Bank Earnings Research Articles

Customers’ Patronage, Earnings of Deposit Money Banks and Nigeria’s Shrinking Economy

Abstract This study investigates the extent to which customers’ patronage has affected, caused and associated with the earnings of deposit money banks in Nigeria in the present Covid-19 era. An ex-post-facto design was adopted leading to data sourced from annual reports and accounts of Deposit Money Banks in Nigeria. A simple regression model was applied in gauging the effect of Customers’ patronage on Profit before Tax, Granger Causality Test determined whether Profit before Tax was caused by Customers’ Patronage while Correlational Analysis confirmed the relationship between the focal variables. Simple regression result reveals that an increase in Total Deposit will significantly increase Profit Before Tax (87%) in the banking industry. Correlation analysis, which is the anchor tool, shows that Total Deposit has a strong relationship with Profit Before Tax of Deposit Money Banks in Nigeria. Lastly, Granger Causality Test reveals that Total Deposit Granger Causes Profit Before Tax in Deposit Money Banks in Nigeria. The findings imply that Total Deposit is a strong determinant of movements in the level of earnings of Deposit Money Banks in Nigeria. It was observed that a greater percentage of customers, even as the economy shrinks into recession after recession, prefer keeping their money with the bank as deposits expecting to earn interest on the investment. The study recommends that banks should strive, through enhanced packages, to mobilize deposits in order to enhance their earnings.

Revisiting earnings quality and bank efficiency among East African developing economies: do systemic banking and financial crises matter?

PurposeIn this paper, the authors investigate whether the systemic local banking crises (LBCs) and global financial crisis (GFC) impact the association between bank profit efficiency and earnings quality in developing economies.Design/methodology/approachUsing panel data spanning 29 years over the period 1991–2019 for 169 banks drawn from five East African countries, the authors perform difference-in-difference multivariate analyses using the generalised method of moments (GMM) system estimator on a sample consisting of 2,261 bank-year observations.FindingsThe results, which are robust for endogeneity and other checks, show that banks with higher profit efficiency consistently report higher quality earnings. The authors further establish that whereas systemic LBCs contribute negatively to bank earnings quality, the GFC tends to have a positive impact. These results are upheld when the joint impacts of both systemic LBCs, GFC and profit efficiency on earnings quality are considered. The positive influence of profit efficiency and GFC on earnings quality is pronounced under income-decreasing earnings management. The impacts of profit efficiency, LBCs and GFC on earnings quality appear to be non-monotonic and vary across the sampled countries.Research limitations/implicationsThe study's findings are based on banks in five developing countries within a regional economic bloc. Additional studies could focus on other economic blocs for enhanced generalisability of the findings. In addition, some of the variables examined are studied at bank-level, while other variables are at country-level. Finally, the study establishes an association between the variables of interest, and this does not necessarily imply causation.Practical implicationsThe results provide useful insights to bank regulatory and supervisory agencies on the need to exercise increased risk-based scrutiny over bank loan loss provisioning and minimum loan loss reserve requirements. From an audit perspective, auditors need to be cautious and apply an enhanced risk-based audit especially when auditing banks during and after a financial, banking or systemic crisis. Credit rating agencies need to pay closer attention to the LLPs of distressed banks. Finally, bank investors and customers should be cautious when using bank financial statements, since bank managers of poorly performing banks might engage in aggressive earnings management.Originality/valueThe study is perhaps the first to examine the joint effects of systemic LBCs on the association between bank profit efficiency and the quality of earnings in a larger dataset of banks in a developing regional economic bloc. The authors also employ the GMM system estimator in the modelling, which helps address some weaknesses in prior studies.

Does banking regulatory regime affect the quality of bank earnings in the East African region?

