The impact of internal and macroeconomic factors on the profitability of the banking sector. A case study of the Western Balkan countries
Abstract
The banking sector in the Western Balkan countries has changed dramatically in recent years. A variety of factors have contributed to these changes, such as economic growth, increased competition, and the implementation of new regulations. As a result, the profitability of the banking sector varies greatly between countries. The purpose of this research is to look into the impact of internal and macroeconomic factors on the profitability of the banking sector in the Western Balkan countries. The research used 85 observations from unbalanced panel data from five countries from 2005 to 2021. Data were gathered from the International Monetary Fund’s World Economic Outlook Database, which contains information on the trend and progress of banking in the Western Balkans. The variables used included macroeconomic variables, internal bank variables, and industry variables, with return on assets and return on equity used to measure bank profitability. Panel regression with pooled least squares, fixed effects, and random effects was used to analyze these variables. Internal factors such as bank Z-score, 3-bank asset concentration, bank net interest margin, bank overhead costs to total assets, bank credit to deposits, and bank capital to total assets have a positive impact on profitability, according to the findings. GDP and inflation, for example, have a mixed impact on profitability. The impact of industry factors such as liquid assets, deposits, and short-term funding, as well as bank Z-score, on profitability is mixed. The study’s findings have significant implications for policy experts and bank managers in Western Balkan countries. The findings can be used by policymakers to create policies that promote the profitability of the banking sector. The findings can be used by bank managers to improve their banks’ profitability by making strategic decisions about asset allocation, capital structure, and risk management.
Keyword : internal factors, macroeconomic factors, profitability, Western Balkans
How to Cite
Hoxha, A., Bajrami, R., & Prekazi, Y. (2025). The impact of internal and macroeconomic factors on the profitability of the banking sector. A case study of the Western Balkan countries. Business: Theory and Practice, 26(1), 28–47. https://doi.org/10.3846/btp.2025.18670
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Bikker, J. A., & Metzemakers, P. A. (2005). Bank provisioning behaviour and procyclicality. Journal of International Financial Markets, Institutions and Money, 15(2), 141–157. https://doi.org/10.1016/j.intfin.2004.03.004
Bordeleau, É., & Graham, C. (2010). The impact of liquidity on bank profitability (No. 2010-38). Bank of Canada.
Borio, C., Gambacorta, L., & Hofmann, B. (2017). The influence of monetary policy on bank profitability. International Finance, 20(1), 48–63. https://doi.org/10.1111/infi.12104
Bouvatier, V., & Lepetit, L. (2008). Banks’ procyclical behaviour: Does provisioning matter? Journal of International Financial Markets, Institutions and Money, 18(5), 513–526. https://doi.org/10.1016/j.intfin.2007.07.004
Claessens, S., Demirgüç-Kunt, A., & Huizinga, H. (2001). How does foreign entry affect domestic banking markets? Journal of Banking & Finance, 25(5), 891–911. https://doi.org/10.1016/S0378-4266(00)00102-3
Cornett, M. M., & Tehranian, H. (1994). An examination of voluntary versus involuntary security issuances by commercial banks: The impact of capital regulations on common stock returns. Journal of Financial Economics, 35(1), 99–122. https://doi.org/10.1016/0304-405X(94)90019-1
Demirgüç-Kunt, A., & Detragiache, E. (1998). The determinants of banking crises in developing and developed countries. Staff Papers, 45(1), 81–109. https://doi.org/10.2307/3867330
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Duan, Y., & Niu, J. (2020). Liquidity creation and bank profitability. The North American Journal of Economics and Finance, 54, Article 101250. https://doi.org/10.1016/j.najef.2020.101250
Elekdag, S., Malik, S., & Mitra, S. (2020). Breaking the bank? A probabilistic assessment of Euro area bank profitability. Journal of Banking & Finance, 120, Article 105949. https://doi.org/10.1016/j.jbankfin.2020.105949
Flamini, V., McDonald, C. A., & Schumacher, L. B. (2009). The determinants of commercial bank profitability in Sub-Saharan Africa (IMF Working Paper). International Monetary Fund. https://doi.org/10.2139/ssrn.1356442
Gashi, A., Tafa, S., & Bajrami, R. (2022). The impact of macroeconomic factors on non-performing loans in the Western Balkans. Emerging Science Journal, 6(5), 1032–1045. https://doi.org/10.28991/ESJ-2022-06-05-08
Golubeva, O., Duljic, M., & Keminen, R. (2019). The impact of liquidity risk on bank profitability: Some empirical evidence from the European banks following the introduction of Basel III regulations. Journal of Accounting and Management Information Systems, 18(4), 455–485. https://doi.org/10.24818/jamis.2019.04001
Haddaweea, A. H., & Flayyihb, H. H. (2020). The relationship between bank deposits and profitability for commercial banks. International Journal of Innovation, Creativity and Change, 13(7).
