Abstract:
The analysis of profitability determinants for banking sector in Azerbaijan was done in this study that
used bank specific and external variables and analyzed these variables for the years between 2010 and
2020. A multiple linear regression model (with a panel data) was used as an inferential tool and the
following results were obtained.
Firstly, bank size, capital adequacy and loan growth are significant and positive factors for bank
profitability in Azerbaijan. On the contrary, credit risk, liquidity and leverage are negative for the
financial performance (profitability) of banks in the country. Cost to income or cost efficiency ratio was
not a significant factor for the profitability of banks. Furthermore, market share is not uniform in terms
of its effect as it impacts ROA and ROE positively and significantly whereas its effect on net interest
margin is not significant. Moreover, GDP growth rate was a significant and positive determinant of
profitability whereas inflation was not significant despite its positive effect. Market share variable was a
significant and positive for ROA and ROE whereas the same variable did not have a significant impact on
net interest margin.
The recommendations for the banks suggest that they have a prudent risk management policy in order
to exceed borrowing capacity, have a rigorous due diligence for loans in order to reduce the proportion
of non-performing loans in the future, maintain a balance between loan and deposits so that unforeseen
fund requirements can be covered, expand their loan portfolio to achieve a higher growth rate and seek
the accomplishment of economies of scale through centralization and efficiency enhancement. Expansion
of market share could also be helpful in terms of improving ROA and ROE of banks.