Challenges of Banking Profitability in Eurozone Countries: Analysis of Specific and Macroeconomic Factors
Abstract
Numerous factors affect the rate of return that a financial institution earns. Some of these factors include external forces that shape earnings performance and internal elements found in each financial institution. Policy implications are determined by the type of explanation and should be taken seriously. This paper classifies determinants of bank profitability as well as reviews existing literature on bank performance. The second section of this study quantifies how external factors and internal determinants have influenced the profitability of EU banks. This paper constructs fixed-effect models and Ordinary Least Squares (OLS), which sheds new light on understanding various factors influencing how the EU banking industry performs. The observation period was from 2012 to 2019, and the findings revealed that EU bank profitability is influenced by both external macroeconomic environment and management decisions. The results of this study suggest that equity to assets ratio (EA), Gap ratio, and GDP have a positive impact on bank profitability, while the loan to assets ratio (LA) and the provision for loan losses to total loans ratio (PLL/TL) hurt EU bank profitability. The empirical findings are consistent with the expected results, although, they are different from those of studies that investigated the structure-performance relationship of EU banks because they found that market share and concentration have a positive effect on bank profitability.
Downloads
References
Albertazzi, U., & Gambacorta, L. (2009). Bank profitability and the business cycle. Journal of Financial Stability, 5(4),393-409. http://dx.doi.org/10.1016/j.jfs.2008.10.002.
Athanasoglou, P.P., Brissimis, S.N., & Delis, M. (2008). Bank specific, industry-specific and macroeconomic determinants of bank profitability. Journal of International Financial Markets, Institutions and Money, 18(2),121-136. http://dx.doi.org/10.1016/j.int-fin.2006.07.001
Barra, C. & Zotti, R. (2018). Financial stability as a public policy goal to increase local economic development: An empirical investigation from Italian labour market areas (No. 154). CELPE-Centre of Labour Economics and Economic Policy, University of Salerno, Italy.
Borroni, M. & Rossi, S. (2019). Bank profitability: Measures and determinants. Banking in Europe Banking in Europe. Palgrave Mac- millan Studies in Banking and Financial Institutions. Palgrave Pivot, Cham. 23-53. https://doi.org/10.1007/978-3-030-15013-6_2.
Cheng, G. & Mevis, D. (2019). What happened to profitability? Shocks, challenges, and perspectives for euro area banks. The Euro- pean Journal of Finance, 25(1), 54-78. https://doi.org/10.1080/1351847X.2018.1470994
Christaria, F. & Kurnia, R. (2016). The Impact of financial ratios, operational efficiency and non-performing loan towards commer- cial bank profitability. Accounting and Finance Review AFR, 1, 43-50. https://ssrn.com/abstract=3000205
Claessens, S., Coleman, N., & Donnelly, M. (2018). Low-For-Long interest rates and banks’ interest margins and profitability: Cross-country evidence, Journal of Financial Intermediation, 35(A), 1-16, ISSN 1042-9573, https://doi.org/10.1016/j.jfi.2017.05.004.
Del Giudice, M., Campanella, F., Dezi, L., & Al-Mashari, M. (2016). The bank of things: An empirical investigation on the profitability of the financial services of the future. Business Process Management Journal. https://doi.org/10.1108/BPMJ-10-2015-0139.
Detragiache, M.E., Tressel, M.T., & Turk-Ariss, R. (2018). Where have all the profits gone? European bank profitability over the finan- cial cycle. International Monetary Fund. ISBN/ISSN 9781484354544/1018-5941.
Dietrich A, & Wanzenried G. (2011). Determinants of bank profitability before and during the crisis: Evidence from Switzerland. Journal of International Financial Markets, Institutions and Money 21(3) 307-327. http://dx.doi.org/10.2139/ssrn.1370245
Durguti, E. A., Krasniqi, E. H., & Krasniqi, D. (2020). Assessing the performance of factors affecting the profitability of the bank- ing system: Evidence from Kosovo. European Journal of Sustainable Development, 9(2), 304. https://doi.org/10.14207/ejsd.2020.v9n2p304
Durguti, E., Zhuja, D., & Arifi, E. (2014). An examination of the net interest margin as determinants of banks’ profitability in the Kosovo banking system. European Academic Research, 2(5), 6350-6364. https://doi.org/10.13140/RG.2.2.24588.46720
Firtescu, B.N., Terinte, P.A., Roman, A., & Anton, S.G. (2019). Corporate governance and bank profitability: An empirical assessment for emerging Europe. Transformations in Business & Economics, 18. https://doi.org/10.2478/saeb-2018-0020
Goddard, J., Molyneux, P., Wilson, J. O. S., & Tavakoli, M. (2007). European banking: An overview. Journal of Banking and Finance, 31(7), 1911–1935. https://doi.org/10.1016/j.jbankfin.2007.01.002
Hassan M.K. & Bashir A. M. (2003). Determinants of Islamic Banking Profitability, Paper Presented at the Economic Research Forum (ERF) 10th Annual Conference, Marrakech. Marocco, 16-18 December 2003. DOI:10.3366/edinburgh/9780748621002.003.0008
Ines, B., Ben, G., & Mhiri, S. M. (2013). Explanatory factors of bank performance in Tunisia: A panel model approach. Global Journal of Management and Business Research Finance, 13(5).
