Internal and External Factors Affecting Banking Profitability: Evidence from Albanian Banking Sector

Abstract

This paper gives an overview of the profitability of commercial banks with a specific view on the case of Albania. The purpose of this study is to analyse some of the most important internal and external factors that affect the profitability of commercial banks in Albania. Profitability has an essential role in evaluating performance of banks. The best formula to measure the bank profitability is Return on Assets (ROA). This paper uses backward regression to analyze the Albanian banks‟ profitability. The sample is composed of some important determinants of the five greatest second level banks in Albania gathered from annual reports of each bank, annual report of Bank of Albania and other data published by Albanian Association of Banks for the period from 2005 to 2014. Size, total loans, total deposits, capital ratio, GDP growth and inflation rate are used as independent variables, while return on assets is the dependent variable. The result from the analysis show that, few of internal and external variables have significant impact on Albanian bank‟s profitability, while some others have no significant impact on bank profitability.