DRIVERS OF PROFIT CONVERGENCE IN EURO AREA BANKS

The findings show a negative two-way link between non-interest income and net interest margin, thus supporting the subsidisation hypothesis. Furthermore, non-interest income is found to have a negative impact on risk-adjusted returns. When observing this relationship in sub-samples, the findings indicate that the negative impact of non-interest income on risk-adjusted returns still holds in the first subsample (2006-2011). The coefficient of non-interest income becomes positive but not significant for the subsequent period (2012-2015). In addition, the Spearman rank order correlations of returns on assets and non-interest income for both subsamples are negative. Together, we conclude that there are no diversification benefits in Vietnamese banking. The evidence suggests a trade-off between non-interest activities and traditional lending ones. In addition, the findings demonstrate that Vietnamese bank may use non-interest income to expand leverage and herd by coordinating non-interest income strategy during the economic downturns. Thus, the banking system may be exposed to greater risk. Our research has implications for bank supervisors, policy-makers and bank managers.

Banks in India have focused on non-interest income streams to complement their income from traditional interest earning activities for some years now. This move to innovation adoption and new income streams has been more pronounced for new private and foreign banks, while there appears to have been certain hesitation on the part of public sector and old private banks. This article studies the impact of the move to new income streams and the consequent rising diversification on performance (as measured by profitability and stability of income) for Indian banks. A comparative analysis of income generated from these income streams for different bank groups in India shows that new private banks and foreign banks in India have been more successful than public sector banks in generating a greater proportion of their income from non-interest and fee-based sources. However, this increasing diversification cannot be linked to better risk-adjusted performance in the Indian context. Using multiple regression analysis, the impact of diversification and increasing share of fee-based income on profitability and risk-adjusted profitability is questioned for all banks in India over the period 2005–2012. The article finds that the rising share of fee-based income and non-interest income in total income and diversification has a positive impact on profitability, but the impact on risk-adjusted performance and hence stability is not statistically significant. While the results show a positive impact of diversification on profitability, the article underlines that the impact direction of diversification measures may be negative, which is in agreement to what many studies have shown in the US, European, Australian and Indian contexts. This article considers the impact of diversification in non-interest income separately from diversification in total income. This diversification score helps to know if the banks are generating their non-interest income from only fee income or only their own investments or have they diversified the non-interest income generation by focusing on both. Importantly, there is a positive impact of increasing share of ‘fee income’ in both total income and non-interest income on profitability as well as risk-adjusted measures. The results underscore that while public sector banks need to generate more income from fee-based activities, it would be imperative to choose sources of fee-based income that remain stable and have a positive impact on risk-adjusted measures.

The article investigates the main characteristics of the financial stability of Ukrainian banks, their risk profile, structure of assets, liabilities, income, expenses based on the monthly reporting data for 2004—2020 (number of observations — 3 813). The Kohonen self-organizing map (SOM) toolkit is used to form homogeneous groups of banks based on a large number of financial indicators. The selected toolkit provides a convenient visualization of the results. Each bank occupies a specific place on the SOM. The close location of banks on the map indicates that these banks have many common characteristics. This study is called the method of structural and functional groups of banks. The study formed stable groups of banks with the same characteristics of business models and risk profile. The formation of consecutive maps for each reporting period allows to obtain the characteristics of each bank separately and the banking system as a whole. The trajectory of an individual bank’s activity during the observation period characterizes the development of its business strategy. The migration of a large number of banks between groups reflects the objective changes in the conditions of banking. Increasing groups of high-risk banks indicate systemic problems. The results show that after a significant reduction in the banking system of Ukraine in 2014—2016, the business models of banks have changed significantly. The resource base relies on unstable sources of current funds with no set term of use. In the assets of banks, a significant portion is invested in government securities — government bonds. Bank loan portfolios have declined and have a higher proportion of non-performing assets (NPL). Many banks have increased currency risk. Concerns are raised about the state of large state-owned banks that hold a separate high-risk group. Thus, the conducted research allows to distinguish groups of banks with specific characteristics of business models and to observe changes of risk profile inherent to these groups. For each structural-functional group, changes in the values of financial indicators are investigated and migration between groups is studied. The proposed methodology is useful for studying both macro and macro levels.

