Abstract
The paper analyzed the determinants of profitability of all the commercial banks in Albania, where the banks were analyzed by dividing into groups[1]. These determinants are categorized into two groups, internal and external factors. The objective of the study is to determine the factors that affect the profitability in commercial banks, to show how they differ according to groups of the banks and making some recommendations which can help the management. A panel data with all the commercial banks that operate in Albania is analyzed for the period 2009-2014. To measure the profitability is used the independent variable return on assets. Banking specific factors that are used in this study include variables such as bank size, asset management, credit risk, liquidity of assets, capital adequacy, operational efficiency and cost of financing. On the other hand is taken into consideration only one industry specific factor, which is the concentration and some macroeconomic factors as GDP, exchange rate and inflation. The quantitative data are obtained from the financial statements of commercial banks, INSTAT, Bank of Albania, World Bank and Bankscope, in order to make empirical analysis needed to identify and measure the determinants of bank profitability. In particular, the multiple regression analysis is used to measure the impact of determinants in bank profitability and to realize empirical analysis is used Eviews 7.The results of the study showed a positive relationship between bank size and profitability, statistically important in the group 2, with 1% level of significance. The credit risk had an inverse relation with profitability in the model, statistically significant at 1% level of significance for the group 2 and 5% for the group 1 and 3. While, in terms of macroeconomic factors, GDP had a positive relationship with profitability and it is statistically significant in the group 3. On the other hand, inflation and exchange rate showed a positive relation with profitability (ROA/ROE) but statistically insignificant for the model.[1] According to the Bank of Albania, in December 2014, banks in the Albanian sector are divided by size of activity: 1) The bank group 1 (0-2% of total banking sector assets) include United Bank of Albania, Veneto Bank, International Commercial Bank, First Investment Bank, Credit Bank of Albania; 2) The bank group 2 (2-7% of total banking sector assets) include Procredit Bank, Credit Agricole Bank, National Bank of Greece, Societe Generale Bank - Albania, Alpha Bank - Albania, Union Bank; and 3) The banks group 3 (about 7% of total banking sector assets) include Raiffeisen Bank, Credins Bank, National Commercial Bank, Intesa Sanpaolo Bank-Albania, Tirana Bank.
Highlights
It is a known fact that banks are the main factor contributing to the economic development of each country as they stand in the centre of the economy because of their role as financial intermediaries
The study of profitability is important because it provided information every year about the health of an economy and because profit is a major determinant of growth and employment in a medium term period
As noted by Pasiouras and Kosmidou (2007); Athanasoglou et al, (2008); Olweny and Shipho (2011); Sufian (2011), and many scholars suggest that reduce profitability (RoA) is the main indicator to measure bank profitability because it is not distorted by the high multiplier of capital, while RoE ignore the financial leverage
Summary
It is a known fact that banks are the main factor contributing to the economic development of each country as they stand in the centre of the economy because of their role as financial intermediaries. The Albanian banking sector occupies 90.4% of financial system assets and 91.7% of the country's GDP (Bank of Albania, 2014). The study of profitability is important because it provided information every year about the health of an economy and because profit is a major determinant of growth and employment in a medium term period. What makes the debate about the determinants of profitability is that these determinants are dynamic from time to time and vary in relation of the nature of the firm operation from one country to another. There are no universal findings about the determinants of profitability in the banking sector because countries differ from each other
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