Net Interest Income Research Articles

An Empirical Investigation on the Determinants of Interest Rate Spread of Commercial Banks in Bangladesh

This paper aims to investigate the determinants or factors affecting the interest rate spread of private commercial banks in Bangladesh from 2013 to 2022. For the purpose of the study, the interest rate spread (IRS) of banks has been considered as a dependent variable while bank-specific factors and macroeconomic factors have been considered independent variables. Bank-specific factors are credit risk, bank size, operating cost ratio, liquidity risk, net interest income as a ratio of total income, capital adequacy ratio, and loan to deposit ratio while macroeconomic factors are Inflation and GDP. The Pooled Ordinary Least Square method (OLS), the Fixed Effect method (FE), the Random Effect method (RE), and the Generalized Least Square method (GLS) have been used to investigate the impact of the factors on interest rate spread. The results exhibit that bank-specific factors such as net interest income as a ratio of total income, and capital adequacy ratio are found to be statistically significant and positively impact the interest rate spread. In contrast, the results also exhibit that bank-specific factors such as bank size, operating expense ratio, and loan to deposit ratio are statistically significant and negatively impact the interest rate spread. Again, the results determine that the macroeconomic factor which is inflation found to be statistically significant and positively impacts the interest rate spread. The study’s findings will assist the banks’ regulatory body in formulating and developing strategies to maintain a satisfactory level of interest rate spread.

Risk-based regulation and supervision of second-tier banks: experience of EU countries

The aim of the study was to determine the impact of increased capital adequacy standards of second-tier banks on their performance. The study is based on second-tier banks of EU member states, as these countries are the first to implement the Basel Committee recommendations, so their experience should be studied and taken into account when building risk-based regulation of second-tier banks of Ukraine and Kazakhstan. The study covers the period of 2009–2022, as the Basel III regulations were adopted after 2008, and they began to operate for the second-tier banks of EU member states in 2013. The study was conducted using econometric modelling with an analysis of the dependence of banking indicators on the capital structure established by Basel III. Functional interrelationships of the dependence of Net Interest Income, Profit, Return on Assets, Return on Equity, Risk Costs to Operating Income were tested. The impact of capital adequacy requirements on the performance of second-tier banks was determined: capital adequacy requirements have a positive impact on net interest income and profit of second-tier banks. The obtained results can be used to substantiate increasing capital adequacy requirements to increase the reliability of the banking system as an element in the system of factors of economic growth of the national economy.

Impact of Operating Efficiency on Profitability of Nepalese Commercial Banks

The study examines the effect of operating efficiency on the profitability of Nepalese commercial banks. Return on assets and return on equity are selected as the dependent variables. The selected independent variables are capital adequacy ratio, operating expenses, net interest income, leverage, loan to deposit ratio and bank size. The study is based on secondary data of 16 commercial banks with 112 observations for the period from 2015/16 to 2021/22. The data were collected from Banking and Financial Statistics published by Nepal Rastra Bank, publications and websites of Nepal Rastra Bank (NRB) and annual reports of the selected commercial banks. The correlation coefficients and regression models are estimated to test the significance and importance of operating efficiency on the profitability of Nepalese commercial banks. The study showed that capital adequacy ratio has a positive impact on return on assets and return on equity. It means that increase in capital adequacy ratio leads to increase in return on assets and return on equity. Similarly, operating expenses has a negative impact on return on assets and return on equity. It means that increase in operating expenses leads to decrease in return on assets and return on equity. Further, the study showed that net interest income has a positive impact on return on assets and return on equity. It means that increase in net interest income leads to increase in return on assets and return on equity. Likewise, leverage has a negative impact on return on assets. It means that increase in leverage ratio leads to decrease in return on asset. Furthermore, loan to deposit ratio has a negative impact on return on asset and return on equity. It indicates that increase in loan to deposit ratio leads to decrease in return on asset and return on equity. In addition, bank size has a negative impact on return on assets and return on equity. It shows that larger the bank size, lower would be the return on assets and return on equity.

How good are banks’ forecasts?

