Profitability Determinants of Big European Banks

Vesna Karadžić,Nikola Đalović

doi:10.2478/jcbtp-2021-0013

Vesna Karadžić, Nikola Đalović

Open Access

https://doi.org/10.2478/jcbtp-2021-0013

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Abstract

Abstract The subject of research in this paper is the profitability of the biggest banks in the European financial market, some of which operate in Montenegro. The profitability of banks is influenced by a large number of factors, including internal banking and external macroeconomic factors. The aim of this paper is to use statistical and econometric methods to examine which factors and with what intensity affect the profitability of large banks in Europe. The empirical analysis used highly balanced panel models with annual data on 47 large banks from 14 European countries over the period 2013-2018. Three static panel models were estimated and evaluated (pooled ordinary least squares, model with fixed effects and model with random effects), as well as dynamic model utilizing general methods of moments. The POLS model was chosen as the best, confirming that all macroeconomic factors have a statistically significant impact on the profitability of big banks, while the impact of internal factors, which are controlled by the bank’s management, is not significant. GDP growth rate, inflation rate and market concentration have a positive effect on profitability, while the membership of the European Union has a negative impact on profit, meaning that banks with headquarters outside the EU are more profitable.

Highlights

The banking sector plays an important role in the economic system
The analysis showed that banks with a larger market share make higher profits
The results showed that the size of the Board of Directors negatively affects the profitability of banks

Summary

Introduction

The banking sector plays an important role in the economic system. Banks operate as intermediaries that mobilize the savings of the population and the economy, with the intention of placing them in order to make a profit. A stable and profitable banking sector is able to withstand negative shocks and maintain the stability of the financial system by providing finance for economic needs. Banks aim to make a profit, which they make in the largest percentage on the basis of interest on loans. Given that interest rates in developed European countries are constantly falling, this should affect the decline in bank profitability. Contrary to intuitive expectations, their profitability is still high. With this research we want to determine which factors and in what way affect the profitability of banks

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Conclusion