BANK-SPECIFIC, ECONOMIC AND LEGAL DETERMINANTS OF PROFITABILITY IN THE REPUBLIC OF NORTH MACEDONIA

Background: Bank profitability is more than just a financial indicator; it is a reflection of the health and vitality of the banking sector and the economy as a whole. Profitable banks help to maintain financial stability by increasing resilience, facilitating capital formation and intermediation, promoting innovation and adaptability, and instilling confidence and trust. Hence, profitability is critical in the banking sector since it directly influences policymakers, regulators, and bank management. Therefore, the study will estimate the influence of specific bank and economic -legal determinants on return on assets in the Republic of North Macedonia. Thus, the study aims to estimate the influence of specific bank and economic -legal determinants on return on assets in the Republic of Northern Macedonia. Methods: The study employs the methodology of the Vector Error Correction Model (VECM) and covers quarterly data from 2007 to 2022. To conduct the empirical analysis required to identify and assess the factors of bank profitability, quantitative data were gathered primarily from the National Bank of the Republic of North Macedonia, the International Monetary Fund (IMF), and the World Bank. Return on Assets was used as a dependent variable. The set of factors is composed into two groups: the first includes bank -specific (controlled) factors such as the sectors' size, credit risk, capital adequacy, liquidity, income diversification, efficiency of operations, and non -performing loans. The second group includes macroeconomic (uncontrolled) factors such as economic growth, inflation, and interest rates. Results and Conclusions: Results reveal that the size of the banking sector, the risk of the credit, liquidity, income diversification and non -performing loans have a meaningful but negative influence on the response variable. However, capital adequacy, operational efficiency, GDP and interest rate have an important positive impact. Hence, based on the empirical analyses, to boost profitability, the Macedonian banking system should prioritise asset management as a size indication, raising the non -income ratio to diversify revenue, reducing credit risk and non -performing loans, and maintaining a good liquidity ratio. Furthermore, there is clear evidence that second -level banks should extend beyond national borders. Better loan portfolio management, greater technology with database processing and communication improvements, and expanded technology with database processing and communication improvements can strengthen the ability to deal with the next crisis. Additionally, banks should increase non -interest revenue by employing it as a risk outlet in banking and distributing it across many income -generating enterprises, enhancing profitability. These findings offer insights for bank executives and regulators interested in increasing bank profitability and stability.