PurposeIn this paper, the authors examine the association between the banking regulatory regime and the quality of bank earnings. We further investigate whether the banking agency regulatory characteristics moderate the association between banking regulation and earnings quality.Design/methodology/approachUsing panel data spanning 29 years over the period 1991 to 2019, the authors model bank earnings quality as a function of scores for banking regulation for 170 banks in the East African region using both the feasible generalized least squares (FGLS) and generalized method of moments (GMM) estimation methods.FindingsThe results, which are robust for endogeneity among other checks, reveal a positive impact of bank regulatory mechanisms on the quality of bank earnings. The authors further establish differential impact of specific regulatory mechanisms, with some contributing positively toward earnings management while others contributing negatively toward earnings management. The differential impacts of banking regulation on earnings quality are also manifested in the country-level analyses.Research limitations/implicationsFirst, the study utilises a mix of bank-specific, country-specific as well as economy-specific variables in one dataset. Second, the authors utilise survey-based data using the World Bank's Bank Regulation and Supervision Surveys (BRSS) for the periods 1999 to 2019. The authors assume that the bank regulatory mechanisms in place pre-1999 are close to the mechanisms in place as per the 1999 BRSS. Given limitations in data availability, the authors are not able to control for banks engaging in multiple activities such as insurance, underwriting of securities, FinTechs, among others.Practical implicationsThe results are useful in bridging the gap between theory and practice regarding the expected effect of strict banking regulations on the quality of earnings in Eastern African Banks. For the positive impact of banking regulation on bank earnings quality to be felt, the institutional, social and environmental specificities of the five selected countries need to be adequately developed and taken into consideration.Originality/valueThis study is perhaps the first to utilise a large dataset of commercial banks from countries in a developing region characterised by relatively lower enforcement and dynamism in the banking regulation. Further, in-depth studies on the association between banking regulation and earnings quality remain sparse.

Gender Differences in a Risk-Reduction Model of Sharing.

The current experimental study investigated human sharing within a laboratory task that modeled environmental variability. In particular, it sought to assess the efficacy of a risk-reduction model of sharing, which originated from a risk-sensitive optimization model known as the energy-budget rule. Participants were given the choice between working alone or cooperating and sharing accumulated hypothetical earnings with a fictious partner. Failure to acquire sufficient money resulted in a loss of accumulated earnings. To investigate the effects of economic context on sharing, the difficulty of meeting an earnings requirement was manipulated across conditions by changing the monetary requirement that needed to be met in order to bank earnings, which could later be exchanged for real money. In some conditions sharing was the optimal strategy (positive budget conditions), sometimes working alone was optimal (negative budget conditions), and other times neither option was optimal (neutral budget conditions). Gender differences were examined within this context to determine if males and females differed in their sharing behavior. The results suggested that males chose the sharing option more often in the positive budget condition and showed a stronger preference for the work-alone option in the negative budget condition than females.

Financial Analysis in Banking: The Challenge of Segment Reporting*

ABSTRACTAn equity analyst at Q&M Independent Research Corporation is assessing the financial and business prospects of two Canadian banks: Bank of Montréal and Canadian Imperial Bank of Commerce. Relying on recent information provided in the financial statements and proxy circulars from both banks, the analyst faces some challenges in performing a prospective analysis, a key input to any valuation model. The case highlights the cost‐benefit analysis of disclosure that banks may perform when applying IFRS 8 – Operating Segments. The case also illustrates the challenges that segment disclosure poses to financial analysts and investors as they attempt to forecast a bank's earnings and to perform a valuation. Furthermore, the case develops the process by which a bank's business model is linked with its financial reporting and, ultimately, its valuation.

Institutional investors and bank governance: An international analysis of bank earnings management

Despite the growing importance of institutional investors in global capital markets and the link between bank earnings management and financial crash risk, little is known about the role of institutional investors in mitigating bank earnings management. We conduct the first international analysis of this issue using a broad sample of banks and institutional investors. We find a negative relation between institutional ownership and bank earnings management, after controlling for the stringency of a country's bank regulations and other relevant bank and country characteristics. Additionally, institutional ownership is more negatively related to earnings management in countries with more-stringent bank disclosure requirements or when ownership is held by domestic rather than foreign institutional investors. Institutional ownership is also more negatively related to earnings management in countries in which insiders extract more private benefits or when ownership is held by institutional blockholders. Our findings have important policy implications regarding institutional investors' engagement with banks.

