bank uses its managerial efficiency and
investment funds to achieve higher profitability level. ROE figure between 15 and 20 percent is a
good indication for the banks
Additionally, the capital adequacy ratio influences positively on performance of banks.
Jabbar (2014), found a positive relationship between banks profitability and capital ratio. They
conducted a comprehensive study for both the developing and developed countries. They found
that the larger banks are more efficient in managing their costs in order to increase their profit.
The negative relationship between the profitability and expenses has been supported by Bourke
and Jiang et al. The dependent variable is ROA which can be derived by dividing net income on
its total assets. It reflects how efficiently the bank’s real investment resources are used by bank’s
management in order to produce profits.
Casey, Fayman and He, “Bank Profitability: The Impact of Foreign Currency
Fluctuations 2014”, this study aimed to investigate the performance of 22 large U.S. commercial
banks is affected by foreign exchange fluctuations over a 40-year period. This study also
presents that these large U.S. banks are exposed to foreign exchange risk and that specific bank
performance is related to the value of the dollar relative to market baskets of other currencies. As
the globalization process has picked up its speed in the past three decades, large U.S. banks, as
well as their major corporate clients, keep increasing their international exposure. As a result of
this study, profitability of those large banks might be significantly affected by fluctuations in
exchange rates. In the quarterly change in net income (EARNING) of largest U.S. banks is
relative to changes in various currency indices. It is valuable to evaluate how bank earnings
respond to changes in values of foreign currencies relative to the U.S. dollar. A significant
relationship may indicate that, in the increasingly global business environment, U.S. banks are
not isolated from levels of international economic activity.
Pancras Otieno, “The Effect of Forign Currency Exchange Rates on Financial
Performance of the Banking Sector in Kenya 2017”, the objective of this study was to determine
the effect of the currency rates on the financial performance of the Banking Sector in Kenya. The
study employed the descriptive research design in collecting information with the target
population being all the 43 commercial banks in Kenya. This study established that exchange
rates do have a positive effect on the commercial banks’ financial performance. The study thus
concludes that increased exchange rates will favour how the banking sector performs and grows.
Offiong, Riman, and Akpan, “Foreign exchange fluctuations and commercial banks
profitability in Nigeria 2016”, this study will employ the pooled cross sectional panel data
analysis to examine the effect of exchange rate movement on the profitability of selected 12
large banks in Nigeria. Eight of the banks selected are national banks while four of the banks
included among the banks selected are assumed to be international banks since they are
capitalized enough to have operational branches outside Nigeria. The study assumes that national
banks have less exposure to international currency risk than international banks.
Lambe Isaac, “Assessing the Impact of Exchange Rate Risk on Banks Performance in
Nigeria 2015”, this study will seek to examine how critical the effective management of foreign
exchange risk is on bank’s performance, what factors can be identified as being responsible
foreign exchange risks and what measures can be adopted as an interventionist approach to
address the problems of foreign exchange rate risks. The findings in this study revealed that real
exchange rate is positively related to terms of trade, real interest differential and lagged real
exchange rate. Given the foregoing, it is therefore concluded that there is a significant impact of
exchange rate risk on bank performance and a well managed exchange rate is capable of driving
immediate and improved performance of banks within the Nigeria economy.
Leyla Ahmed, “The Effect of Foreign Exchange Exposure on the Financial Performance
of Commercial Banks in Kenya 2015”, this study shows all major hard currencies of
international transaction are sources of foreign exchange risk to commercial banks in Kenya. In
general, most commercial banks in Kenya are significantly exposed to foreign exchange risk
emanating from all the major hard currencies of international trade, namely, the US dollar, the
sterling pound, the Euro and the Japanese Yen. Corporate managers and investors in Kenya
should endeavor to apply a combination of simple tools such as the use of forward contracts and
swaps to supplement price adjustments and investment in foreign currency in order to minimize
their exposure to exchange risk. Despite the shortcomings of the financial system in terms of
availability of tools for managing foreign exchange risk exposure, instruments are still available
to manage the risk exposure.
Osundina, C. Kemisola, “Exchange Rate Volatility and Banks Performance: Evidence
from Nigeria 2016”, this study empirically examined the effect of exchange rate fluctuation on
banks performance in Nigeria covering the period of ten years between 2005 and 2014. Foreign
exchange (FOREX) has been a major concept in international banking. Without foreign
exchange, international banking would be impossible as it represents the financial part of the
commercial transactions which is conducted through the payment and settlement systems of the
banks. It has been established, through the findings of this research, that the exchange rate
fluctuation has been found to be one of the drawbacks that banks faced which does not allow
them effectively or efficiently derive the desired revenues from trading in the foreign exchange
market. Therefore, the researcher concludes that the effect of exchange rates fluctuation on banks
performance is subjective on the specific measure of performance used in the research.
Tadesse Getachew, “The Impact of Exchange Rate on the Profitability of Commercial
Banks in Ethiopia”, this study mainly aims to empirically investigate the overall effect of
exchange rate on the profitability of commercial banks of Ethiopia. The study presents that
exchange rate regime is the way a country manages its currency in respect to foreign currencies
and the foreign exchange market. The effect of exchange rate on the economy in general could
therefore affect the bank performance. The Exchange rate volatility measures the degree to
which the exchange rate fluctuates or varies over a period of time. Exchange rate is said to be
more volatile if there are more frequent ups and downs or less volatile if there are lesser changes
in it over a period of time. The correlation and cause and effect relation of the Ethiopian birr
exchange rate with the profitability (ROE) of Ethiopian commercial banks has been analyzed
using regression model. As a result of the study, it has been identified that exchange rate
variation can affect bank performance both directly and indirectly. The direct effect is a balance
sheet based exposure (from asset and liability denominated by foreign currency) and the indirect
effect can be from different sources and it is very subtle. The indirect effect on the bank
profitability is basically emanate from its pressure on the business of bank clients, which
manifested by its effect on demand for bank loan and loan performance.
Conceptual Framework
The relationship between the study variables is presented in conceptual framework
presented in Figure 1. Exchange rate fluctuations the independent variable while dependent
variable will be the bank’s financial performance. The controls variables will be inflation rate,
interest rate spread, and the bank sizes.
Independent Variable
Dependent Variable
Exchange Rates
Fluctuations
Exchange Rate
Inflation Rate
Consumer Price
Index Bank Financial
Performance
Interest Rates Return on Assets

