Secondary Model for Bank Profitability Management – Test on the Case of Macedonian Banking Sector

Abstract

Banks' profitability is permanently a hot topic in banking circles. The relevance of this subject particularly increases in the periods of stagnation on financial services sector and growing rate of non-performing loans. Our research demonstrates that the dominant independent variables influencing profitability parameters ROA and ROE vary between different regions and economies, as well as between different banks operating on the same market. Establishing suitable internal bank models enables better management of statistically important variables on level on each individual bank which unfastens opportunities for enhanced and proactive management decisions.In the secondary model for profitability of Macedonian banks, we found capital adequacy ratio, capital and reserves/total assets, highly liquid assets/total assets, non-performing loans/total loans, net-interest income /gross income and personnel costs/non-interest expenses as statistically significant parameters for ROA and ROE. On the other hand, the independent variable GDP growth rate, loans to population/gross loans and business loans/gross loans were statistically insignificant for ROA and ROE.We consider that high positive statistical significance of the variable personnel costs/non-interest expenses (which according to our best knowledge wasn’t tested on ROA and ROE in previous studies on bank profitability), presents that the usage of human resources in Macedonian banks in the observation period was rational i.e. the costs in this category adequately follow the dynamics of business development. The costs for optimization should be reaching in other non-interest cost categories.

Keywords: ROA, ROE, Macedonian banks, secondary model, profitability.