Hassan, M. K., & Bashir, A. H. M. (2003, December). Determinants of Islamic banking profitability. In 10th ERF Annual Conference (Vol. 7, pp. 2–31). ResearchGate.
Hmweck, G. A., & Kilcollin, T. E. (1984). Bank profitability and interest rate risk. Journal of Economics and Business, 36(1), 77–84. https://doi.org/10.1016/0148-6195(84)90013-4
Jacques, K., & Nigro, P. (1997). Risk-based capital, portfolio risk and bank capital: A simultaneous equations approach. Journal of Economics and Business, 49(6), 533–547. https://doi.org/10.1016/S0148-6195(97)00038-6
Joaqui-Barandica, O., Manotas-Duque, D. F., & Uribe, J. M. (2022). Commonality, macroeconomic factors and banking profitability. The North American Journal of Economics and Finance, 62, Article 101714. https://doi.org/10.1016/j.najef.2022.101714
Kanwal, S., & Nadeem, M. (2013). The impact of macroeconomic variables on the profitability of listed commercial banks in Pakistan. European Journal of Business and Social Sciences, 2(9), 186–201.
Karadi, P., & Nakov, A. (2021). Effectiveness and addictiveness of quantitative easing. Journal of Monetary Economics, 117, 1096–1117. https://doi.org/10.1016/j.jmoneco.2020.09.002
Karadžić, V., & Đalović, N. (2021). Profitability determinants of big European banks. Journal of Central Banking Theory and Practice, 10(2), 39–56. https://doi.org/10.2478/jcbtp-2021-0013
Kiganda, E. O. (2014). Effect of macroeconomic factors on commercial banks profitability in Kenya: Case of equity bank limited. Journal of Economics and Sustainable Development, 5(2), 46–56.
Kosmidou, K. (2008). The determinants of banks’ profits in Greece during the period of EU financial integration. Managerial Finance, 34(3). https://doi.org/10.1108/03074350810848036
Kosmidou, K., Tanna, S., & Pasiouras, F. (2005, June). Determinants of profitability of domestic UK commercial banks: Panel evidence from the period 1995–2002. In Money Macro and Finance (MMF) Research Group Conference (Vol. 45, pp. 1–27). ResearchGate.
Louzis, D. P., Vouldis, A. T., & Metaxas, V. L. (2012). Macroeconomic and bank-specific determinants of non-performing loans in Greece: A comparative study of mortgage, business and consumer loan portfolios. Journal of Banking & Finance, 36(4), 1012–1027. https://doi.org/10.1016/j.jbankfin.2011.10.012
Nuhiu, A., Hoti, A., & Bektashi, M. (2017). Determinants of commercial banks profitability through analysis of financial performance indicators: Evidence from Kosovo. Business: Theory and Practice, 18, 160–170. https://doi.org/10.3846/btp.2017.017
Obamuyi, T. M. (2013). Determinants of banks’ profitability in a developing economy: Evidence from Nigeria. Organizations and Markets in Emerging Economies, 4(2), 97–111. https://doi.org/10.15388/omee.2013.4.2.14251
Parrado-Martínez, P., Gómez-Fernández-Aguado, P., & Partal-Ureña, A. (2019). Factors influencing the European bank’s probability of default: An application of SYMBOL methodology. Journal of International Financial Markets, Institutions and Money, 61, 223–240. https://doi.org/10.1016/j.intfin.2019.04.003
Pasiouras, F., & Kosmidou, K. (2007). Factors influencing the profitability of domestic and foreign commercial banks in the European Union. Research in International Business and Finance, 21(2), 222–237. https://doi.org/10.1016/j.ribaf.2006.03.007
Perry, P. (1992). Do banks gain or lose from inflation? Journal of Retail Banking, 14(2), 25–31.
