The Profitability and Performance Measurement of U.S. Regional Banks Using the Predictive Focus of the “Fundamental Analysis Research”

Abstract

Purpose À This paper examines the profitability and performance measurement of U.S. regional banks during the period 1994À2011, using the GMM estimator technique. Our study extends prior research by including several factors not previously considered using U.S. data.Approach À We use bank-specific, industry-specific, and macroeconomic determinants of profitability contemporaneous with our performance indicators. We follow the accounting fundamental analysis path in explaining the bank performance.Findings À Among the performance measures, the efficiency ratio and provisions for credit losses are negatively and equity scaled by assets is positively related to profitability. However, these relationships either reverse (efficiency ratio and provisions for credit losses) or become insignificant (equity scaled by assets) when the target becomes change in profitability. The level of nonperforming assets is negatively related to profitability across all measures of profitability used. Macroeconomic variables are largely unrelated to profitability during the year they are measured. However, they have a significant relationship with earnings change measures, suggesting they have a lagged effect on profitability. The slope of the yield curve is especially strong in this regard.Originality À We use our determinants to model changes in bank profitability one year ahead, in addition to including several factors not previously considered, using the predictive focus of the fundamental analysis research.Keywords: Banking profitability; return on assets (ROA); return on equity (ROE); efficiency ratio; macroeconomic factors; fundamental analysis research LITERATURE REVIEWWe review the literature on the determinants of bank profitability. Because of its widespread acceptance, for the sake of conciseness, and to facilitate comparisons across studies, we cite ROA results unless otherwise specified. We will also describe the approach of fundamental analysis to earnings prediction. Geographic Scope of Banking Profitability StudiesSeveral studies have focused on bank profitability in individual countries. Single country studies are of

Performance and Profitability of Islamic Banks in Saudi Arabia: An Empirical Analysis

“…Higher the ratio, more stable and efficient the bank is. While the relationship of this variable to profitability may vary across the stages of the business cycle (Berger, 1995) we expect it will have an overall positive relationship to profitability (Growe et al, 2014).…”

Analysis of Factors Influencing Bank Profitability: Evidence from the West African Economic and Monetary Union Banking Sector

“…Return on assets (ROA), Return on equity (ROE), and Net interest margin (NIM) are the three measures of profitability supported by the literature review (see Growe et al 2014, Alberttazzi and Gambacorta, 2009, Angbazo, 1997, Demirguc-kunt and Huizinga, 2008, Golin and Delhaise (2013. Return on assets (ROA) is used as a primary measure of bank profitability.…”

“…The negative effect is expected here. ( Growe. et al, 2014, Ben Naceur & Goaied, 2008Kosmidou et al, 2005) Macroeconomic factor Per capita Real Gross Domestic Product Growth (PRGDPG).…”

97 The effect of bank-specific factors and unstable macroeconomic environment on bank efficiency: evidence from FCC

“…Forster and Shaffer (2005) argue that banks' efficiency may generally be considered as a function of both bank-specific characteristics and financial market factors. Furthermore, Growe et al (2014) investigated the profitability and performance measurements of U.S. regional banks through the period 1994-2011, by applying the efficiency ratio, i.e., (non-interest income over total income). They indicated that the efficiency ratio is a measure of banks' efficiency, and found that there is a significant and negative relationship between profitability and the efficiency ratio.…”

“…Bank efficiency ratio is measured by the cost-income ratio (Goddard et al, 2010). Hence, the measurement of the cost-income ratio is noninterest expenses over total revenue (NIE/TR), where total revenues are equals to (Non-Interest Income + Net Interest Income) (Forster and Shaffer, 2005;Growe et al, 2014) (Table 2). World Bank data; the plan of accounts that all FCC financial institutions have to report to their Central Banks on a yearly basis.…”