This research paper studies the relationship between bank net interest margin (NIM) and non-interest income (NII) using Cambodian banking data. The research focuses on the contribution of the NII, which is the non-traditional banking activity, to the banking profitability. The analysis runs a three-stage least square system to handle the NIM and NII employing 28 banks data from 2004-2010. For the growing period, there is a trade-off between interest margin and non-interest income. It is argued that banks increase non-traditional activities associates with the reduction in net interest margin and vice-versa. This paper also finds that the non-traditional activities have positive causal effect on net interest margin in the post financial crisis period.

Topic. The article analyzes Russia’s banking system, which is a complex, multi-layered, hierarchically organized system in which there exist different stable groups of banks. It is stated the strengthening role of multi-branch banks. We analyze the existing approaches to the selection of the group of multi-branch banks. There is lack of uniformity in the definition of ‘multi-branch bank’ and existence of different interpretation among researchers, legislators, and regulators as concerns the characteristics and quality of group multi-branch banks. Purpose. The purpose of this paper is the construction of a typology of banks with branches in the Russian Federation according to the number of branches and allocation in the banking system of the group multidivisional banks. Methodology. Based on the clustering of banks that have branches and representative offices (Ward’s method, distance metric — a Euclidean distance), we constructed the typology of banks according to a number of their branches and departments. Further, we tested a dedicated group of multi-branch banks for its substantial stability using different methods of clustering and neural networks. Results. In the study, we propose a list of parameters for the implementation of clustering procedures of Russian banks that have branches and representative offices. As parameters of the clustering, we consider all statutory allowed internal and external units of banks. We implemented verification of a typology of banks by the neural network with the teacher: if the proposed typology is not true, the network will not be trained, or it will make errors corresponding to the ‘fallout’ from the classification. The result of the implementation of the neural network confirmed the presence in the banking system of the Russian Federation groups of banks classified on the basis of cluster analysis. Conclusions. Received typology of branches of banks has confirmed the hypothesis about the existence in the banking system of the Federation group of multi-branch banks. It has been actually determined this group of banks and given its mathematical description in accordance with the average number of structural units. The results of the study can be used for further study of the properties inherent in different types of banks with branches and offices, including multi-branch banks, and for analysis of the mechanism of their functioning that could serve as a basis of increase of efficiency of banking activities in the Russian Federation.

Discerning the impact of disaggregated non-interest income activities on bank risk and profits in the post-Gramm-Leach-Bliley Act era

Non-interest income and bank lending

Research Question: How do ESG and financial performance indicators vary according to different classifications of European banks? Motivation: Banks’ ESG performance and its relationship with corporate financial performance represents a field of continuous interest for researchers and practitioners. The results of previous studies are still mixed, either positive, negative, or even neutral. What’s new? The novelty of this paper is represented by the statistical comparison of variables that measure the ESG and financial performance of European banks based on three classifications that we propose (i.e. the geographical regions of Europe, functional currency, and cluster analysis on GDP and population of European countries, respectively). To the best of our knowledge, there are no studies applied to the banking sector, analyzing the selected variables between groups of banks according to the aforementioned classifications. So what? We contribute to the field by extending Thomson Reuters’ grouping of banks (Emerging and Developed Europe) with three more classifications. The comparison of ESG and financial performance data contributes to practice by highlighting which parts of Europe contain the banks with the highest and respectively the lowest values of ESG and financial performance, controversies, and audit fees. Therefore, the results will help investors, policymakers, regulatory bodies, bank managers, and auditors to acknowledge the significant differences within Europe and adopt appropriate measures that could improve the financial and sustainability performance of banks. Data: We collect data from Thomson Reuters Eikon, World Bank statistics, and EuroVoc for 108 European banks (81 from Developed Europe and 27 for Emerging Europe) for 2018, the most recent year on which all information is available. Tools: We conduct a cluster analysis on the macroeconomic variables of the study: the GDP per capita and the population. We used group tests and the ANOVA test as methods in analyzing the results. Findings and Contribution: We contribute with a quantitative study that fills the gap in the literature regarding significant differences that are obtained in ESG and financial performance of banks classified as Developed Europe versus Emerging Europe; Eurozone versus non-Euro countries; Western, CEE, Northern, and Southern banks; small GDP – large population and large GDP – small population clusters. Our methodology will improve future research in adopting better and more transparent classifications of companies analyzed at an international level.