Petria, N., Capraru, B., & Ihnatov, I. (2015). Determinants of banks’ profitability: Evidence from EU 27 banking systems. Procedia Economics and Finance, 20, 518–524. https://doi.org/10.1016/S2212-5671(15)00104-5
Riaz, S., & Mehar, A. (2013). The impact of bank specific and macroeconomic indicators on the profitability of commercial banks. Romanian Economic Journal, 16(47).
Saeed, M. S. (2014). Bank-related, industry-related and macroeconomic factors affecting bank profitability: A case of the United Kingdom. Research Journal of Finance and Accounting, 5(2), 42–50.
Sahyouni, A., & Wang, M. (2018). The determinants of bank profitability: Does liquidity creation matter? Journal of Economics and Financial Analysis, 2(2), 61–85. https://doi.org/10.2139/ssrn.3125714
Salas, V., & Saurina, J. (2002). Credit risk in two institutional regimes: Spanish commercial and savings banks. Journal of Financial Services Research, 22(3), 203–224. https://doi.org/10.1023/A:1019781109676
Tan, Y., & Floros, C. (2012). Bank profitability and GDP growth in China: A note. Journal of Chinese Economic and Business Studies, 10(3), 267–273. https://doi.org/10.1080/14765284.2012.703541
Thanasoglou, P. P., Brissimis, S. N., & Delis, M. D. (2008). Bank-specific, industry-specific and macroeconomic determinants of bank profitability. Journal of International Financial Markets, Institutions and Money, 18(2), 121–136. https://doi.org/10.1016/j.intfin.2006.07.001
Veríssimo, P., de Carvalho, P. V., & Laureano, L. (2021). Asymmetries in the Euro area banking profitability. The Journal of Economic Asymmetries, 24, Article e00224. https://doi.org/10.1016/j.jeca.2021.e00224
Al-Qudah, A. M., & Jaradat, M. A. (2013). The impact of macroeconomic variables and banks characteristics on Jordanian Islamic banks profitability: Empirical evidence. International Business Research, 6(10), Article 153. https://doi.org/10.5539/ibr.v6n10p153
Athanasoglou, P. P., Brissimis, S. N., & Delis, M. D. (2008). Bank-specific, industry-specific and macroeconomic determinants of bank profitability. Journal of International Financial Markets, Institutions and Money, 18(2), 121–136. https://doi.org/10.1016/j.intfin.2006.07.001
Baldacci, E., Gupta, S., & Mulas-Granados, C. (2009). How effective is fiscal policy response in systemic banking crises? IMF. https://doi.org/10.2139/ssrn.1442263
Berger, A. N. (1995). The profit-structure relationship in banking – tests of market-power and efficient-structure hypotheses. Journal of Money, Credit and Banking, 27(2), 404–431. https://doi.org/10.2307/2077876
Berger, A., & Humphrey, D. (1997). Efficiency of financial institutions: International survey and directions for future research. European Journal of Operational Research, 98(2), 175–212. https://doi.org/10.1016/S0377-2217(96)00342-6
Bikker, J. A., & Metzemakers, P. A. (2005). Bank provisioning behaviour and procyclicality. Journal of International Financial Markets, Institutions and Money, 15(2), 141–157. https://doi.org/10.1016/j.intfin.2004.03.004
Bordeleau, É., & Graham, C. (2010). The impact of liquidity on bank profitability (No. 2010-38). Bank of Canada.
