Abstract. The purpose of this paper is to investigate the relationship between profitability of the Lithuanian banking sector and its internal and external determinants. We use the panel error correction model to assess long-term and short-term determinants of items from bank income statements (net interest income, net fee and commission income and operating expenses). The results of the pooled mean group estimator show that bank size and real GDP are the main determinants in the long-term. Meanwhile, empirical examination suggests various variables as short-term determinants of income statement items. The pooled mean group estimation technique and the analysis of separate income statement items enable us to have a better insight into the Lithuanian banking sector and determinants of its revenue and expenses.

The Working Paper Series seeks to disseminate original research in economics and finance. All papers have been anonymously refereed. By publishing these papers, the Banco de España aims to contribute to economic analysis and, in particular, to knowledge of the Spanish economy and its international environment.The opinions and analyses in the Working Paper Series are the responsibility of the authors and, therefore, do not necessarily coincide with those of the Banco de España or the Eurosystem.The Banco de España disseminates its main reports and most of its publications via the Internet at the following website: http://www.bde.es.Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged.

Purpose-to find and assess connection between banking sector profitability and real economy data, using panel data, and to display analysis capabilities of dynamic panel data estimation methods. Design/methodology/approach-a panel, or longitudinal data set, consists of a sequence of observations, repeated through time on a set of statistical units. Panel data and their estimation methods are frequently used in various economic research, as it gives more information than pure cross-section or time series data. Findings-dynamic panel data estimation methods are used to study relationship between income statement items (net interest income, net fee and commission income and operating expenses) and macroeconomic variables. Model estimation shows that included macroeconomic variables are significant and there is interaction between banks profitability and real economy. Net interest income are found to be dependent on real investment and short term interest rate, net fee and commission income reacts to changes in real gross domestic product (GDP) and operating expenses are connected to real GDP and compensation per employee. Practical implications-the model is used to estimate income statement items changes after the external forecasted macroeconomic impact. The forecasts indicate that banks profitability reacts to changes in macroeconomic situation.

The Working Paper Series seeks to disseminate original research in economics and finance. All papers have been anonymously refereed. By publishing these papers, the Banco de España aims to contribute to economic analysis and, in particular, to knowledge of the Spanish economy and its international environment.The opinions and analyses in the Working Paper Series are the responsibility of the authors and, therefore, do not necessarily coincide with those of the Banco de España or the Eurosystem.The Banco de España disseminates its main reports and most of its publications via the Internet at the following website: http://www.bde.es.

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