Profitability and efficiency of the Croatian banking sector: impact of bank size

Abstract

Profitability and efficiency of the banking sector significantly contributes to the economic growth and stability. The aim of this paper is to calculate, analyse and discuss profitability and efficiency of the banking sector in the Republic of Croatia for the period 2004-2016, focusing on the segmentation of banks into three groups according to the classification of the Croatian National Bank. Banks' profitability is represented by calculating return on assets (ROA) and return on equity (ROE), while window analysis, form of a data envelopment analysis (DEA), is used to calculate intermediation efficiency. Results indicate that large banks are the most profitable and most efficient banks' group using variable returns to scale (BCC model), while the medium sized banks appear most efficient using constant returns to scale (CCR model). The obtained results allow for an analysis of trends of the banking sector performance and certain recommendations to boost banks' business results are provided.