Unveiling the drivers of bank profitability: insights from Ethiopian banks

Bank profitability analysis seeks to identify macroeconomic, industry, and bank-specific factors, helping management understand and assess key determinants of profitability. To this end, the objective the current study is to analyze the effects of bank specific, industry-specific and macroeconomic factors on fourteen Ethiopian commercial bank profitability for the period of 2011–2023 using a random effect (RE), generalized methods of moments (GMM), fully modified ordinary least square (FMOLS). The findings reveal that income diversification negatively impacts return on assets (ROA), while gross domestic product (GDP) and government effectiveness have substantial positive effects on return on assets (ROA). Return on equity (ROE) is positively influenced by productivity, government effectiveness, and innovation indexes, but negatively affected by capital adequacy and income diversification. Lastly, profitability evaluated by net interest margin (NIM) is positively affected by productivity, COVID-19, and GDP, whereas bank stability and government effectiveness have negative impacts. This study is the first to explore the influences of the innovation index, government effectiveness, and COVID-19 on the performance of Ethiopian banks. By addressing this novel area, the current study offers valuable insights for policymakers, regulators, bank managers, analysts, and other stakeholders, providing a foundation for strategies to enhance the profitability and performance of banks in Ethiopia