Abstract:
Commercial banks have always been the backbone of a country`s economy, helping businesses
and individuals alike, consequently, helping to boost the nation`s economy. This study aims to
examine the factors that affect and impact the profitability of the commercial banks in the
countries of the Western Balkans. The data and observations cover a period of 11 years, starting
from 2010 until 2021, for all the sic countries: Albania, Bosnia and Hercegovina, Kosovo, North
Macedonia, Montenegro and Serbia. Return on assets(ROA) was chosen as the indicator of the
commercial banks` profitability and as the dependent variable while our independent variables
can be classified into two groups: the internal, bank specific, factors and the external,
macroeconomic, factors. The internal factors include capital adequacy, liquidity, bank branches
and non-performing loans while the external factors include GDP growth, inflation rates and
unemployment rates. Initially a panel data regression model was applied, but after conducting
the test of unit root a part of our variables resulted to be non-stationary, so they were transformed
into first differences and a differenced fixed effects model was estimated as the definitive
model of this study. Following the results of our model, the internal factors, specifically, nonperforming
loans(NPL) and bank branches had a significant impact on profitability while out of
the external factors, none of them was found to have a positive impact on the banks` profitability.
