Volume 3, ISSUE1/2012 - Review of Applied Socio-Economic ...

ISSN: 2247-6172
ISSN-L: 2247-6172
Review of Applied Socio- Economic Research
(Volume 3, Issue 1/ 2012), pp.87
URL: http://www.reaser.eu
e-mail: editors@reaser.eu
Effects of market share on the bank’s profitability
Evgeni Genchev 1
1 Economics Department, Faculty of Economics, Trakia University, Bulgaria
Abstract. The relationship between market share and profitability is perhaps the most-studied single
phenomenon in business policy. The purpose of this study is an attempt to explore the impact of various
factors (such as market share, concentration ratio) on profitability measurements of banks in Bulgaria. The
analysis is based on balanced panel data of 22 banks over the period 2006 to 2010. For the measurement of
bank profitability using one of the most widely used indicators: return on equity (ROE)
The main research hypothesis is that the leading banks (on market share) should achieve better profitability.
The survey results show that the relationship between market share and profitability of banks is positive and
statistically significant. Empirical results confirm that there was no statistically significant relationship
between the concentration in the Bulgarian banking sector and its profitability. The estimation results
suggest that the profitability of Bulgarian banks is influenced only by factors related to their management
decisions and not by changes in the external macroeconomic environment.
The findings of this study have several managerial implications. First, the bank can enlarge their market
share to improve profitability. Second, bank managers should not worry about the degree of concentration in
the industry. Analysis shows that it is management rather than concentration which affects bank profitability.
Keywords: market share, profitability, Bulgarian bank system, concentration ratio.
JEL Codes: G21, C23, and L10.
1. Introduction
Banking sectors in Eastern Europe have undergone a remarkable transformation from the beginning of
the 1990s, which resulted in a relatively consolidated and to a large extent privatized banking industry that is
characterized by a heavy presence of foreign owned banks. The rapid changing face of the financial service
industries has caught growing attentions of academic researchers and business managers on the
competitiveness and sources of profitability of the banking industry.
The main characteristics, which play a significant role in the development of the Bulgarian banking
system, (Mirchev, 2009) are: the transformation of the banking system from one-tier into a two-tier with the
Bulgarian National Bank (BNB) on the first and the commercial banks on the second tier. This was done
through the reestablishment of the commercial banks. New legislative framework was adapted to reflect the
new market structure. The Law on the Bulgarian National Bank (1991) defined the objectives and the powers
of the BNB. Later the Law on the banks and credit activity (1992) defined the activities banks could perform
under the license they were granted.
Corresponding author. Evgeni Genchev, Tel.: + (3590894368703);
E-mail address: (evg_gen2000@abv.bg).