Bank net interest margin related to risk, ownership and size: an exploratory study of the Serbian banking industry

Abstract

The article empirically explores bank-specific, industry-specific and macroeconomic determinants of the net interest margin (NIM) in the Serbian banking industry. The baseline regression results suggest that banks with an above-average equity-to-asset ratio tend to report higher NIMs. The chosen proxy for loan default risk also appears statistically significant, but contrary to what is suggested by theory, indicates that the relation between default risk and the NIM is inverse. Amongst industry-specific determinants, only the proxy for concentration appears significant, as expected, and carries the prefix envisaged. Despite its narrow focus, this article does not ignore other possible determinants of the bank NIM. The type of bank ownership, as well as size effects, are explored further in order to gain insights into the influence of those variables on the NIM. The approach we follow does not include proxies for such determinants, but rather involves testing differences in regression results for banks that belong to different groups (proposed by Angbazo, 1997). Where size is taken into account, results indicate that large banks are better able to insulate books against interest rate risk by managing liabilities, while the superior performance of foreign banks could be attributed to their conservative lending practices and better access to foreign finance.

Мерење Перформанси Банкарског Сектора Републике Србије Путем Camels Метода

“…For this reason, liquidity of the banking sector was significantly above the prescribed limits. This conclusion is in line with the proof of the authors Marinković & Radović (2014) which concluded that Serbian banks with an above-average equity-to-asset ratio tend to report higher net interest margin, because of "risk aversion". This loan structure contributed to banking sector stability, and indirectly led to a general fall in profitability given a minimum rate of return on investment.…”

The influence of corporate governance on bank risk during a financial crisis

“…The banking sector is particularly important in economies where banks play a central role in the financial system. Furthermore, during a financial crisis, turbulence can lead to a credit crunch, as noted by Marinković and Radović (2014). This can affect banks' activity and spread to other sectors.…”

Bank Interest Rate Margin, Portfolio Composition and Institutional Constraints

“…This result is consistent with Poghosyan (2012) that banks are expected to require higher interest margins to compensate for funding riskier projects, and to maintain adequate loan reserves. Marinković and Radović (2014) note 'at least for existing loan customers, if possible, banks will re-price existing loans as they become due or when they are renegotiated. This will generate a positive relation between default risk and the NIM, ceteris paribus'.…”