We analyse the financial forecasts small and medium-sized German banks provided in several waves of a quantitative survey, called LIRES, and compare them with the results the banks actually realized. Based on this unique data set, we find that the predictions are relevant, especially concerning the net interest income for the next year, and persistent, but neither unbiased nor rational. We also find slight evidence for a positive relationship between planning and performance, i.e. banks whose predictions are more accurate tend to have a higher return on assets. Looking at the forecasts made just before the end of the low-interest rate environment, we observe that the explanatory power of predictions went down.

Lessons from low interest rate policy: How did euro area banks respond?

This paper studies the impact of the Eurosystem’s low interest rate policy on euro area banks. We first assess the impact of low rates on banks’ net interest margins. An important extension to previous studies is that we split the interest margin into a funding and lending component. The decomposition makes clear that the low interest rate environment significantly reduced banks’ net interest income by squeezing funding margins, which corroborates the reversal rate literature. We find no strong evidence that banks have boosted their lending margins to offset the lost funding margin. However, we do observe that banks partly compensated for the impact of low rates by switching to non-interest income sources and by cost savings. We also find that low interest rates have not reduced bank lending, which suggests that banks’ compensatory measures largely outweighed the impact of low rates.

Is This Time Different: How Are Banks Performing during the Recent Interest Rate Increases Compared to 2004–2006?

In 2022, the Federal Reserve began its latest monetary tightening cycle. Increases in interest rates are generally favorable for commercial bank net interest income (interest income minus interest expense). This relationship holds because many loan types have adjustable rates, and banks do not pass through all interest rate increases to depositors.

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

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.

An estimation of the Italian banking sector profit rate in a crisis period

In this paper an attempt is made to calculate the profit rate of the banking sector in the period following the 2007–2008 financial crisis, in order to compare it with that of other real productive sectors. Various techniques are used, highlighting the differences between the results of national accounts data—on which the GDP calculation is based—and those of the central bank. This paper studies the problem of this difference on Italian data and offers a possible explanation, which confirms some analysis (Banque de France on French data) related to an earlier period. The second step in the analysis is directed at comparing bank profit rate and the productive profit rate. The result is that the bank profit rate has been surprisingly low in recent years, due to a decrease in net interest income, an increase in capital and an increase in non-performing loans. However, since 2021, bank profitability has improved greatly, thanks in part to institutional interventions.

Testing of the Structure-Conduct-Performance Hypothesis for Industrial Banking Profitability: Evidence from Indonesia

This study aims to test the validity of the Structure Conduct and Performance (SCP) hypothesis on banking profitability in Indonesia. This research data comes from banking financial statements from the Financial Services Authority (OJK) and Bank Indonesia. The analysis method uses the panel data regression method. The banking industry studied includes 110 conventional commercial banks and Islamic banks from 2010-2019. This research has found that the profitability performance of the banking industry is statistically significantly influenced by concentration, market share, cost efficiency to generate revenue, bank size, net interest income margin, Bank Indonesia's benchmark interest rate, and economic growth. Meanwhile, inflation is insignificant. The contribution of the research was to develop of Structure Conduct Performance (SCP) theory. The SCP is applicable to Indonesian banking and it is the Hybrid of the Efficient-Structure Traditional Hypothesis which states that the effects of efficiency and market concentration have improved banking profitability performance. The combination of structure, market share, and efficiency supports the hypotheses on Efficiency and SCP Traditional. High banking profitability due to the combination of efficiency and market concentration formed by increased assets and mergers. Therefore, OJK and Bank Indonesia in encouraging asset improvement through future mergers can improve efficiency, the competitiveness of the banking industry, the and economic stability of Indonesia.

Net Interest Income of Greek Banks: is it a case of Bankflation?

