THE IMPACT OF MACROECONOMIC DETERMINANTS ON COMMERCIAL BANK PROFITABILITY IN CENTRAL AND SOUTHEASTERN EUROPEAN COUNTRIES

Abstract

The purpose of this paper is to investigate the impact of macroeconomic variables on bank profitability indicators in Central and Southeastern European countries (CESE). The research sample includes 13 countries of CESE countries: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Hungary, Macedonia, Montenegro, Poland, Romania, Serbia, Slovakia and Slovenia, for the period 2008-2015. The core idea is to empirically evaluate the impact of the main macro indicators, such as gross domestic product, inflation and the real interest rate on bank profitability and their potential relationship. The subject of this paper applies a two-step model: model 1 includes return on asset (ROA), while model 2 includes return on equity (ROE) as the dependent variable. On the other hand, independent variables are gross domestic product (GDP), inflation (INF) and real interest rate (RIR). The results of the panel study indicate that there is a significant effect of GDP and INF on bank profitability indicators in selected countries. Namely, the 1% increase in GDP and INF rise ROA for 0.47% and 0.48%, where inflation has a greater influence on ROA and ROE compared to GDP. The results of the random effect model show that the 1% increase in GDP and INF raise ROE for 0.49% and 0.42%. Likewise, real interest rate has no significant effect on ROA and ROE in selected countries. Based on empirical findings, policymakers should focus on rapid economic growth with controlled inflation that will enhance bank profitability in Central and Southeastern European countries.