Borio, C., Gambacorta, L., & Hofmann, B. (2017). The influence of monetary policy on bank profitability. International Finance, 20(1), 48–63. https://doi.org/10.1111/infi.12104
Bouvatier, V., & Lepetit, L. (2008). Banks’ procyclical behaviour: Does provisioning matter? Journal of International Financial Markets, Institutions and Money, 18(5), 513–526. https://doi.org/10.1016/j.intfin.2007.07.004
Claessens, S., Demirgüç-Kunt, A., & Huizinga, H. (2001). How does foreign entry affect domestic banking markets? Journal of Banking & Finance, 25(5), 891–911. https://doi.org/10.1016/S0378-4266(00)00102-3
Cornett, M. M., & Tehranian, H. (1994). An examination of voluntary versus involuntary security issuances by commercial banks: The impact of capital regulations on common stock returns. Journal of Financial Economics, 35(1), 99–122. https://doi.org/10.1016/0304-405X(94)90019-1
Demirgüç-Kunt, A., & Detragiache, E. (1998). The determinants of banking crises in developing and developed countries. Staff Papers, 45(1), 81–109. https://doi.org/10.2307/3867330
Demirgüç-Kunt, A., & Huizinga, H. (1999). Determinants of commercial bank interest margins and profitability: Some international evidence. World Bank Economic Review, 13(2), 379–408. https://doi.org/10.1093/wber/13.2.379
Dietrich, A., & Wanzenried, G. (2009, April). What determines the profitability of commercial banks? New evidence from Switzerland. In 12th Conference of the Swiss Society for Financial Market Researches (Vol. 2, p. 39). Geneva. https://www.efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2009-Milan/papers/EFMA2009_0079_fullpaper.pdf
Duan, Y., & Niu, J. (2020). Liquidity creation and bank profitability. The North American Journal of Economics and Finance, 54, Article 101250. https://doi.org/10.1016/j.najef.2020.101250
Elekdag, S., Malik, S., & Mitra, S. (2020). Breaking the bank? A probabilistic assessment of Euro area bank profitability. Journal of Banking & Finance, 120, Article 105949. https://doi.org/10.1016/j.jbankfin.2020.105949
Flamini, V., McDonald, C. A., & Schumacher, L. B. (2009). The determinants of commercial bank profitability in Sub-Saharan Africa (IMF Working Paper). International Monetary Fund. https://doi.org/10.2139/ssrn.1356442
Gashi, A., Tafa, S., & Bajrami, R. (2022). The impact of macroeconomic factors on non-performing loans in the Western Balkans. Emerging Science Journal, 6(5), 1032–1045. https://doi.org/10.28991/ESJ-2022-06-05-08
Golubeva, O., Duljic, M., & Keminen, R. (2019). The impact of liquidity risk on bank profitability: Some empirical evidence from the European banks following the introduction of Basel III regulations. Journal of Accounting and Management Information Systems, 18(4), 455–485. https://doi.org/10.24818/jamis.2019.04001
Haddaweea, A. H., & Flayyihb, H. H. (2020). The relationship between bank deposits and profitability for commercial banks. International Journal of Innovation, Creativity and Change, 13(7).
Hassan, M. K., & Bashir, A. H. M. (2003, December). Determinants of Islamic banking profitability. In 10th ERF Annual Conference (Vol. 7, pp. 2–31). ResearchGate.
Hmweck, G. A., & Kilcollin, T. E. (1984). Bank profitability and interest rate risk. Journal of Economics and Business, 36(1), 77–84. https://doi.org/10.1016/0148-6195(84)90013-4
Jacques, K., & Nigro, P. (1997). Risk-based capital, portfolio risk and bank capital: A simultaneous equations approach. Journal of Economics and Business, 49(6), 533–547. https://doi.org/10.1016/S0148-6195(97)00038-6
Joaqui-Barandica, O., Manotas-Duque, D. F., & Uribe, J. M. (2022). Commonality, macroeconomic factors and banking profitability. The North American Journal of Economics and Finance, 62, Article 101714. https://doi.org/10.1016/j.najef.2022.101714
Kanwal, S., & Nadeem, M. (2013). The impact of macroeconomic variables on the profitability of listed commercial banks in Pakistan. European Journal of Business and Social Sciences, 2(9), 186–201.
