Evaluating the bank profitability in euroized economies

Abstract

Financial euroization is a significant phenomenon in developing countries. The key financial institutions for macroeconomic stability in these countries are the banks. Conversion of most of the financial assets and liabilities into foreign currency creates a currency mismatch between the assets and liabilities in domestic and foreign currency. Banks in the role of intermediaries between depositors and borrowers face the risks of accepting foreign currency deposits and placing foreign currency loans. With this, financial euroization can impact the performance of banks. The paper's main objective is to analyze the impacts of euroization on the performance of banks in North Macedonia, Serbia, and Bosnia and Herzegovina for the period from 2010 to 2020. For performance measure, we use bank profitability. The paper uses a pre-set empirical model, in which the dependent variable is ROA (annual data for the return on assets - as a variable for measuring the profitability of banks) and a set of independent variables, including the degree of euroization. The results suggest that the model is robust, and the variables are statistically significant. In conclusion, this outcome can be ascribed to the segmentation of the bank credit portfolio in credit denominated in domestic versus foreign currency credit denomination. Moreover, the degree of euroization proved to be statistically significant for predicting the performance of banks, hence is high bank management decision-making information.