Big 4 auditors, bank earnings management and financial crisis in Africa

PurposeThis paper aims to examine whether African banks audited by a Big 4 auditor use loan loss provisions (LLPs) for earnings management purposes before, during and after the global financial crisis. It focuses on income smoothing as a type of earnings management.Design/methodology/approachThe study analyzed banks in 21 African countries from 2002 to 2014. The estimation techniques used are the fixed effect regression technique, descriptive statistic and Pearson correlation statistic. The model used in the study expresses LLPs as a function of its discretionary and non-discretionary determinants.FindingsAfrican banks audited by Big 4 auditors use LLPs to smooth income and the incentive to smooth income is greater during an economic downturn or recession. Also, African banks audited by a Big 4 auditor use income smoothing to lower high earnings during the financial crisis and in the pre-financial crisis period but not in the post-financial crisis period.Originality/valueThe literature shows that the presence of Big 4 auditors improves earnings quality. The direct impact of Big 4 auditors on earnings management in African banks has received little attention in the literature, and the impact of audit quality on bank earnings smoothing particularly in Africa is yet to be known.

Bank earnings management using loan loss provisions: comparing the UK, France, South Africa and Egypt

PurposeThis paper aims to investigate bank earnings management using loan loss provision. The paper examines income smoothing, which is a type of earnings management. It compares the income smoothing behaviour of banks in the UK, France, South Africa and Egypt.Design/methodology/approachThe study uses the panel fixed effect regression methodology to analyse bank income smoothing.FindingsThe findings show that bank income smoothing is present in the UK and Egypt and absent in France and South Africa. Banks in Egypt used LLPs to smooth income before the global financial crisis. Meanwhile, bank income smoothing is pronounced in France during and after the financial crisis but was absent in the pre-crisis period. Also, bank income smoothing is reduced in countries that (1) have strict banking supervision, (2) adopt common law particularly the United Kingdom, and by countries that adopt civil law, particularly France and Egypt. Bank earnings management is greater in countries that (3) adopt a mixed legal system, particularly South Africa, and in countries that adopt International Financial Reporting Standards accounting standards.Research limitations/implicationsThe implication of the findings is that country differences may affect banks' incentive to smooth income using loan loss provision.Originality/valueThe novelty of this paper is that it explicitly analyses specific countries that have different supervisory regimes, different structure and accounting rules.

Does economic policy uncertainty affect bank earnings opacity? Evidence from China

Uncertainty about economic policy (EPU) in today's interconnected world and its impact worldwide is more significant than ever before. Thus, this study examines EPU's impact on the bank's earnings opacity of the Chinese banking industry, using the two-step system GMM estimator and the time covering 2011–2018. Our finding shows a negative and statistically significant relationship between EPU and bank earnings opacity, implying that the Chinese banking sector decreases earnings opacity in times of high EPU to earn trust and show good banks’ financial image. Moreover, our finding reveals that the effect of EPU on earnings opacity relies on the banks’ financial strength. This study recommends that a policy to reduce earnings opacity should be in place and also the supervisory capability and financial regulation should be strengthened. Moreover, the regulators should be more vigilant while making economic policies during high economic uncertainties.

Gender equality on board and banks’ earning management: Achieving SDG in Southeast Asia’s Corporation

This study aims to analyze the influence of gender equality, which is one issue in sustainable development goals (SDGs), on earnings management of banks in the Philippines, Indonesia, Malaysia, and Thailand stock exchanges. This study uses the Generalized Methods of Moments (GMM) method on 73 listed banks in these countries from 2013-2018. Both linear and non-linear effects of a woman on the board on earnings management are examined in this study, and bank earnings management is measured using discretionary loan loss provisions. This analysis is divided into countries that have one-tier and two-tier corporate governance systems. Our findings suggest that there are insignificant results for the influence of a woman on the board and a woman on the board squared on bank earnings management, measured by discretionary loan loss provision (DLLP), for one-tier and two-tier countries. Meanwhile, there is a different result from previous studies that the presence of three women directors has a significant and positive influence on bank earnings management in two-tier countries. The results of one-tier and two-tier countries can be different because the absolute value of the error term of the two-tier countries is higher than the one of one-tier countries, which indicates higher DLLP values.

Interest rate risk in the banking book – is the SSM’s regulatory approach tight enough?