This article examines whether the diversification of operating income in Korean banks has persistently enhanced the performance of Korean banks. The results show that, despite Korean banks’ efforts to diversify their operating income, these banks do not gain any benefit from the diversification. Thus, bank managers in Korea focus on interest income revenue. The results also show that the increase in non-interest income revenue keeps pace with the growth in expenses, which offsets the diversification effect on the performance of Korean banks. As a result, Korean banks discourage banking diversification and focus on non-interest income revenues. JEL Classification: G21

Purpose – The aim of this article is to present results of research on the relation between non-interest income and bank’s profitability for Liechtenstein banks specialized in private banking. Design/Methodology/Approach – The study examines 12 Liechtenstein banks specialized in private banking and wealth management services in the period from 2014 to 2016. Example of Liechtenstein has been chosen as the country is a significant European private banking centre. Data used in the research come from financial statements published by the banks. The relationship between profitability, presented as return on equity (ROE) and return on assets (ROA), and non-interest to interest income ratio has been examined by Pearson correlation coefficient. Findings – Results show a negative correlation between non-interest to interest income ratio and ROA. No relevant correlation had been found between non-interest to interest income ratio and ROE. Originality/Value – Most of the researchers investigating the relation between non-interest income and profitability of banks show opposite results to those presented in this paper. Available studies are concentrated on markets dominated by retail and corporate banking services generating mainly interest income. This paper treats the problem of non-interest income’s relation to banks’ profitability from the perspective of private banking, a specific branch of financial services focused on services generating earnings which are not based on interest-based products. Article type – Research paper.

As bank managers have informational advantage in screening and monitoring borrowers, loan loss provisions determined by bank managers may contain important information for outside investors and regulators. This paper adapts a time-series framework and finds that loan loss provision contains information for future non-performing loans during the post-crisis period. This indicates that U.S. commercial banks have been associated with enhanced risk-taking discipline [Bushman and Williams, 2012]. Secondly, high yield corporate bond spreads have contained information for future bad loans, and loan loss provisioning by bank managers has incorporated such information. Finally, when exercising the discretion of loan loss provisioning by bank managers, smoothing the long-run level of loan loss reserves has been considered. Traditional hypotheses such as earnings management, capital management or income signaling are not supported by the data.

The present paper employs various commonly used accounting based measures of financial institutions performance and examines the developments in the Thailand banking sector's profitability during the post Asian financial crisis period of 1999-2005. The empirical findings suggest that bank specific characteristics, in particular size and capitalisation exhibits positive and significant impacts on Thailand banks' profitability, while credit risk, non-interest income, and overhead costs have negative relationship with bank profitability. The results suggest that credit risk has negative impact on return on assets, while the opposite is true for return on equity. As for the impact of macroeconomic indicators, we find that higher economic growth and inflation contributes positively to Thailand banks' profitability, while per capita GDP has a negative impact.

