Modelling Profitability Determinants in the Banking Sector: The Case of the Eurozone

Abstract

The aim of this study is to analyze which factors affect the profitability of banks in the eurozone and to make recommendations for supporting them to achieve higher levels of profitability in particular eurozone countries. The banks operating in the eurozone are specific that they are under one monetary policy. The main purpose of the banks’ profitability analysis is to identify main bank-specific and macroeconomic determinants and help bank management to more fully comprehend their importance of bank-specific determinants and macroeconomic determinants’ influence when measuring and evaluating bank profitability. For the purpose of this research, we analyze the impact of bank-specific determinants (NPL, CIR, NIM, NIF and NIT) and macroeconomic determinants (GDP, INF, UNM and DEBT) on bank profitability in the eurozone for the period of 2015–2020 using a random effects model, fixed effects model, and the general method of moments (GMM). This empirical research analyzed quarterly data series from Eurostat for eighteen countries in the eurozone. We came to the results that on the eurozone-level NPL, the cost-to-income ratio has a negative impact on the banks’ profitability, while the net interest income to the operating income, the net income for trading assets to the operating income and the net fee and commission income to the operating income have a positive impact on the banks’ profitability. Considering the macroeconomic variables, we found a positive impact only in the case of GDP, while the inflation rate, unemployment rate and gross government debt have shown a negative impact on the banks’ profitability. The main contribution of this study implies different panel techniques with two uncommonly used macroeconomic variables such as the unemployment rate and debt ratio. The results on the country level differ from country to country and these findings can give a lead to policy makers on the national level on how to enhance the banks’ profitability levels.