Abstract The current low interest rate environment is an unprecedented situation for the European banking union’s single supervisory mechanism (SSM) in that it increases interest rate risk in the banking book (IRRBB) for euro area banks. Sudden upward movements in rates threaten the economic value of bank equity, and persistently high interest rates can lead to lower bank earnings. These risks point to the need for a comprehensive supervisory approach to regulating IRRBB. Given the extraordinary circumstances and high levels of IRRBB which banks are and will be exposed to, we evaluate whether the SSM’s regulatory approach is tight enough. Specifically, we assess the adequacy of the supervisory outlier tests by performing an empirical analysis on historical interest rate changes and discussing whether the earnings perspective should be included in the supervisory outlier tests. Furthermore, we consider the minimum capital requirements for IRRBB against the background of the current low interest rates. Overall, we conclude that the current SSM’s approach on IRRBB is not tight enough. While we confirm the adequacy of the existing supervisory outlier tests, we recommend complementing them with outlier tests regarding the net interest income of banks. We further recommend implementing a standardised approach for calculating minimum capital requirements to improve banks’ resilience against IRRBB.

Does the Financing Model of Islamic Banks make them More Stable: A Comparative Analysis of Returns, Stability and Risk in Between Diversified, Interest, and Inventory Based Earning?

Most boom-bust cycles witnessed across the world in recent decades have exposed several underlying factors that highlight the vulnerability of conventional banking, namely, high leveraging, wholesale financing, and utilization of complex instruments. Islamic financial institutions largely escaped the direct impact of the global financial crisis. In theory, Islamic banks are more resilient to shocks than conventional banks because ‘gharar’ considerations prohibit them from investing in excessively risky assets, as well as zero-sum betting on derivatives. Moreover, by promoting risk-sharing (as opposed to risk transfer) and endorsing investment in wealth-creating activities, the asset-based nature of Islamic financing naturally curbs excessive leverage. This paper investigates Does the Financing Model of Islamic Banks make them More Stable. For this, we proposed that the risk of fluctuation of the interest-based instrument (risk to banking sector stability) is counterbalanced by non-banking type movements through inventory changes thus making Islamic banking more stable. Specifically, we focused on three factors for comparison between Islamic and conventional banking systems, First factor was returns represented by ROA, ad ROE. The second was the stability, measured by volatility of returns. And the third factor was market risk represented by Beta. We hypothesized that the risk of the banking system is mainly due to interest rate movements. A sharp increase in interest rates would adversely affect the returns not only due to maturity mismatch problem but also due to increased loan loss provisions, taken because of higher chances to default. This makes the banking system more volatile and exposes it to systematic risk. Islamic banks on the other hand have mandatory involvement of underlying products in the lending transactions. This makes banks not only take exposure of those products on their balance sheet in form of inventory but also absorb their fluctuations in returns through mark to market adjustments. As these adjustments would no be highly correlating with interest-based earnings, as well as systematic risk, this would not only make total returns of Islamic banks more stable but also have less exposure to market risk. Since Islamic banks have a diverse earning base, the pure effect of inventory fluctuation was captured by Return of Financing product Inventory of Islamic Banks. Also, we explored the effect of different bank-specific factors on Returns (ROA, and ROE), stability (volatility of ROA, and ROE), and market risk (BETA), and how these factors affect conventional and Islamic banks differently. These included Loan ratio (LR), Asset growth (AG ), the logarithm of total assets (LogTA), the ratio of loan loss provision over assets (LLP), the ratio of equity to assets (EQA), Return of Financing product Inventory (FPI ), and FOCUS measures the degree of specialization/ diversification in a bank's earnings. Dataset of a total of 13 banks (9 Conventional and 4 Islamic banks) operating in Pakistan was collected, for the period from 2009 to 2018. Results were according to expectations. All three factors (returns, stability, and market risk) seem to have a significant difference in their means. Where Islamic banks seem to have higher and more stable returns (high ROA, with lower volatility of ROA and ROE). Pure inventory returns seem to have even lower volatility than both Islamic and conventional banks, supporting the claim that the effect of inventory portion in Islamic banks’ balance sheet makes them more stable. Islamic Banks also seem to have lower market risk (low Beta) as compared to conventional banks, presumably because of countercyclical inventory movements. The results of the regression suggested that size has a significant negative effect on ROE of both conventional and Islamic banks, size also seems to decrease the volatility of ROE in both types. Size also seems to decrease systematic risk in an Islamic bank. loan loss provision also seems to inversely affect ROE and its volatility, but interestingly, does not seem to affect Islamic banks. Capital adequacy also seems to affect the ROE of both Islamic and conventional banks but seems to provide stability in returns for Islamic banks as it has a negative effect on the volatility of both ROE and ROA. Asset growth also seems to be inversely affecting the volatility of ROA for the overall sample. Results also suggested that Diversification in a bank's earnings seems to improve ROA of conventional banks, whereas Financing product Inventory returns seem to be positively affecting the beta.

