Acta Universitatis Danubius. Œconomica, Vol 11, No 6 (2015)

Abstract

This research aims at assessing and comparing the financial performance of the domestic and foreign banks in the banking sector of Kosovo. The foreign and domestic banking data used for the research are annual data gathered by the Central Bank for the 2001-2007period. We will use the DuPont financial analysis model to measure the comparative performance between domestic and foreign banks. Through this model, we have shown the factors that has driven banks to higher or lower Return on Equity (ROE). The research results show that foreign banks have been more efficient and profitable, thus having a higher ratio of Return on Assets (ROA) and Return on Equity (ROE). The foreign banks’ high ratio of Return on Equity is a result of a higher interest margin (PM), which indicates that foreign banks have made a better costs management and a larger use of financial leverage.  Moreover, the results indicate that despite the domestic banks’ higher ratio of Assets Use (AU) compared to foreign banks, the main factor that has contributed to worsening of domestic banks’ profitability was the high costs of loans provisioning due to poor quality of the loan portfolio. This outcome suggests that domestic banks mostly had clients with less creditworthy and did not possess the adequate techniques to manage loan risk as foreign banks have