This study investigates the impact of internal bank-specific and external macroeconomic factors on the profitability of commercial banks in Ethiopia. A panel FMOLS regression model was applied. Ten years of data were gathered from audited financial statements of six selected banks, the National Bank of Ethiopia, and World Bank sources. The findings indicate that the mean values of profitability for the banks, measured by ROA and NIM, indicate a “very healthy” condition, while ROE indicates a “healthy” condition. The CAR has a positive and significant impact on the ROA, ROE, and NIM, highlighting the importance of capital reserves in maintaining profitability and financial stability. GDP shows mixed results for profitability indicators. It positively influences ROE and NIM but negatively impacts ROA, indicating inefficient asset utilization during economic expansion. IFL has a positive and significant impact on ROE and NIM, suggesting that the banks may adjust interest rates during inflationary periods to maintain profitability. Although the LLPTL has no statistically significant effect on profitability, strong credit risk management remains crucial to maintaining financial stability. The Granger tests reveal that IFL has a unidirectional impact on CAR and ROA. GDP and IFL exhibit a bidirectional relationship. The study forwarded the recommendations to the banks’ managements and the policy regulating authorities. The management required reinforcing minimum capital requirements to maintain stable financial operations and risk resilience. The policymaking authorities continued to enhance economic development to mitigate the negative impact of GDP on ROA, while closely monitoring inflation as a crucial factor in preventing its adverse effects on profitability.