Evaluating The Performance of the Commercial Banks In Georgia

Abstract

Banking sector is the most important component of financial system. Development of banking system contributes to the stability and sustainable economic growth. While banks determine policies for profit maximization, they should make efforts to create liquidity and security margins to minimize risk. Therefore, determination of factors affecting the profitability of banks is an important issue in order to identify their policies applied. This study investigates the impact of bank-specific and macroeconomic determinants on profitability of 14 private and commercial banks in Georgia where banks tend to be largest part of financial system with free market system and liberalization policies as in other transition economies for 2009-2013 period by panel data analysis. Return on asset (ROA), return on equity (ROE) and net interest margin (NIM) that have been widely used in the earlier literature as profitability measures were employed. The results indicate that the most important bank-specific determinants are net loans, nonperforming loans and capital adequacy ratio. The other bank specific determinants, asset size and credit to deposit ratio have statistically insignificant impact on profitability of the banks. On the other hand, while one of two macroeconomic determinants of profitability, money supply (M2), has positive significant impact at 10% significance level, other macroeconomic determinant, inflation rate, has insignificant impact on profitability performance levels of the banks included in the study.