Profitability Management: How Can Macro and Microeconomic Determinants Influence Commercial Bank Profitability in the EU-27?

Abstract

This paper examines the role of macro and microeconomic determinants in bank profitability in the EU-27. To identify how defined variables can affect profitability, a regression model was constructed with a multicollinearity condition, with multicollinearity below the defined value. Data were collected based on 3,257 bank balance sheets and the World Bank and ORBIS Bank Focus databases. Based on a literature review, we have stated that the bank sector profitability is measured by Net Interest Margin (NIM), Return on Average Assets (ROAA), and Return on Average Equity (ROAE) as dependent variables. The statistical model showed no acceptable solution for Return on Average Equity. Four allowable solutions were found for the profitability of average assets and six solutions for net interest margin. Lastly, the results indicate a clear effect of rising inflation on increasing bank interest rates, and therefore higher interest margins. A healthy economy, also characterized by a growing GDP rate, also positively affects the interest margin.