(ROA)
Lending Interest
Rates by the Banks
Bank Size
Total Assets
Figure 1.
CHAPTER III
RESEARCH DESIGN AND METHODS
Description of the Research Design
This research entitled “The Effect of Foreign Exchange Transactions on Bank
Profitability in Angeles City” will employ a descriptive statistical approach which will describe
the impact of Foreign Exchange Transactions on Bank Profitability. Further, our research
methodology will use both the descriptive statistics and quantitative analysis. The quantitative
methods will be applied to analyze financial data from secondary database. In the upcoming
analyses, foreign exchange fluctuations will be studied, with the aim of determining how it
effects that profitability of banks that engage in foreign currency transactions.
The purpose of this study is to examine the extent and effect of foreign exchange
presence in the selected banks in Angeles City. In addition, as a descriptive research, the purpose
of this study is to obtain accurate, factual, systematic data in order to fit them with explanations,
and then test or validate those explanations. Descriptive research involves gathering data that
describe events and then organizes, tabulates, depicts, and describes the data collection.
The dependent variable will measure the bank’s financial performance. It is chosen as a
representation for bank profitability in this research and will be measured by return on assets
which is the ratio of earnings before interests and taxes and total assets. ROA determines the
management efficiency in using a firm’s assets to generate earnings. It is a better measure since
it relates a firm’s profitability to its total asset base and it is also used by most of researchers.
The point of focus of the study is to determine how the foreign exchange transaction
effect the bank profitability of selected banks in Angeles City. The study will be done at a given
time and as such, it will be classified as a cross-sectional study.
Respondents of the Study
According to Given (2017), respondents are those persons who have been invited to
participate in a particular study and have actually taken part in the study. It indicates the analysis
of entire units or total elements collection on which the study was conducted (Cooper &
Schindler, 2015). The target respondents of this research are banks that engaged in foreign
exchange transactions particularly in Angeles City. The respondents consisted of banks that were
listed on the Philippine Stock Exchange (PSE). The study examined these banks because their
information and data lies in the public domain and thus collecting data from the same would be
relatively easier than collecting data from banks not listed in PSE. In addition the study
investigated the market value of banks relative to foreign exchange trading. Thus by using banks
listed on the PSE, it was expected that stock price changes would give a more definite indication
of the macro economic factors that existed at the time the study was done.
Methods of Data Gathering
The type of research method that can be used in gathering data in this study is qualitative
data collection methods. This method provides information useful to further understand the
processes behind the observed results. There are various data collection techniques under
qualitative method such as interviews, observations, focus groups, action research and
ethnography.
The techniques applicable in this study are interviews and observations. Interviews can
be done in any way either over the telephone or much better in person. The questions that will be
raised should be clear and focused with a limited number of topics. Observations involve the
natural settings but this might be lengthy in noting what is happening. Information obtained in
this technique are more reliable since the researcher see how the people actually behave.
Statistical Treatment
The method for analyzing data involves the utilization of the right analytical tools to
address the research questions of the study. The study involved an assessment of foreign
exchange risk management to establish the relationship between foreign exchange risk
management and financial performance of commercial banks in Kenya. Data collected from the
study was sorted, edited and corded to have the required quality and accuracy. It was then
entered into SPSS (Version 21) for generation of frequency tables, charts, correlations and
regressions which helped in the analysis.
The multiple linear regression analysis was applied to examine the extent of influence of
the independent variable on the dependent variables. The regression model is a multivariate
model stating the commercial banks ROA as a function of the selected foreign exchange risk
management strategies.
Ethical Consideration
Ethical considerations in research are critical. Ethics, according to the article of Resnik
(2015) published in the National Institute of Environmental Health Sciences, are the standards or
measures of conduct that recognize the difference between good and bad. They help to decide the
distinction amongst acceptable and unacceptable behaviors. There are several ethical behaviors
to be consider in a research study. It is to be noted that first and foremost, this research study is
academic in nature and for knowledge preservation only. Any usage for purpose outside the
academe range will not be possible. Additionally, all results will be kept confidential. Ethical
behavior is particularly vital in considering issues identified with information sharing, co-origin,
copyright rules and numerous different issues, thus this research paper will undergo an anti-
plagiarism scan tool which makes sure that all authors, websites, sources and figures were
properly cited and quoted. Lastly, authors and other sources will be given proper citation and
recognition.

