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Commercial Bank Profitability Analysis: Evidence from Croatia

Croatian financial system is dominantly bank centered. That give banks crucial role in functioning primary financial system and then in whole economic system. Very inconstant and insignificant past periods in economic activity in Croatia from 2008 to 2016 will be point of interest in this paper. The strong decrease in interest rates in recent period has lowered market interest rates close or even below zero. In such circumstances, banking sector profitability continues to be under the pressure, not least due to generally low lending activity. As commercial banks are not able to administer market interest rates, but rather take it as a given variable, the banks management boards are forced to find other mechanisms in order to defend/increase their profitability. In this paper, we will examine how banking sector profitability in Croatia depends on the selected microeconomic and macroeconomic variables which will be represented through the structure of overall loans, as well as size of total asset and capital with exchange rate and GDP growth yoy. As a dependent variable that represents profitability we will examine most commonly used accounting profitability indicators such as return on asset (ROA) and return on equity (ROE). After introduction, the paper will give the overview of literature regarding the issue as well as the main assumptions of this paper. The third part will give comparison of profitability of banking sectors in Southeastern Europe in aspect of historical movements and changes. After mentioned, the fourth part will examine econometric model with results and explanation. The concluding remarks gives the recommendations and explanations of given econometric results in order to improve bank profitability or increase their competitiveness.

commercial banking, profitability, competitiveness, Croatia

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