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What does affect profitability of banks in Croatia?

Filip Fidanoski (School of Economics, Australian Business School, University of New South Wales, Sydney, Australia)
Moorad Choudhry (Kent Business School, University of Kent, Kent, UK)
Milivoje Davidović (Department of Economics, Northern Illinois University, DeKalb, Illinois, USA)
Bruno S. Sergi (Davis Center for Russian and Eurasian Studies, Harvard University, Cambridge, Massachusetts, USA and Department of Economics, University of Messina, Messina, Italy)

Competitiveness Review

ISSN: 1059-5422

Article publication date: 16 July 2018

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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.

Keywords

Citation

Fidanoski, F., Choudhry, M., Davidović, M. and Sergi, B.S. (2018), "What does affect profitability of banks in Croatia?", Competitiveness Review, Vol. 28 No. 4, pp. 338-367. https://doi.org/10.1108/CR-09-2016-0058

Publisher

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Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited

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