As a financial intermediary, commercial banks are more exposed to the effect of exchange rate.rnExchange rate can affect bank performance both directly and indirectly. The direct effect isrneasy to identify and can be easily managed. However, the indirect effect of exchange rate onrnthe profitability of commercial banks is very subtle. Basically, it emanates from the impact ofrnexchange rate on the business of bank clients and the economy in general. Therefore, knowingrnthe aggregate impact of exchange rate on the profitability of banks is very crucial to device anrnappropriate coping strategy. This study, is therefore seek to examine the composite impact ofrnexchange rate on the profitability (ROE) of commercial banks in Ethiopia using a balancedrnpanel data set of banks over the period of 2000-2014. Furthermore, this study tried torndetermine how exchange rate affects the growth of bank loan with the intension to identifyrnwhether one of the indirect effect of exchange rate on bank profitability is through its effects onrnloan growth. The empirical findings of this study suggest that exchange rate has statisticallyrnsignificant negative impact on the profitability of commercial banks in Ethiopia. The result ofrnthe model estimated to examine the impact of exchange rate on loan growth of commercialrnbanks in Ethiopia showed that exchange rate has statistically significant positive impact on thernloan growth of banks in Ethiopia. Moreover, from the independent variables included asrncontrol variables in the regression analysis, loan growth rate and GDP growth are found tornhave statistically significant positive impact on bank profitability in Ethiopia, while loan lossrnexpense ratio (Loan loss expense to total loan) is found to have statistically significantrnnegative impact on bank profitability in Ethiopia. Similarly, from control variable included inrnthe loan growth model, number of bank branches, lending interest rate and deposit to loanrnratio are found to have statistically significant negative impact on the bank loan growth inrnEthiopia. The study recommends that the bank managers and governing body shall focus onrnthe composite effect of exchange rate variation on the bank profitability and make sure to availrnappropriate strategy to reduce its adverse effect on the profitability of their bank.rnKey Words: Bank, Exchange rate, profitability, Ethiopia