The Determinants of Profitability of Western Balkan Countries Commercial Banks: A panel Data Approach

Commercial banks are considered to be important contributors to the country’s financial system and economic development. The aim of this study was to examine the impact of various factors on commercial banks’ profitability. Moreover, the study compares and analyzes the main determinants of the banks’ profitability in Western Balkan (WB) countries. The sample size includes all commercial banks in WB countries, covering the period 2010–2020. The collected data provides information about the two main measurements used to determine a bank’s performance: 1) return on assets (ROA) and 2) return on equity (ROE), which in our study were used as indicators varying from non-performing loans, the number of banks, real gross domestic product growth, the unemployment rate, and consumer price inflation (percent, period average). The estimated regression models with panel data revealed that real GDP growth, the unemployment rate, and inflation are positively correlated and significantly determine the bank’s performance. While two other factors (non-performing loans and the number of banks) were negatively associated with the performance of banks. Since the determining factors of external and internal profitability turn out to be almost the same for all the countries of the Western Balkans, during the observed period of 2010– 2020, the number of cases of non-performing loans was much higher in other countries of the region than in Kosovo. Once again, the banking system in Kosovo, unlike other countries, has scored ROE performance indicators that are almost three times higher than the average of the countries in the region. On the other hand, Kosovo has the highest unemployment rate in the region. While the weakest ROE performance was in Montenegro, which was improving year after year. Our findings have several important implications for policymakers and regulators, especially in Kosovo.