Determinants of profit in the commercial banking industry: evidence from selected transitional economies
Determinants of profit in the commercial banking industry: evidence from selected transitional economies

Summary/Abstract: The paper is focused on the banks profitability as one of the key factors treated by the bank management and observed by the bank shareholder. Having in mind the enduring trend in the banking industry in the developed countries and factors influencing its profitability, the paper attempts to identify and determine the key independent variables influencing the profitability in selected transitional economies. Thus, by using data base of the several transitional economies (Republic of Macedonia, Bosnia and Herzegovina and Serbia), the research determinates key factors which show statistically significance with the profitability ratio, ROA as dependent variable. The results for the tested banks in the three countries showed that: 1) Banks which maintained higher income per employee are more profitable; 2) Banks with private ownership are more profitable then state banks; 3) Banks with higher liquidity ratio are showing higher profitability ration, expressed in ROA; 4) Banks established before 1991 are more profitable then the banks created after 1991; 5) Banks with higher non-interest income are not more profitable in its operation. Results of the multiply regression can be used as policy advocacy by the bank management in focusing toward the key elements which can contribute toward higher profitability. Such results indicate that profitability in analyzed region mainly results from traditional bank activities as credit–deposit activities. Unlike developed countries where high competition and constant decrease in the interest income force banking industry to shift toward non-interest income, in traditional economies, banks can secure higher income and profit by credit activities without need to switch toward new banking products, widely used in developing countries. Therefore the main activities of the banks in the analyzed region are focused on credit activities and traditional banking operations since its utilization, as research indicated, secure high profit.

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