Abstract
The purpose of this study was to examine banks’ strategic adjustments to the challenges brought about by the COVID-19 pandemic. It examines how deep and pressing the necessary transformations are, based on an analysis of the banking sectors of Central, Eastern, and Northern European countries (CENE): the Czech Republic, Hungary, Poland, Slovakia, Estonia, Latvia, and Lithuania. The main research question posed asks how the pandemic and the subsequent economic crisis have changed banks’ sources of profits and risks, forcing banks to speed up structural transformations. In particular, the study identified and verified the following hypotheses: that the initial impact of the COVID-19 pandemic on banks in the analyzed region was heterogeneous and that the pandemic has intensified the challenges of digitalization and forced banks to speed up the digital transformations of their business models. The methodology employed was the dynamic panel data model—generalized method of moment (GMM-SYS version), using an adjusted dataset from the BankFocus database for unconsolidated bank data for the 2016–2020 period. The econometric analysis was supplemented with a CENE bank survey, researching bank attitudes and the stage of digital transformation. The results of the survey revealed that the majority of the surveyed banks consider themselves digitalization leaders, with a clearly articulated and implemented digitalization strategy. The main finding of the study was that the digital focus may help large banks in CENE to address and offset problems revealed by the panel data model: that traditional sources of incomes, based on intermediation and interest-related incomes, no longer contribute positively to profitability but also to stability.
Highlights
For the Financial Stability Indicator (FSI), values were quite harmonized within the group, and for all countries were higher in 2020 than in the preceding years, indicating the stable funding and liquidity position of banks in the analysed countries, and the lack of a substantial credit risk related to the non-performing loans (NPLs) portfolio; one of the most affected banking sectors in terms of bank profitability were those of Hungary, Latvia, and Poland
The aim of this study was to contribute to the discussion on the long-term impact of the COVID-19 pandemic and the 2020 economic crisis on bank stability and profitability, with a focus on Central, Eastern, and Northern European countries
The most interesting findings of the empirical section are that banks in CENE have to modify their business models based on traditional intermediation, as they no longer contribute to profitability and stability
Summary
Publisher’s Note: MDPI stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. There is a consensus within the banking literature that the COVID-19 pandemic and the related economic crisis has forced banks to change their business model (Carletti et al 2020). The main research question posed was how the COVID-19 pandemic and the subsequent economic crisis have changed a bank’s source of profit and risks, forcing banks to speed up their structural transformations, and in this process what the role of the digital transformation was. The main finding of the study was that the digital focus may assist large banks in CENE to address and offset problems revealed by the panel data model, in particular, that traditional sources of income, based on intermediation and interest-related incomes, no longer contribute positively to profitability and to stability. The concluding section summarizes the key findings and suggests the direction of future research
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