Profitability Determinants of Commercial Banks in Mongolia: A Panel Data Approach

This paper examines the factors that influence the profitability of banks in Mongolia. As most literature shows, a bank’s return on assets (ROA) and return on equity (ROE) are considered measures of profitability. The study explores various internal and external drivers of profitability, including bank size, deposit ratio, capital adequacy, liquidity, operational efficiency, the annual growth rate of the gross domestic product, inflation, and the concentration ratio. At the time of the study, 12 banks were operating in Mongolia. However, due to data availability, unbalanced panel data from 9 commercial banks spanning 2014–2024 are used to identify the factors influencing bank profitability. We employed Pooled Ordinary Least Squares (Pooled OLS), Fixed Effect (FE), and Random Effect (RE) models. Empirical findings indicate that liquidity has a positive and significant impact, while operational efficiency and capital adequacy have negative and significant effects on banking profitability. Deposits have a negative impact across all models; however, their effect on ROE, as a profitability measure, is statistically significant at the 1% level. Bank size shows a positive and significant impact on ROE, but its influence on ROA is insignificant. The concentration ratio is negative and significant at 1% in all estimated models. We recommend that commercial banks manage assets efficiently and operate optimally to increase profits and ensure sustainability. Additionally, banking policymakers should consider these measures when making decisions. This research is unique because it is one of the few studies examining the profitability determinants of Mongolian commercial banks, contributing to the literature in this area.