LIQUIDITY IMPACT ON BANKS PROFITABILITY IN THE REPUBLIC OF SRPSKA

Abstract

Banks, as the primary goal have profit maximization, but because of its importance for the overall economic system there is a huge number of stakeholders from depositors to government who are vitally interested in how banks operate, i.e. maximize profits. Our aim is to establish and examine relationship between banks profitability and liquidity. We will look at 16 interdependencies between liquidity indicators: liquid assets by total assets, liquid assets towards short-term financial liabilities on the one hand and profitability indicators: returns on average assets, return on average capital, net interest income according to total income, non-interest expense according to the total income etc. We constructed solvency model for banks in the Republic of Srpska according to factors which are mostly correlated on state level. We used the data available for the banking system of Republika Srkska to form the model. The model captures 70% of linear relationship between predictor variables and response variable. We can conclude that significant variables are interest cost, capital to asset ratio, dividends, and membership to a group. However, our model caputre 70% of relationship and give us satisfactory level to conduct politics in order to increase bank profitability and creditworthines.