Bank-Specific and Macroeconomic Determinants of Return on Equity in Cambodian Commercial Banks

This research investigates the impact of bank-specific and macroeconomic variables on return on equity as a measure of bank profitability in Cambodia during the period 2014–2024. Based on panel estimation methods, including dynamic panel modeling, the findings indicate that profitability is driven by both bank-specific features and country-level economic conditions. The dynamic panel estimates imply positive and statistically significant lagged return on equity, which means moderate profit persistence. Nevertheless, the coefficient is still less than one, indicating that profitability gradually reverts rather than being permanent. In terms of bank-specific factors, non-performing loans have a negative and statistically significant effect on profitability in all models, supporting the view that decline in asset quality leads to deterioration in bank performance via higher provisioning costs, reduced income generation and lower shareholder returns. The size of banks is always positive and statistically significant, meaning larger banks benefit from economies of scale, better market dominance positions, broadening customer bases and greater income diversification. The impact of capital-related variables is also mixed, indicating that the effects of capital strength on profitability depend on model specification. It is only when controlling for bank-specific effects and dynamic adjustment that the loan-to-deposit ratio becomes significant in pooled and random-effects models. Macroeconomic conditions also affect profitability. GDP growth has a positive and significant effect; inflation has a negative and significant effect.