Profitability Puzzles: Insights from North Macedonian Banks

Abstract

The profitability of banks, as an indicator of financial performance, reflects their ability to generate substantial revenues. Bank profits are essential for their survival, solvency, and growth in a highly competitive environment. Moreover, even if solvency is high, poor profitability undermines a bank’s capacity to absorb negative shocks, which can eventually impact its solvency. Consequently, profitability has a vital role in maintaining the stability of the banking and financial system as a whole. Hence, the primary goal of this research is to analyze several important bank-specific and macroeconomic determinants of bank profitability in the Republic of North Macedonia. More specifically, the paper investigates how the Return on Average Assets (ROAA) is influenced by the Capital Adequacy Ratio (CAR), Credit Risk (CR), Cost to Income Ratio (CIR), Loan to Deposit Ratio (LDR), Inflation Rate (IR), and Gross Domestic Product Rate (GDPR). Using secondary data from trustworthy sources, covering quarterly time series from 2005:Q1 to 2023:Q4, we employ correlation analysis, Granger causality tests, as well as the Auto-Regressive Distributed Lag (ARDL) approach to examine both short- and long-run dependencies among the variables. The results confirm the statistically significant impact of the regressors on the dependent variable and provide a solid foundation for the successful management and enhancement of banks’ profitability.