Determinants Of Bank’s Profitability In EU15

Abstract

In this paper we analyse determinants of bank profitability of EU15 banking systems for the period 2001-2011. We use as proxy for banks profitability the return on average assets (ROAA), the return on average equity (ROAE) and net interest margin (NIM). We also measure the impact of the first and the largest wave of enlargement (10 new members in 2004) on EU15 bank profitability, introducing a dummy variable. The contribution of this paper for the empirical literature is that there are no other studies that deal bank profitability for all EU 15 countries for the period considered (2001-2011). The literature splits the factors that influence banks’ profitability in two large groups: bank-specific (internal) factors and industry specific and macroeconomic (external) factors. Our results are in line with the economic theory. Cost to Income Ratio, credit risk and market concentration had a negative influence in case of all measures of banks’ profitability, while bank liquidity only for ROAE and NIM. The size of banks had a negative impact on NIM, suggesting that bigger the bank is, smaller the net interest margin ratio is, but, on the contrary, in case of ROAA, had a direct effect. The market concentration had a negative influence, meaning that the increasing competition, as a structural point of view, increases banks’ profitability. The results show us that the process of European Union enlargement from 2004 does not have significant impact on EU15 banking systems’ profitability. It has a week and negative effect only in case of net interest margin. As policy recommendations, we suggest for authorities a better supervision for credit risk and liquidity and maintaining a competitive banking environment. For banks’ management we also recommend to monitor the credit risk indicators, optimizing costs and diversifying the sources of income.

Solvency and Liquidity Level Trade-off: Does it Exist in Croatian Banking Sector?

“…In addition, large banks are usually more profitable (e.g. Căpraru and Ihnatov, 2015) and do not have liquidityprofitability trade-off as they rather adopt borrowed liquidity strategy or balanced liquidity management strategy than the asset conversion strategy (Rose and Hudgins, 2013), what is empirically confirmed for the Croatian banking sector in the pre-crisis period (Kundid Novokmet et al, 2016). But besides availability of the interbank market funds, attention should be payed to affordability of the short-term liabilities as it is confirmed that over the period 2003-2008 Croatian banks profitability was more determined with the interest costs on received loans than the interest costs on received deposits (Kundid, 2014).…”

Cost and profit efficiency of listed South African banks pre and post the financial crisis

“…The good performance of banks is not isolated to South Africa, it is a general phenomenon across geographies, including in emerging Europe where there was a substantial increase in total assets as a percentage of GDP (Anayiotos, Totoyan and Vamvakidis, 2010). As the proportion of assets to GDP grows, growth in non-interest revenue is encouraged, leading to better earnings stability (Albertazzi & Gambacorta, 2009, Capraru & Ihnatov, 2015. At business level, cost and profitability are major determinants of financial performance, hence the variety of studies that have been conducted to understand the underlying drivers of these variables (Shahwan & Hassan, 2013).…”

“…These can range from the heterogeneous nature of banks to economic and business cycles, bank size, financial risk, regulation and regulatory capital, as well as ownership, collectively called "other market factors" (Ariff & Can, 2008;Isik & Hassan, 2002;Mathuva, 2009). These elements can be categorised into two broad categories: bank-specific internal factors and external factors (Capraru & Ihnatov, 2015;Forster & Shaffer, 2005;Pasiouras & Kosmidou, 2007).…”

“…The most common methods to measure profit efficiency is return on equity (ROE), return on assets (ROA) and return on average assets (ROAA) (Yeh, 1996;Demirgüç-Kunt & Haizinga, 1999;Golin, 2001;Maudos et al, 2002;Pasiouras & Kosmidou, 2007;Dietrich & Wanzenried, 2011;Capraru & Ihnatov, 2015) as a key measure of profitability. In the ROAA calculation, the average assets can also be used as it spreads the assets during the fiscal year (Pasiouras & Kosmidou, 2007).…”

The Effect of Internal, Industry and Macroeconomic Factors on Banking Profitability: Evidence from the Post 2000 Southern European Banking Sector

“…In the majority of studies, the effect of the sector is expressed by the variables of the H. H. Index (Herfindahl Index), as well as the percentage of the overall sector held by the three or five largest banks at an assets level (CR-3, CR-5). The Market Power Hypothesis is included in the industry framework and recognizes that, only banking institutions with large market share and well diversified products, are in position to apply their leadership influence in order to increase their monopoly / oligopoly profits (non-competitive products) (Berger, 1995;Kosmidou, 2008;Athanasoglou et al, 2005;Samy Ben Naceur, 2003;Capraru, 2015;Hoffmann, 2011;Petria et al, 2013;.…”