Karadi, P., & Nakov, A. (2021). Effectiveness and addictiveness of quantitative easing. Journal of Monetary Economics, 117, 1096–1117. https://doi.org/10.1016/j.jmoneco.2020.09.002
Karadžić, V., & Đalović, N. (2021). Profitability determinants of big European banks. Journal of Central Banking Theory and Practice, 10(2), 39–56. https://doi.org/10.2478/jcbtp-2021-0013
Kiganda, E. O. (2014). Effect of macroeconomic factors on commercial banks profitability in Kenya: Case of equity bank limited. Journal of Economics and Sustainable Development, 5(2), 46–56.
Kosmidou, K. (2008). The determinants of banks’ profits in Greece during the period of EU financial integration. Managerial Finance, 34(3). https://doi.org/10.1108/03074350810848036
Kosmidou, K., Tanna, S., & Pasiouras, F. (2005, June). Determinants of profitability of domestic UK commercial banks: Panel evidence from the period 1995–2002. In Money Macro and Finance (MMF) Research Group Conference (Vol. 45, pp. 1–27). ResearchGate.
Louzis, D. P., Vouldis, A. T., & Metaxas, V. L. (2012). Macroeconomic and bank-specific determinants of non-performing loans in Greece: A comparative study of mortgage, business and consumer loan portfolios. Journal of Banking & Finance, 36(4), 1012–1027. https://doi.org/10.1016/j.jbankfin.2011.10.012
Nuhiu, A., Hoti, A., & Bektashi, M. (2017). Determinants of commercial banks profitability through analysis of financial performance indicators: Evidence from Kosovo. Business: Theory and Practice, 18, 160–170. https://doi.org/10.3846/btp.2017.017
Obamuyi, T. M. (2013). Determinants of banks’ profitability in a developing economy: Evidence from Nigeria. Organizations and Markets in Emerging Economies, 4(2), 97–111. https://doi.org/10.15388/omee.2013.4.2.14251
Parrado-Martínez, P., Gómez-Fernández-Aguado, P., & Partal-Ureña, A. (2019). Factors influencing the European bank’s probability of default: An application of SYMBOL methodology. Journal of International Financial Markets, Institutions and Money, 61, 223–240. https://doi.org/10.1016/j.intfin.2019.04.003
Pasiouras, F., & Kosmidou, K. (2007). Factors influencing the profitability of domestic and foreign commercial banks in the European Union. Research in International Business and Finance, 21(2), 222–237. https://doi.org/10.1016/j.ribaf.2006.03.007
Perry, P. (1992). Do banks gain or lose from inflation? Journal of Retail Banking, 14(2), 25–31.
Petria, N., Capraru, B., & Ihnatov, I. (2015). Determinants of banks’ profitability: Evidence from EU 27 banking systems. Procedia Economics and Finance, 20, 518–524. https://doi.org/10.1016/S2212-5671(15)00104-5
Riaz, S., & Mehar, A. (2013). The impact of bank specific and macroeconomic indicators on the profitability of commercial banks. Romanian Economic Journal, 16(47).
Saeed, M. S. (2014). Bank-related, industry-related and macroeconomic factors affecting bank profitability: A case of the United Kingdom. Research Journal of Finance and Accounting, 5(2), 42–50.
Sahyouni, A., & Wang, M. (2018). The determinants of bank profitability: Does liquidity creation matter? Journal of Economics and Financial Analysis, 2(2), 61–85. https://doi.org/10.2139/ssrn.3125714
Salas, V., & Saurina, J. (2002). Credit risk in two institutional regimes: Spanish commercial and savings banks. Journal of Financial Services Research, 22(3), 203–224. https://doi.org/10.1023/A:1019781109676
Tan, Y., & Floros, C. (2012). Bank profitability and GDP growth in China: A note. Journal of Chinese Economic and Business Studies, 10(3), 267–273. https://doi.org/10.1080/14765284.2012.703541
Thanasoglou, P. P., Brissimis, S. N., & Delis, M. D. (2008). Bank-specific, industry-specific and macroeconomic determinants of bank profitability. Journal of International Financial Markets, Institutions and Money, 18(2), 121–136. https://doi.org/10.1016/j.intfin.2006.07.001
Veríssimo, P., de Carvalho, P. V., & Laureano, L. (2021). Asymmetries in the Euro area banking profitability. The Journal of Economic Asymmetries, 24, Article e00224. https://doi.org/10.1016/j.jeca.2021.e00224