An Empirical Analysis of Profitability Determinants of Commercial Banks in the Western Balkans

Abstract

Commercial banks have always been the backbone of a country`s economy, helping businesses and individuals alike, consequently, helping to boost the nation`s economy. This study aims to examine the factors that affect and impact the profitability of the commercial banks in the countries of the Western Balkans. The data and observations cover a period of 11 years, starting from 2010 until 2021, for all the sic countries: Albania, Bosnia and Hercegovina, Kosovo, North Macedonia, Montenegro and Serbia. Return on assets(ROA) was chosen as the indicator of the commercial banks` profitability and as the dependent variable while our independent variables can be classified into two groups: the internal, bank specific, factors and the external, macroeconomic, factors. The internal factors include capital adequacy, liquidity, bank branches and non-performing loans while the external factors include GDP growth, inflation rates and unemployment rates. Initially a panel data regression model was applied, but after conducting the test of unit root a part of our variables resulted to be non-stationary, so they were transformed into first differences and a differenced fixed effects model was estimated as the definitive model of this study. Following the results of our model, the internal factors, specifically, nonperforming loans(NPL) and bank branches had a significant impact on profitability while out of the external factors, none of them was found to have a positive impact on the banks` profitability.