Credit Risk and Bank Profitability: Case of Croatia

Banks are exposed to a wide range of different risks and credit risk is considered one of the most important and most influential ones in terms of affecting bank performance. In order to investigate credit risk—profitability relationship, in addition to other bank-specific variables, the model also encompasses industry-specific and macroeconomic variables that might have an influence on bank profitability. A dynamic panel data analysis is applied to the data set of commercial banks that operated in Croatia in the period from 2003 to 2013. The aim of this chapter is to contribute to the understanding of the profitability determinants in the context of developing countries such as Croatia and to give additional insight into the main factors that may influence bank success, which is of unquestionable importance for both policy makers and bank management.