Bank profitability and macroeconomic conditions: Are business models different?

Abstract

The paper investigates the impact of macroeconomic conditions on the profitability of EU banks by testing for differential effects according to the business model. We group banks into three business models using a hierarchical cluster analysis and find that using clusters based on the share of assets invested in loans reveals heterogeneity in the sensitivity of bank profitability to economic growth across business models. Our main result is that GDP growth, credit growth, and the risk-free yield curve influence profitability as expected, but we also find that the effect of GDP growth is only significant for banks that have a high and medium share of assets invested in loans, and not for banks that hold large portfolios of securities. This difference depends on the impact of growth on asset write downs, especially those on loans and, to a lesser extent, on revenues. The results suggest that studies relating bank profitability to macroeconomic conditions should take the heterogeneity of business models into account.

Does economic policy uncertainty affect bank profitability?

“…Their analysis suggests that a strong expansionary effect of bank profitability on credit supply tends to destabilize the economy, leading to cycles driven by the interaction between firms' and banks' financial behavior. Bonaccorsi di Patti and Palazzo (2020) investigate the impact of macroeconomic conditions on the profitability of EU banks under different business models. They group banks into three business models using a hierarchical cluster analysis and find that GDP growth, credit growth and the risk-free yield curve influence profitability but the effect of GDP growth is only significant for banks that have a high and medium share of assets invested in loans and not for banks that hold large portfolios of securities.…”

“…, 2018), the low interest rate environment (Bikker and Vervliet, 2018), inflation (Tan and Floros, 2012), market structure (Mirzaei et al. , 2013), bank credit supply (Ryoo, 2013), gross domestic product (GDP) growth (Bonaccorsi di Patti and Palazzo, 2020) and productivity (Batten and Vo, 2019), among others. Although profitability is an important indicator of bank performance (Dietrich and Wanzenried, 2011), the literature has not extensively examined the effect of EPU on bank profitability.…”

“…Other studies focused on the economic factors or macro determinants of bank profitability, such as inflation (Tan and Floros, 2012), market structure (Mirzaei et al. , 2013); GDP growth (Bonaccorsi di Patti and Palazzo, 2020), taxation (Albertazzi and Gambacorta, 2010) and productivity (Batten and Vo, 2019). We add to this literature by showing that EPU is another important macro determinant of bank profitability.…”

Gestión Financiera de las Cooperativas de Crédito y el Sistema Bancario Privado de Ecuador durante el período 2015 – 2020

“…De la gran cantidad de indicadores financieros que existen en la literatura financiera corporativa, los indicadores que miden la rentabilidad y la eficiencia económica y financiera son los utilizados mayoritariamente por los inversores (Gaur & Mohapatra, 2021;Subbarayan et al, 2017). La constante referencia hacia los indicadores de rentabilidad se debe a que esta medida relaciona los beneficios obtenidos y el uso de los diferentes recursos con los que cuenta la compañía (Ali et al, 2020;Bonaccorsi di Patti & Palazzo, 2020;El-Ansary & Megahed, 2016;Knezevic & Dobromirov, 2016) En este epígrafe, se analiza el comportamiento que han tenido estos indicadores en cada uno de los subsistemas financieros. Con respecto a los indicadores de rentabilidad, se hace referencia a dos: rentabilidad financiera (Return on common equity -ROE), que mide la rentabilidad que se obtiene sobre los fondos propios promedio (patrimonio); y, el rendimiento económico (Return on total assets -ROA), que relaciona el beneficio obtenido con el nivel de activos o inversión promedio de la empresa.…”