Latest To

Hochgeladen von

Dokumentinformationen

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Latest To

Hochgeladen von

Copyright:

Verfügbare Formate

THE EFFECT OF FOREIGN EXCHANGE TRANSACTIONS ON BANK PROFITABILITY IN ANGELES CITY ii

HOLY ANGEL UNIVERSITY

Holy Angel University

School of Business and Accountancy

The Effect of Foreign Exchange Transactions on Bank Profitability in Angeles City

Mr. Jon Bryan B. Pamintuan, CPA

1. Background of the Study……………………………………………………………..…. 3

2. Statement of the Problem……………………………………………………………..…. 4

3. Significance of the Study……………………………………………………….……….. 4

4. Operational Definition of Terms …………………………………………………………5

2. Related Studies ………………………………………….…………………...…………

3. Conceptual Framework …………………………………………………....……………

CHAPTER III – RESEARCH METHODOLOGY

1. Research Design …………………………………………………….…..…………….

2. Respondents of the Study …………………………………...…………………………

3. Methods of Data Gathering …………………………………………....………………

4. Statistical Treatment ……………………………………………………………………

5. Ethical Consideration ………………………………………………………...…………

Background of the Study

In an article written in www.researchgate.net (2015), banks have expanded

internationally by establishing foreign subsidiaries and branches or by taking over established

foreign banks tend to be less sensitive to their wishes.

Profitability depends on bank-specific factors and market on which it operates. Bank

significantly influence long-term profitability (Bucevska, 2017).

Statement of the Problem

This study aims to provide answers to the following questions:

1. How can banks be described in terms of:

3. How can the profitability of banks be described in terms of:

3.1 Return on Assets (ROA)

3.2 Return on Equity (ROE)

3.3 Profit after Tax

Significance of the Study

understanding on how foreign exchange effects the success of the industry.

necessary action to protect the performance of their organization.

Accounting or Business Management Students – This study will be important in providing

the area of study.

as their reference or related literature.

Scope and Delimitations

Operational Definition of Terms

market for the trading of currencies;

Affect - have an effect on; make a difference to;

organization where people and businesses can invest or borrow money

Profitability - measurement of efficiency; ability of a business to produce a return on an

needs to be dealt with or solved;

to happen; bring about;

of a nation's currency in terms of the currency of another nation or economic zone.

Foreign Currency – currency of another country

Performance - the act of doing a job;

paid; net income usually for a given period of time.

Review of Related Literature

some sectors.” Then added, “I’d say it’s marginally beneficial”

amidst currency fluctuations,”

legitimate foreign exchange obligations, subject to the provision of information and/or

speculating on foreign exchange fluctuations.

According to the article from nibusinessinfo.co.uk (2018), businesses which import or

market and how your competitors set their prices.

addition to economic shortcomings.

individual microeconomics of a business.

to ask: is the currency problem translational or transactional?

but the reported bottom-line in your home currency might be distorted.

to market-oriented reforms and outward-looking strategies of accomplishing competitiveness

through price stability and efficiency.

In the Philippines, peso-dollar trading among Bankers Association of the Philippines