On 27th of July 2022, the European Central Bank (ECB) responding to emerging inflation pressures increased the interest rate of the main refinancing operation to 0.5% up from 0.0% which was the norm for the second half of the previous decade. Since then, the ECB responded to inflationary shocks by increasing interest rates nine more times till 20 September 2023, reaching 4.5%. Following these unprecedented hikes in ECB interest rates, Greek banks responded swiftly by raising their lending interest rates, whereas they kept deposit rates at very low levels with the net interest margin (NIM) being at 2.6% in the first half of 2023 compared to 1.5% in the Euro-area while in November 2023, the Greek NIM was raised further to 4.83%, which was more than twice the corresponding NIM at 2.4% of Euro Area banks. Our dynamic panel VAR analysis study examines whether the oligopolistic structure of the Greek banking industry contributes to this divergence in NIM. This high NIM has induced a staggering increase in net interest income of Greek banks by 59.9% in 2023 compared to 2022 from 2.54 mil euros to 4.07 mil euros. During the same period, Greece reported a negative saving rate at − 4%, as people resorted to their savings to cope with greedflation in consumer goods. We show that successive interest rate hikes by the ECB aimed to reduce inflation have positively contributed to the sustainability of the Greek banking industry by building up stronger capital buffers and accelerating amortization of the deferred tax credits mainly through the channel of NIM. Alas, the high cost of diverging Greek NIM from the rest of the Euro Area hurts credit expansion and fuels existing greedflation by generating its own bankflation. Our study shows that EU policymakers should accelerate the banking union in the Euro Area which would enhance competitive pressures for Greek banks and potentially reduce NIM and tackle bankflation. The regaining of Greece’s investment grade gives the impetus to the convergence of Greek NIM to euro area ones.

Analisa Pengaruh Rasio Keuangan Terhadap ROA Pada PT. Bank mandiri, Persero (Tbk)

With a consistent business strategy and mature digitalization optimization, Bank Mandiri managed to record good financial performance, as seen from the profit in the 1st quarter of 2023, which was the result of a performance focused on the business ecosystem approach both from financing and funding. The credit increase was due to the improving solid economic fundamentals, Bank Mandiri seeks to contribute to the Indonesian economy. The condition of Indonesian banking after the Covid pandemic began to improve, as seen from the increase in the capital adequacy ratio (CAR), the ratio of non-performing loans (NPL), an increase in net interest income (NIM), a decrease in the ratio of operating expenses to operating income (BOPO), with high capital owned there is an increase in the fulfillment of loan requests (LDR) with a low ratio level. This research was conducted by analyzing, testing and concluding the effect of CAR, NPL, NIM, BOPO and LDR on ROA at Bank Mandiri for the 2017-2023 period using secondary data through information on Bank Mandiri's financial reports. Quantitative analysis technique with multiple linear regression and classical assumption test using SPSS version 25. The results show BOPO, NIM and LDR partially have a positive and significant effect, while CAR and NPL do not have a significant effect on ROA Simultaneously CAR, BOPO, NPL, NIM and LDR affect the increase or decrease in ROA. From the independent variable to the dependent variable it has a predictive ability of 98.3% and 1.7% is influenced by other variables outside the research.

Are Larger Banks Performing Better than Smaller Banks in Bangladesh?

This paper examines the relationship among bank size, net profit after tax and net interest income of 41 commercial banks in Bangladesh from 2012 to 2021. The study develops six hypotheses to diagnose the relationship between bank size and net profit or net interest income from the perspective of lag period data, generation wise data, and yearly data. Convenience sampling has been used, and the data is collected for the period 2012 to 2021 that considers all four generations of banks and thus the data set includes 410 firm year observations. After conducting OLS regression, it turns out that bank size positively impacts net interest income and net profit after tax. Overall, the correlation between net interest income and net profit after tax with bank size is significant revealed by examining the value of R2 and adjusted R2. We suggest testing with some other relevant variables (qualitative) which may produce some insightful thoughts and thus opens up the door of future research. Finally, it can be concluded that bank size is a self-sustaining attribute

Analysis of the Influence of Capital, Income and Liquidity on Banking Performance with Fintech as a Moderation

