The Profitability of Banking Sector in Republic of Macedonia

Abstract

A profitable banking sector is better able to withstand negative shocks and contribute to the stability of the financial system. Important changes in the operating environment, particularly after the Asian financial crisis, are likely to affect bank profitability. Empirical analysis finds that both bank-specific as well as macroeconomic factors are important determinants in the profitability of banks. With regard to macroeconomic factors, real GDP growth, inflation and real interest rates have a positive impact. Among bank-specific variables, operational efficiency and business diversification contribute to higher returns on assets, after controlling for differences in the credit quality of loans. The deterioration in profitability in recent years is mainly attributable to the adverse macroeconomic environment in Hong Kong. However, bank profitability should in general improve as the economy recovers.