Determinants of bank profitability in Georgian banking sector

Abstract

This study examines the impact of bank-specific and macroeconomic determinants on the profitability of commercial banks in Georgia, where banks tend to be the largest part of the financial system, with free market systems and liberalization policies similar to those in other transition economies, using panel data analysis and random forest method (RVI) is implemented as a robustness check. The profitability indicators return on asset (ROA), return on equity (ROE), and net interest margin (NIM), all of which have been extensively utilized as indicators of profitability in previous research, were employed. The research indicates that the three most significant bank-specific factors are net loans, nonperforming loans, and capital adequacy ratios. Other bank-specific factors such as asset size and liquidity ratio have statistically minor effects on bank profitability. The other macroeconomic determinant, inflation rate, has no effect on the profitability performance levels of the banks studied.