Currency substitution and bank profitability: Panel evidence from Serbia

Abstract

The paper analyzes the impact of three groups of determinants (macroeconomic, industryspecific and bank-specific) on the financial performances of 10 biggest banks in Serbia. Balanced panel model with quarterly data from 2005-2011 was applied. The results show that inflation, ownership structure, market concentration and financial system structure are not the predominant determinants of bank profitability. Significant negative impact refers to currency substitution, liquidity, ratio of operational expenses, and risks. Significant positive impact on Serbian banks has been revealed with reference to asset size, interest rates, capital adequacy, economic development, leverage, net-interest margin ratio, market participation, and increase of off-balance sheet operation (only in Model 1). © Milivoje Davidovic, Ivan Milenkovic, Srdjan Furtula, 2013.