Determinants of Bank Profitability in Ukraine

Abstract

The Ukrainian banking system exhibits low profitability compared to other transitional countries in the region. This study examines the determinants of bank profitability in Ukraine. It relates bank specific, industry specific and macroeconomic indicators to the overall profitability of Ukrainian banks. The study uses a panel of individual banks’ financial statements from 2005 to 2009. According to the empirical results, Ukrainian banks suffer from low quality of loans and do not manage to extract considerable profits from the growing volume of deposits. Despite low profits from the core banking activities Ukrainian banks manage benefit from exchange rate depreciation. This study finds evidence for the difference in profitability patterns of banks with foreign capital versus exclusively domestically owned banks. The results also indicate that there is room for consolidation of Ukrainian banks in order to benefit from economies of scale.

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