Non-performing loans (NPLs) represent serious obstacles for the banking system, as loans generally constitute the main category of a bank’s assets. NPLs are bank loans that are subject to delayed repayment or are unlikely to be repaid by the borrower. The purpose of this study is to determine the impact of macroeconomic factors such as gross domestic product (GDP) growth, unemployment, inflation, and exports on the level of NPLs, as well as to determine the impact of NPLs on the profitability of the banking sector. Using data from the World Bank, a sample was formed for a 10-year period, from 2012 to 2021, for five Balkan states: North Macedonia, Albania, Kosovo, Bulgaria, and Croatia. With this dataset and the assistance of a linear ordinary least squares regression model, fixed effects regression, and random effects regression, the relationship between determinants of NPLs and their impact on the profitability of the banking sector was assessed. The findings indicate that GDP growth and inflation have negative correlations with NPLs, while unemployment has a positive correlation with them. Furthermore, the reduction in NPLs has contributed to the increase in the profitability of the banking sector for each state included in the study.