Understanding Bank Profitability in CEFTA Countries: The Impact of Capital Structure and Bank Size

In the dynamic and highly competitive financial landscape, understanding the relationship between capital structure, bank size, and commercial bank profitability is crucial for optimizing performance. This research study investigates both the correlation and the impact of these factors on profitability in the CEFTA countries. A comprehensive dataset was assembled, comprising audited annual financial statements from 18 commercial banks over the period 2017–2021. Various statistical tests were employed, including correlation analysis, multiple linear regression, fixed effect, random effect, Hausman - Taylor regression, the GMM model, and the GEE model, to assess the impact of capital structure and bank size on commercial bank profitability. The results of the analysis indicate that several factors have a significant influence on the profitability of commercial banks in CEFTA countries. Long-term debt to capital (LTDTC) has a significant positive impact on ROE. Similarly, short-term debt to capital (STDTC) has a positive impact, implying that a higher proportion of short-term debt in relation to capital leads to a substantial increase in ROE. Additionally, compared to smaller banks, larger banks typically exhibit higher levels of profitability. Additionally, commercial banks that experience significant growth in total assets over time also tend to achieve greater profitability. Furthermore, the findings of this study provide valuable insights into strategies for enhancing the profitability of commercial banks within the CEFTA countries. Specifically, they offer actionable recommendations tailored to the unique economic and regulatory contexts of these nations. Additionally, by addressing the specific factors influencing profitability in this regional context, this research contributes to the advancement of knowledge in the field of banking and finance, thereby enriching the existing literature on the subject. In addition to the factors mentioned above, it is essential to acknowledge the positive impact of capital adequacy on the profitability of commercial banks in CEFTA countries. Furthermore, the detrimental effects of inflation and the COVID-19 pandemic on the performance of these banks should also be considered.