Interest Rate Risk in the Banking Book - Is the SSM's Regulatory Approach Tight Enough?

The current low interest rate environment is an unprecedented situation for the European banking union’s single supervisory mechanism (SSM) in that it increases interest rate risk in the banking book (IRRBB) for euro area banks. Sudden upward movements in rates threaten the economic value of bank equity, and persistently high interest rates can lead to lower bank earnings. These risks point to the need for a comprehensive supervisory approach to regulating IRRBB. Given the extraordinary circumstances and high levels of IRRBB which banks are and will be exposed to, we evaluate whether the SSM’s regulatory approach is tight enough. Specifically, we assess the adequacy of the supervisory outlier tests by performing an empirical analysis on historical interest rate changes and discussing whether the earnings perspective should be included in the supervisory outlier tests. Furthermore, we consider the minimum capital requirements for IRRBB against the background of the current low interest rates. Overall, we conclude that the current SSM’s approach on IRRBB is not tight enough. While we confirm the adequacy of the existing supervisory outlier tests, we recommend complementing them with outlier tests regarding the net interest income of banks. We further recommend implementing a standardised approach for calculating minimum capital requirements to improve banks’ resilience against IRRBB.

Bank Earnings Management Using Loan Loss Provisions: Comparing the UK, France, South Africa and Egypt

This paper investigates bank earnings management using loan loss provision (LLP). The paper examines income smoothing which is a type of earnings management. It compares the income smoothing behaviour of banks in the UK, France, South Africa and Egypt. The findings show that bank income smoothing is present in the UK and Egypt, and absent in France and South Africa during the period examined. Banks in Egypt used LLPs to smooth income before the global financial crisis. Meanwhile, bank income smoothing is pronounced in France during and after the financial crisis but is absent in the pre-crisis period. Also, bank income smoothing is reduced in countries that (i) have strict banking supervision, (ii) adopt common law such as the United Kingdom, and (iii) adopt civil law such as France and Egypt. Bank earnings management is also greater in countries that adopt a mixed legal system such as South Africa, and in countries that adopt IFRS accounting standards.

Characteristics of banks as determinants of profit management for Islamic and conventional banks in ASEAN

This study aims to analyze company characteristics as a determinant of conventional and Islamic bank earnings management in several ASEAN countries (Association of South East Asian Nations). The Multiple Discriminant Analysis was applied to determine the differences between Islamic and Conventional Banks. This test was conducted based on Capital Adequacy Ratio, Income Before Tax and Interest, Non-Performing and Changing Loans, and Company's Size in the banks of Indonesia, Malaysia, and Brunei Darussalam from 2014 to 2018. The data obtained from 200 banking entities were analyzed discriminatively. The results showed that there were simultaneous differences between Capital Adequacy Ratio, Earnings Before Tax, Loan Loss Provision, Non-Performing and Changing Loans, and Company's Size as determinants of earnings management between Islamic and conventional banks. Also, it was found that Company's Size was the dominant variable determining the management differences. Based on Discriminant Analysis, there were significant differences in the determinants of conventional and Islamic earnings management. The Changing Loan variable showed the highest contribution in determining earnings management in Islamic banks. Overall, this study found that conventional banks dominated Islamic system in practicing earnings management.

OPERATING CASH FLOW ON EARNINGS MANAGEMENT: EVIDENCE FROM NIGERIAN BANKS

This study assesses the effect of operating cash flow on earnings management of Nigerian Banks. The study adopted Ex post Facto research design. The study used sample of fifteen (15) Nigerian banks from 2010 to 2019. Data for the study was collected from annual reports and accounts of the banks. Regression analysis was used to test the hypothesis with the aid of E-view 9.0. Based on this, the study revealed that operating activities are not statistically significant and have a negative effect on total accruals earnings of Nigerian banks. The study concludes that the importance of risk management activities is aimed at reducing future cash flow. Based on this, the researcher recommended among others that managers should be more likely to opportunistically boost operating cash flows if the firm has a cash flow forecast like engaging in principal financing source for maintaining the operating capability of the entity in terms of repaying loan and making new investment.

