The Determinants of Commercial Bank’ Profitability in the South-Eastern Europe Region: A System GMM Approach

Abstract

This study investigates the determinants of banks’ profitability on a sample of 169 commercial banks located in 7 countries of South-Eastern Europe. Specifically, the study employs dynamic panel data analysis based on the generalized method of moments over a period spanning from 2003–2012. Using alternative profitability measures, such as ROA and ROE, suggests that total assets and loan loss provision usually have more pronounced effects on banks' profitability than other variables and that macroeconomic variables are usually statistically significant, therefore highlighting their importance. Splitting the sample into small and large banks, we found that the determinants of profitability on small banks have a larger effect in comparison to large banks irrespective of the profitability measures used in the analysis; the opposite is the case on macroeconomic variables.