This research examines the effects of Capital, Interest Income, and Liquidity on Financial Performance of the Bank during period of 2012-2022, taking into consideration the moderating role that FinTech plays in the relationship. Capital, as assessed via CAR which is Capital Adequacy Ratio, exhibits conflicting impacts on banking performance. It has a significant negative influence on profitability (ROA) and asset quality (NPL), but it has a good impact on efficiency (BOPO). Capital effects on different things ROA, NPL, and BOPO, however, becomes statistically negligible when FinTech is used moderately. The ratio that represents net interest income, known as the net interest margin, contributes considerably to an increase in profitability (ROA), but at the expense of the asset quality and operational efficiency. If FinTech is managed properly, its influence on ROA will be reduced, while the consequences it has on NPL and BOPO will become less significant. The Return on Assets (ROA) and Efficiency (BOPO) are both favorably affected by Liquidity, as assessed by the Loan to Deposit Ratio (LDR), while Asset Quality (NPL) is not significantly impacted. However, because of the moderation brought about by FinTech, the effect of liquidity on ROA, NPL, and BOPO becomes statistically irrelevant. Among our suggestions is the adoption of digital services for the purpose of boosting liquidity, the reduction of unproductive branch offices, the formation of collaborative partnerships with FinTech companies, and the improvement of regulatory control. This study reveals important insights into the rapidly changing world of banking and FinTech, which may influence strategies for achieving sustainable development

The Impact of Exchange Rate Changes and Diversified Revenue Structure on The Profitability of Commercial Banks

All the income of commercial banks is divided into traditional interest rate spread income and various non-interest income, all along, the bank's income mainly comes from its deposit and loan spread, that is, net interest income, and other businesses develop slowly. However, with the deepening of interest rate market-oriented reform and foreign exchange system reform, the diversified development of commercial banks has become increasingly prominent, becoming one of the basic hubs for bank transformation and financial risk prevention and control. Based on the revenue data of 10 listed commercial banks in China from 2011 to 2021, this paper analyzes the impact of commercial banks' profitability on their income structure and exchange rate changes, so as to explore the business strategies that can bring profit improvement to banks in the context of changing macro economy.

Influence of Credit Risk Management on Financial Performance of Commercial Banks in Kenya

The management of credit risk in commercial banks determines the banks' financial performance, which predominantly influences the quality of the loan portfolio and the nature of credit administration programs as a whole. By ensuring that credit risk is effectively managed, the primary objective of credit risk management is to generate a high-quality, stable, large, and growing flow of net interest income for banks. This objective is achieved by ensuring that banks can meet the needs of their customers. This study determined the effect of credit risk management on the financial performance of Kenyan commercial banks. The investigation was founded on the portfolio theory. The paradigm of Positivism served as the philosophical foundation for the investigation. The study incorporated both explanatory and longitudinal research designs into its methodology. The study's target population consisted of 32 Commercial Banks in Kenya. The study utilized panel data consisting of time series and cross-sectional data spanning a decade from 2010 to 2019. Using Eviews, descriptive and inferential statistics were used to analyze the collected data, which was then presented in tables and figures. The study found out that Credit risk management had an insignificant negative relationship with Return on Equity (ROE) (F=87.02884, p<0.05) and Return on Assets (ROA) (F=118.1208, p<0.05). Arising from the study findings, it is observed that credit risk management has a negative effect on financial performance measure either in ROA or ROE, it is recommended that commercial banks should keep this parameter as minimum as possible so as not involve in loss making undertakings.

A financial supply chain on corporate working capital and interbank lines of credit

Companies sign prior contracts for working capital demand loans with banks to mitigate their working capital shortfall. In order to honor the contract, banks also undertake lines of credit agreements in the interbank market to protect themselves from liquidity mismatch. The paper proposed a mathematical model to assess the performance of banks in a probabilistic environment, where corporates exercise their options for working capital loans and banks face liquidity problems, therefore resort to lines of credit in the interbank market. The paper through simulation examined the effect of expected income and expenses, at different probabilities for companies exercising their options for different quantities of working capital demand loans, and banks approaching the interbank market for lines of credit. It is found that as the probability of exercising working capital demand loans increases, the net-interest income for banks also increases. The model is further validated with unique primary data for a bank having overdraft contracts with 55 companies in an interbank market of 22 banks. The paper uses the network theory to examine the stability of banks in an interbank market. This model will help banks with policy formulations to maximize net-interest income by considering the number of corporates signing overdraft contracts, overdraft interest rate, the probability of corporates exercising overdraft contracts, and the number of banks to be considered in an inter-bank market.