Kosmidou, K., Pasiouras, F., Doumpos, M., & Zopounidis, C. (2006). Assessing performance factors in the UK banking sector: A multicriteria methodology. Central European Journal of Operations Research, 14(1), 25–44. https://doi.org/10.1007/s10100-006-0158-5.
Linares-Mustarós, S., Coenders, G. & Vives-Mestres, M. (2018). Financial performance and distress profiles. From classification according to financial ratios to compositional classification. Advances in Accounting, 40, 1-10. https://doi.org/10.1016/j.adi-ac.2017.10.003.
Mamatzakis, E., & Panagiotis, R. (2003). Determinants of Greek commercial banks, 1989-2000. SPOUDAI- Journal of Economics and Business, 53(1), 84–94. http://sro.sussex.ac.uk/id/eprint/40071.
Martinho, R., Oliveria, J. & Oliveria, V. (2017). Bank Profitability and Macroeconomic Factors. Financial stability papers, Banco de Portugal, Lisbon, 2183-4059.
Mendes, V., & Abreu, M. (2003). Do macro-financial variables matter for European bank interest margins and profitability? Eco- Mod2003 - International Conference on Policy Modeling, 1–12.
Menicucci, E. & Paolucci, G. (2016). Factors affecting bank profitability in Europe: An empirical investigation. African Journal of Business Management, 10(17), 410. https://doi.org/10.5897/AJBM2016.808.
Meriç, E., Kamışlı, M. & Temizel, F. (2017). Interactions among stock price and financial ratios: The case of the Turkish banking sector. Applied Economics and Finance, 4(6), 107-115. https://doi.org/10.11114/aef.v4i6.2755.
Miller, S. M., & Noulas, A. G. (1997). Portfolio mix and large-bank profitability in the USA. Applied Economics, 29(4), 505–512. https://doi.org/10.1080/000368497326994.
Naceur, S. Ben, & Goaied, M. (2001). The determinants of the Tunisian deposit banks’ performance. Applied Financial Economics, 11(3), 317–319. https://doi.org/10.1080/096031001300138717.
Pacini, K., Berg, D., Tischer, T. & Johnson, J. (2017). An empirical investigation of macroeconomic factors on firm performance in the United Kingdom. Available at SSRN 3013944.
Petria, N., Capraru, B., & Ihnatov, I. (2015). Determinants of banks’ profitability: Evidence from EU 27 banking systems. Procedia Economics and Finance, 20, 518–524. https://doi.org/10.1016/S2212-5671(15)00104-5.
Rossi, S., Borroni, M., Lippi, A., & Piva, M. (2018). Determinants of Bank Profitability in the Euro Area: What has changed during the recent financial crisis? International Business Research, 11(5). https://doi.org/:10.5539/ibr.v11n5p18
Saeed, M. S. (2014). Bank-related, industry-related and macroeconomic factors affecting bank profitability: A case of the United Kingdom. Research Journal of Finance and Accounting, 5(2), 2222–2847.
Staikouras, C.K., & Wood, G.E. (2004). The determinants of European bank profitability. Int. Bus. Econ. Res. J. 3(6), 57-68.
Miller, S. & Noulas, A. (1997) Portfolio mix and large-bank profitability in the USA, Applied Economics, 29(4), 505- 512, DOI: 10.1080/000368497326994
Sufian, F.,& Chong, R. R.(2008). Determinants of bank profitability in a developing economy: empirical evidence from the Philippines. Asian Academy of Management Journal of Accounting and Finance, 4(2), 91–112. https://doi.org/10.1080/10599230903340205
Sufian, F., & Habibullah, M. S. (2009). Bank specific and macroeconomic determinants of bank profitability: Empirical evidence from the China banking sector. Frontiers of Economics in China, 4(2), 274–291. https://doi.org/10.1007/s11459-009-0016-1.
Tan Y, & Floros C. (2012). Bank profitability and inflation: the case of China. Journal of Economic Studies 39(3), 675-696. https://doi.org/10.1108/01443581211274610
Tmava, Q., Berisha, F., & Mehmeti, M. (2019). Comparative analysis of banking system profitability in Western Balkan countries.Journal of Economics and Management Science, 2(2), 139-152. https://doi.org/10.30560/jems.v2n2p33.
Wheelock, D. C., & Wilson, P. W. (1995). Evaluating the efficiency of commercial banks: Does our view of what Banks do matter? Federal Reserve Bank of St. Louis Review, 77(4), 39–52.
Williams, B. (2003). Domestic and international determinants of bank profits: Foreign banks in Australia. Journal of Banking and Finance, 27(6), 1185–1210. https://doi.org/10.1016/S0378-4266(02)00251-0.
