An Inquiry into the Determinants of the Profitability of Italian Banks

Abstract

This paper examines the history and the determinants of bank profits in Italy from 2005-15. We first identify a number of key stylized facts by comparing the income statement of Italian lenders with that of banks in other European countries. The comparison suggests that the profitability gap of Italian banks is partly related to a business model characterized by a more conservative positioning along the risk-return frontier. We then use the Bank of Italy's Quarterly Model of the Italian Economy to provide quantitative estimates of the impact of four factors (the economic activity growth rate, taxation of bank income, dynamics of operating costs and dividend policy) on profits, regulatory capital and bad debt. Our counterfactual simulations suggest that the weak growth of the Italian economy is responsible for a sizeable share of the profitability gap of Italian banks, being by far the main driver of the increase in bad debts in the last decade; nonetheless, the impact of the other factors on their profitability (and capitalization) is far from negligible.

The Evolution of Bad Debts in Italy During the Global Financial Crisis and the Sovereign Debt Crisis: A Counterfactual Analysis

“…By cumulating the counterfactual flows of new bad debt, it is thus possible to build the counterfactual evolution of bad debts in Italy in the absence of the two crises. A similar analysis is conducted in Albertazzi, Notarpietro and Siviero (2016), where the dismal growth performance of the Italian economy is also found to be one of the main drivers of the observed increase in bad debt.…”

What does affect profitability of banks in Croatia?

“…The largest portions of these studies are devoted to analysing the profitability determinants of banks which operated in a specific country. Examples of these single-country research studies are those for the USA (Chaudhry et al , 1995; Tregenna, 2009; Hoffmann, 2011; Kanas et al , 2012; Chronopoulos et al , 2015; Ding et al , 2017), UK (Kosmidou et al , 2005; Saeed, 2014), Japan (Liu and Wilson, 2010), Spain (Trujillo-Ponce, 2013), Italy (Albertazzi et al , 2016), India (Badola and Verma, 2006; Manoj, 2010; Bhatia et al , 2012; Sufian and Noor, 2012; Karimzadeh et al , 2013; Sinha and Sharma, 2016; Davis and Mathew, 2017), China (Garcia-Herrero et al , 2009; Heffernan and Fu, 2008; Garcia-Herrero et al , 2009; Tan and Floros, 2012; Lee and Hsieh, 2013; Yin and Matthews, 2016; Ding et al , 2017; Tan et al , 2017), Hong Kong (Jiang et al , 2003), Switzerland (Dietrich and Wanzenried, 2011), Brazil (Afanasieff et al , 2002), Latvia (Jurevičienė et al , 2015), Lithuania (Jurevičienė et al , 2015; Naruševicius, 2018), Greece (Mamatzakis and Remoundos, 2003; Athanasoglou et al , 2005; Alexiou and Sofoklis, 2009), Turkey (Sayilgan and Yildirim, 2009; Alper and Anbar, 2011; Akbaş, 2012; Macit, 2012; Acaracvi and Calim, 2013, Ayaydın and Karakaya, 2014; Turgutlu, 2014; Ozgur and Gorus, 2016; Topak and Talu, 2017), Albania (Duraj and Moci, 2015), Vietnam (Le, 2017), Mauritius (Bhavish et al , 2017), Nigeria (Obamuyi, 2013; Chidozie and Ayadi, 2017; Ebenezer et al , 2017), Ethiopia (Rani and Zergaw, 2017; Akinkunmi, 2017), Pakistan (Gul et al , 2011; Sohail et al , 2013; Kanwal and Nadeem, 2013; Shoaib et al , 2015), Bangladesh (Majumder and Uddin, 2017), Tunisia (Bougatef and Bougatef, 2017), Indonesia (Agustini and V...…”

Bank Consolidation, Efficiency, and Profitability in Italy

“…Relatively high operating costs compared to many other European countries play a significant role in explaining Italian banks' relatively low profitability (Albertazzi andothers, 2016, IMF, 2017). Legacy factors include notable asset quality challengesnonperforming loans (NPLs) are very high at around 21 percent of GDP, although they have declined marginally recently-and the associated need for provisioning.…”