Article2018

What does affect profitability of banks in Croatia?

Filip Fidanoski · Moorad Choudhry · Milivoje Davidović · Bruno S. Sergi

50 citations0/0 files storedCompetitiveness Review An International Business Journal incorporating Journal of Global Competitiveness

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Banking stability, regulation, efficiency Banking Sector Performance and Management Banking Systems and Strategies

Abstract

Purpose The paper aims to determine the impact of bank-specific, industry-specific and macro-specific determinants on the profitability indicators – return on assets (ROA) and ratio net-interest margin (RNIM). Design/methodology/approach This research sample includes selected Croatian banks, and the empirical analysis covers the period 2007-2014. Based on the reliable and robust econometric tests, dynamic estimation technique (DOLS) was run to estimate the profitability models, by using of ROA and RNIM as dependent variables, which also include lagged dependent variables to capture the speed of mean reversion in terms of profitability, respectively. Findings The results proved the crucial positive impact of assets size (economies of scale), loan portfolio and GDP growth on the banks’ profitability. Further, the negative impacts on profitability have risks and administrative costs. This paper shows the positive impact of capital adequacy ratio (CAR) and leverage on ROA and RNIM, as well as the correlation between market concentration and banks’ profitability. Practical implications Basically, Croatian banks should improve operative efficiency and risk management practice to increase their profitability. In addition, banks should carefully balance between capital base and risk exposure on the one hand and take advantage of using relative cheaper deposits and borrowed funds instead of using more expensive equity. This conclusion is reasonable, keeping in mind that the Croatian financial market does not punish banks for an extra risk exposure caused by market imperfections. Finally, the regulatory authority in Croatia should impose some additional antitrust measures to increase competition in the banking market. Originality/value Although a bunch of existing studies explain the determinants of bank profitability from different perspectives, this paper conducts a specific empirical analysis about the determinants of bank profitability in Croatia. In addition, this paper provides a good synthesis of the relevant empirical and theoretical studies from this domain.

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References

1999Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence 1992Determinants of European bank profitability: A note 2010Determinants of Bank Profitability Before and During the Crisis: Evidence from Switzerland 2006Factors influencing the profitability of domestic and foreign commercial banks in the European Union 2004The profitability of european banks: a cross‐sectional and dynamic panel analysis 2000The determinants of bank interest rate margins: an international study 2017The influence of monetary policy on bank profitability 2015Determinants of Banks’ Profitability: Evidence from EU 27 Banking Systems

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