Commercial Banks Profitability Indicators: Empirical Evidence from Latvia

Abstract

The aim of the present article is to determine the impact of the external and internal factors of bank performance eon the profitability indicators of the Latvian commercial banks in the period from 2006 to 2011. On the basis of research conducted abroad on bank and macroeconomic profitability indicators, in order to obtain research results the authors evaluated return on assets (ROA) and return on equity (ROE) indicators of the Latvian commercial banks. The authors conducted the survey of scientific literature and analyzed profitability indicators of commercial banks using descriptive methods, as well as SPSS data analysis methods, data correlation and regression analysis. On the basis of the obtained results, the authors have concluded that profitability has had a positive effect on operational efficiency, portfolio composition and management, while it has had a negative effect on the capital and credit risks, as measured according to ROA, while according to ROE, positive influence is exerted on composition of the capital portfolio and negative – on operational efficiency and credit risk. With regard to macroeconomic indicators, the authors have revealed that GDP has a positive impact on profitability as measured by ROA and ROE. The methodology used in the present research can be applied to determine not only profitability indicators of some commercial bank in particular, but also to compare performance indicators of several banks. Having conducted the present research, the authors have obtained empirical evidence on interrelationship between microeconomic and macroeconomic indicators and their effect on the profitability indicators of the Latvian commercial banks.