Determinants of Bank Profitability: Case of Latvia

Abstract

Abstract Research purpose. The goal of the current paper is to investigate the impact of internal factors on bank performance. All the performance indicators and explanatory factors have been distinguished from the scientific literature. Design/methodology/approach. To investigate if there was an effect of the distinguishing factors on Latvian banks’ performance, correlation-regression analysis was applied. To test the developed models’ accuracy, determination coefficient, Durbin–Watson coefficient, variance inflation factor (VIF), Cook’s distance and p-value were computed. Findings. The findings revealed that there was a relationship between all the dependent and independent factors, except return on assets (ROA) and return on equity (ROE). ROA has a significant positive relationship only with net commission income, and ROE, with net interest margin and net commission income. Moreover, two regression models were developed and showed that total assets and number of automated teller machines (ATMs) affect the profitability, represented by earnings before interest, taxes, depreciation, and amortization (EBIDTA) and bank value. Originality/value/practical implications. The current findings contribute to the scientific literature dealing with commercial banks’ performance issue and could be used by the banks to develop strategies for maximising profitability.