Profitability of the Latvian Commercial Banks: a OLS Evaluation Method

Jana Erina

Abstract


Purpose. The main purpose of the present paper is to assess the Latvian commercial banks profitability using OLS method.

Methodology. In order to achieve the results of the present research, the qualitative overview of the scientific literature on Ordinary Least Squares (OLS) method has been performed. To gain the required data, the author of the present paper has analyzed the work of the Latvian commercial banks and the branches/ agencies of the foreign banks, as well as the work of the credit institutions registered in the member states of the European Economic Area (EEA) and their affiliations operating in Latvia in the reporting period of 2007 – 2013. The financial indicators applied for the needs of the present research have been obtained from the data available on the Bankscope data base.

In order to assess the profitability of the Latvian commercial banking system, the author has applied the OLS method, which is based on the unknown parameters in a linear regression model.

For evaluation of the bank profitability the author has used bank specific indicators such as asset quality, liquidity and operational efficiency. Aldo for the additional analysis were included macroeconomics indicators, like GDP and inflation.

Results. Assessing the profitability of the Latvian commercial banks, the author has come to the conclusion that the liquidity and operational efficiency can positive influence bank profitability, while there is no positive influence between profitability and asset quality. Also the macroeconomical indicators showed that there exist strong connection between profitability and GDP and inflation.

The theoretical contribution. The research results showed how profitably working commercial banks in Latvia are, as well as what kind of bank specific and macroeconomics indicators can influence the bank profitability in general.

Practical implications. The research performed has provided information on the profitability of the commercial banks operating in Latvia, which allows making decisions considering future perspectives of each bank not only from the standpoint of a shareholder, but also from the standpoint of a bank personnel.

Keywords: OLS, Bank profitability, Latvia.

Paper type: Research paper

 


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