BANKS’ BUSINESS MODEL AND THEIR PROFITABILITY. THE CASE OF THE REPUBLIC OF NORTH MACEDONIA

Abstract

In conditions of significant change in the financial markets and the environment, the analysis of banks business models is an important tool for better understanding of the risks to which banks are exposed in their operations. The comprehensive analysis of the business model shows how and in what way the bank operates, i.e. makes a profit in the short term.Also, this analysis gives a complete picture of how the bank will operate in the future under the influence of long-term strategic decisions of the bank and changes in the business environment. It is an indisputable fact that Macedonian banks apply traditional banking, with dominance of lending activity. With application of cluster analysis were identified two groups of banks with different strategies for business activities: banks that are more focused on corporate lending and banks that are more focused on household lending. Thereby, were used data for the period from 2010 to 2019 and on that basis was performed a comparative analysis of the performance. The analysis confirmed that banks that are more focused on household lending show better performance and lower risk. The analysis unequivocally showed that in addition to the traditional performance indicators (ROA and ROE, banks should increasingly use the RWA (Risk Weighted Assets) and RoRWA (Return on Risk Weighted Assets) indicators which incorporate the risk element, enabling more accurate measurement of their profitability. Significant changes in the business models of banks can be expected in the future, primarily due to the health crisis, which, among other things, accelerated the changes in digitalization initiated by the fintech industry.