Did the COVID-19 pandemic amplify the positive impact of income diversification on the profitability of European banks?

Abstract

Research background: The contribution of banks? non-interest income to the total income becomes particularly important in the face of a severe financial crisis, usually accompanied by burdensome restrictions in economic activity, insolvencies of enterprises and households and low interest rates of central banks. Purpose of the article: This study investigates banks in 40 European countries to determine whether non-interest income had a significant impact on the bank?s profitability and whether the severity of the COVID-19 pandemic influences the form of this relationship. Methods: This study used a linear cross-section model using bank-level data. In the model, the bank?s profitability was regressed with the measure of income diversification, controlling for the pandemic?s intensity and the state of the country?s economy and bank characteristics. Banking data were obtained from the S&P Global MI. The Oxford COVID-19 Government Response Tracker (Hale et al., 2021, pp. 529?538) was the source of pandemic-related variables. Findings & value added: The obtained results indicate that the increases in non-interest income share in the bank?s total income have a statistically significant positive impact on profitability for the European banking sector. The dependence of profitability on diversification was stronger with the growing adverse effects of the pandemic. Our results are in line with those for the US banks (Li et al., 2021) and the European Central Bank Banking Supervision?s assessment that higher non-interest income has allowed banks? profitability in the euro area to be maintained at a pre-pandemic level (ECB, 2021). In addition, the study contributes to previous literature by testing the impact of the severity of the COVID-19 pandemic on the relationship between income diversification and bank profitability in 40 European countries.

Does the Size of the Business Still Matter, or Is Profitability under New Management, by Order of the COVID-19?

“…Banks also had to address this problem, which put pressure on the people (Caby et al 2022) who wanted to profit despite the bad economy. European banks were discussed by Kozak and Wierzbowska (2022). Asian banks were analyzed by Nguyen and Le (2022) and Dsouza et al (2022).…”

Covid-19 and the Performance of Islamic Banks in Indonesia

“…To increase bank profitability during the pandemic, Kozak and Wierzbowska (2022) emphasizes that banks need to increase non-interest income. The impact of the COVID-19 pandemic explained by Ghosh and Saima (2021) will be more pronounced in banks with low levels of capital adequacy, liquidity, and performance as well as high non-performing loans.…”

Business Diversification and Banks’ Performance: The Moderating Role of Credit and Liquidity Risk (Empirical Study)

“…This means that revenue diversification does not help banks to be more stable. Also, Kozak and Wierzbowska (2022) tested the impact of income diversification on banks' profitability, furthermore, they examined whether the severity of the COVID-19 pandemic affects the relationship between income diversification and profitability. The study relied on a sample consisting of forty European banks over the period from 2019 to 2020.…”

“…On the other hand, some studies found that the effect of business diversification on banks' risks was negative (e.g., Sissy et al, 2017;Ovi et al, 2020;Li et al, 2021;Alouane et al, 2022;Ochenge, 2022). Regarding performance, some studies showed that business diversification positively affected banks' performance (e.g., Ferreira et al, 2019;Li et al, 2021;Uddin et al, 2021;Alouane et al, 2022;Kozak and Wierzbowska, 2022;Ochenge, 2022), while other studies implied that business diversification negatively affected banks' performance (e.g., Edirisuriya et al, 2015;Ngoc Nguyen, 2019). It is noteworthy that some studies demonstrated an insignificant impact on banks' performance (e.g., Edirisuriya et al, 2015); Raei et al, 2016;Abuzayed et al, 2018).…”

“…This study contains five control variables to control for characteristics that can influence banks' performance, risks, and diversification. First, capital adequacy is considered an indicator of the sufficiency of a bank's equity to absorb losses from assets, in other words, the capital adequacy ratio denotes the level of capital banks should keep as a portion of their risky assets (Kozak and Wierzbowska, 2022;Naili and Lahrichi, 2022). Capital adequacy is measured by a ratio of total equity to total assets.…”