Purpose- Operational efficiency is one of the strategic concerns for bank management. The aim of our study is to investigate the effect of operational efficiency on banks’ market valuation. Methodology- We empirically examine the way in which the financial market evaluates different efficiency measures of banks, using a panel data of listed banks at Borsa Istanbul for the years 2010 – 2017. We employ three different efficiency measures as proxies. Those are i) operating expenses compared to total net income, ii) total net income per branch, and iii) total net income per employee. Findings- We find that cost efficiency, interest income as return on equity (ROE) and loan loss provisions (LLPs) are found to be statistically significant drivers of market valuation of banks. We use risk-weighted assets to total assets as a measure for risk-taking behavior of banks. The results suggest tentative findings for risk-taking behavior of banks. The findings also suggest that bank size and non-interest income as ROE do not significantly influence bank market valuation. Conclusion- We conclude that operating expenses compared to total net income as an efficiency measure is a determinant of market valuation of banks while income per branch and income per employee as efficiency measures are not related to market valuation of banks. Thus, we recommend bank managers boost net interest income while avoiding credit losses, and drop off operating costs compared to revenue in order to maximize bank’s market valuation.

This study examines how economic cycles, business cycles, and financial market fluctuations affect bank profitability. The topic is relevant and important in the context of macro prudential policy and systemic risk in the banking sector in Indonesia. Evaluating how economics cycle, business cycle and financial market fluctuation influence the profitability of bank is important as such indicators could be used as early warning indicators in anticipating the banking instability that could lead to a more severe financial crisis.The sample of this study comprises of banks operating in Indonesia, which includes seven groups of banks: (1) commercial banks; (2) state-owned banks, (3) foreign exchange commercial banks; (4) non-foreign exchange commercial banks; (5) regional development banks; (6) joint venture banks; and (7) foreign banks. The data utilized in this study is panel data covering 13 consecutive years observation period (2000-2012), with a total of 91 firm-year observations.The factors examined in this study are based on the model of macro prudential indicators proposed by IMF (2001). The model states that there are three main groups of macroprudential indicators: (1) macro economics indicators; (2) aggregated micro prudential indicators; and (3) market-based indicators. The dependent variables in this study can be classified into two groups: (1) the components of profitability (net-interest income; non-interest income; operating costs; and profit before tax), and (2) the level of profitability (ROE and ROA). The study utilized the Generalized Method of Moment (GMM) regression which economically considered more superior in terms of efficiency and consistency than the traditional OLS regression models.The findings reveal that bank profitability is positively associated with the economic cycle factors such as GDP, but negatively affected by the exchange rate of USD/IDR. Among business cycle indicators, the result indicates that the net interest margin (NIM) has a positive and significant effect on bank profitability, while asset quality indicators, efficiency (BOPO) and credit risk (NPL) showed a negative effect on bank profitability. The findings on financial market fluctuations factors indicate that the stock market capitalization, capital market volatility index, as well as the proportion of foreign debt relative to GDP showed a negative effect on the profitability of banks.The implication of this paper is that policies aimed at controlling those factors found significantly induced bank profitability should be given priority in fostering financial intermediation. Since the indicators of macroeconomic cycles (GDP and exchange rate of USD/IDR), the bank business cycle indicators (asset quality, NPL, BOPO, and NIM), and fluctuations in the financial markets (stock market capitalization, capital market index volatility, as well as the proportion of foreign debt) matter for bank profits, the government and Central Bank should put more attention on the various factors as indicators that can be used as the early warning system to anticipate the occurrence of banking instability and to prevent a systemic financial crisis.

In this paper, we analyze the impact of banks' non-interest income share on risk in the German banking sector for the period between 2002 and 2010. Using linear and quantile regression estimators, we find that the impact of non-interest income on risk significantly differs depending on banks' overall business model. More specifically, we show banks with retail-oriented business model such as savings banks, cooperative banks and other retail-oriented banks become significantly more stable if they increase their share of non-interest income. Investment-oriented banks, in contrast, become significantly more risky. They do not only report a significantly higher share of non-interest income, but also differ in terms of their activities from retail-oriented banks. Overall, this indicates that retail-oriented banks should increase their share of non-interest income to become more stable. Investment-oriented banks, in contrast, should decrease it. Our results imply that banks are significantly less risky if they have a more balanced income structure and neither depend heavily on interest nor on non-interest income. Furthermore, they indicate that the impact of non-interest income on risk significantly depends on the activities used to generate non-interest income with retail-oriented activities being significantly less risky than investment-oriented activities such as those pertaining to capital markets activities.