Revisiting Capital Structure and Bank Performance Through the Lens of Profitability: The Case of Bosnia and Herzegovina

Abstract

The primary objective of this research is to examine the direction and strength of the impact that capital structure indicators have on the performance of banks in Bosnia and Herzegovina. Specifically, the study aims to assess the degree and nature of the interdependence between capital structure and profitability indicators within the banking sector of Bosnia and Herzegovina. The empirical analysis is based on audited annual data from commercial banks operating in the Bosnian market from 2008 to 2024. To explore these relationships, econometric panel models with fixed and random effects were employed. The findings reveal a statistically significant influence of the debt-to- equity and debt-to-asset ratios on bank profitability. Additionally, internal factors such as bank size and the cost-to-income ratio demonstrated notable significance. Beyond capital structure variables, the analysis also incorporated selected macroeconomic factors, which were found to play an important role in shaping bank profitability. The results highlight the relevance of the regulatory framework and prevailing market conditions in Bosnia and Herzegovina, as they considerably affect bank operations and their ability to generate profit.