Banking sector earnings management using loan loss provisions in the Fintech era

PurposeThis paper analyzes banking sector earnings management using loan loss provisions (LLPs) in the Fintech era.Design/methodology/approachRegression methodology was used to examine earnings management in the Fintech era.FindingsThe findings show evidence for bank income smoothing using LLPs. There is greater income smoothing in the second-wave Fintech era compared to the first-wave Fintech era, and the presence of strong institutions did not lower income smoothing in the second-wave era. Bank income smoothing is also greater in (1) Bank of International Settlement (BIS) and EU countries than in non-EU countries and G7 countries, (2) well-capitalized banking sectors and (3) during economic booms in the second-wave Fintech era.Practical implicationsThe competition for loans and deposits by banks and Fintech lenders in the second-wave Fintech era created additional incentives for banks to engage in income smoothing to report competitive and stable earnings.Originality/valueThe study uses a unique approach to detect country-level earnings management in the banking sector. Also, this study extends the bank earnings management literature by introducing the Fintech era as a determinant of the extent of bank earnings management.

PENGARUH PENYALURAN KREDIT, TINGKAT SUKU BUNGA DAN KECUKUPAN MODAL TERHADAP PROFITABILITAS PADA PERUSAHAAN PERBANKAN YANG TERDAFTAR DI BURSA EFEK INDONESIA TAHUN 2012-2014

The main purpose of a company is to make profit. In calculating the benefits made by a banking company, it can use profitability ratios by using a measurement scale; that is, Return on Assets (ROA). Some of the ratios that affect the profitability of a bank include the Loan to Deposit Ratio, Interest Rates and Capital Adequecy Ratio. The research used the theories of financial accounting and banks and other financial institutions with regard to bank earnings and bank capital. The study used a quantitative approach, this type of research is descriptive, and the nature of research is explanotary. Data collection was performed by means of documentation, while data analysis was performed by multiple linear regression analysis. The populations of the study are all banks listed on the Indonesia Stock Exchange (BEI) in the period from 2012 to 2014 totaling 27 companies. The 81 samples of the study were drawn by using purposive technique. The results of this study showed that the value of Adjusted R Square was 15.6% and loan portfolio, interest rates and capital adequacy simultaneously have a significant positive effect on profitability with a significant value of 0.001. And partially, credit does not have any effect on profitability, as well as the interest rate has a significant negative effect on the profitability with the significant value of 0.01 and a capital adequacy has a significant effect on profitability with significant value of 0.01.
 Keywords: Lending, Interest Rates, Capital Adequacy, Profitability

Debtholder Monitoring Incentives and Bank Earnings Opacity

AbstractWe exploit exogenous legislative changes that alter the priority structure of different classes of debt to study how debtholder monitoring incentives affect bank earnings opacity. We present novel evidence that exposing nondepositors to greater losses in bankruptcy reduces earnings opacity, especially for banks with larger shares of nondeposit funding, listed banks, and independent banks. The reduction in earnings opacity is driven by a lower propensity to overstate earnings and is more pronounced among larger banks and in banks with more real estate loan exposure. Our findings highlight the importance of creditors’ monitoring incentives in improving the quality of information disclosure.

Watch out for bailout: TARP and bank earnings management

We study the impact of the recent government bailout, called Trouble Asset Relief Program (TARP), on bank accounting quality. By adopting a difference-in-difference (DID) method, we find a significantly positive impact of TARP on earnings management of recipient banks, compared with their non-recipient peers. Further, we observe that TARP-recipient banks engage more in earnings-decreasing manipulation rather than earnings-increasing manipulation. This behavior is more obvious for those banks that voluntarily request for TARP funds. Also, participant banks change their accounting strategy to manipulate earnings upwards after TARP funds are paid back. Our findings confirm our hypothesis that TARP-recipient banks are motivated to manipulate downwards (or hide some earnings) to obtain further favorable treatment by the program administrators.