АНАЛІЗ КОНКУРЕНТОСПРОМОЖНОСТІ ЦИФРОВОГО БАНКІНГУ В УКРАЇНІ

The article analyzes the state of digital banking in Ukraine in order to identify the competitiveness of this sector of the economy. The Ukrainian banking system has gradually accustomed its consumers to the technology of services and the digital environment, using the latest technologies and introducing them into its activities at all levels. Accordingly, the latest technologies are used, high service and interesting applications are offered, which are pleasant and convenient to use. At the same time, the approach to all banking operations is changing, they are becoming increasingly easy, fast and convenient and do not involve visits to branches at the physical level. In total, 66 banks operate in Ukraine, among which only 5 are included in the list of systemically important banks of Ukraine: JSC "KB PrivatBank", JSC "Oshchadbank", JSC "PumbBank", "Sense Bank" and "Monobank". The article compares the activities of Ukrainian banks according to the following indicators: Number of employees, Number of customers, types of cards, cashback, availability of partner programs, Annual interest on the loan, Grace period, Credit limit without collateral, Annual interest on the deposit. The dynamics of the main financial indicators of the mentioned competitors in the digital banking market of Ukraine were also studied: net profit, net interest income, and commission income. It has been established that the largest technological banks in Ukraine have joint projects with fintech companies. The exception is "PrivatBank", which has its own powerful development center. PrivatBank continues the active digitization of its services and financial services, which have long since gone beyond classical banking and are forming a new digital ecosystem in Ukraine at the junction of financial services, retail and e-commerce. In addition, Ukrainian banks have their own centers for incubation and acceleration of startups – they expect to receive a return from them in the form of innovative products and services that can be implemented in themselves.

LIQUIDITY IMPACT ON BANKS PROFITABILITY IN THE REPUBLIC OF SRPSKA

Banks, as the primary goal have profit maximization, but because of its importance for the overall economic system there is a huge number of stakeholders from depositors to government who are vitally interested in how banks operate, i.e. maximize profits. Our aim is to establish and examine relationship between banks profitability and liquidity. We will look at 16 interdependencies between liquidity indicators: liquid assets by total assets, liquid assets towards short-term financial liabilities on the one hand and profitability indicators: returns on average assets, return on average capital, net interest income according to total income, non-interest expense according to the total income etc. We constructed solvency model for banks in the Republic of Srpska according to factors which are mostly correlated on state level. We used the data available for the banking system of Republika Srkska to form the model. The model captures 70% of linear relationship between predictor variables and response variable. We can conclude that significant variables are interest cost, capital to asset ratio, dividends, and membership to a group. However, our model caputre 70% of relationship and give us satisfactory level to conduct politics in order to increase bank profitability and creditworthines.

Research on the Competitiveness Analysis of Commercial Banks Based on the Malmquist Index - A Case Study of 26 Listed Commercial Banks in China

Bank Competitiveness is a concentrated reflection of China's financial strength. Using the Malmquist Index calculation method based on the DEA (Data Envelopment Analysis) approach, this study analyzes the performance of 26 commercial banks in terms of operating expenses, net fixed assets, net interest income, and non-interest income indicators. Through empirical analysis, the competitiveness of commercial banks is evaluated from aspects such as efficiency change, technological change, scale efficiency, and total factor productivity. The research findings indicate that although commercial banks have shown some improvement overall in different years, their progress in terms of production efficiency remains limited. Based on the analysis results, suggestions for countermeasures are proposed, including optimizing resource allocation, promoting continuous technological innovation, optimizing scale management, and establishing effective monitoring and evaluation mechanisms.

Determining the value of an enterprise on the example of two leading Ukrainian banks

The paper addresses the issue of determining the precise value and the financial prospects of enterprises subject to sales or purchase by investors. In order to illustrate the process of calculating the value of a company, the article analyses the financial condition and capital of the two largest Ukrainian banks, i.e. PrivatBank and Oschadbank. The aim of the study is to compare the values of these enterprises on the basis of statistical criteria. The statistical and comparative analysis of the aforementioned entities covering the years 2015–2021 was carried out using the following indicators: total assets, total liabilities, total capital, net interest income, profit before tax, annual net profit and total aggregate annual income. The study was based on data available in the banks’ financial reports. The study method consisted in statistical analysis, correlation and multiple regression. The research determined the value of both banks, indicating that PrivatBank outperforms Oschadbank in this respect.