Net Interest Income Research Articles

Effect of operational risk on financial performance in banking industry IDX

Seeing the phenomenon of the COVID-19 pandemic, it has resulted in changes in the work patterns of many banks in Indonesia. The presence of COVID 19 is able to change the current pattern of bank operations in Indonesia. The financial performance of a company is a measure of the company's profits or losses in a certain period of time. Which could be issues related to banking risk management such as exchange rate risk, operational risk and interest rate risk. To raise arguments about how risk affects financial performance can reduce the probability of bankruptcy and provide greater stability of banking. This study aims to determine the effect of the dependent variable on financial performance as measured by return on assets and return on equity and the independent variable net interest income, average asset turnover, total operating expense, interest over years, exchange rate. The purpose of this study is to examine the effect of operational risk on financial performance in the banking industry listed on the IDX.

Banks’ Net Interest Income from Maturity Transformation and Other Interest Income: Communicating Vessels?

Banks’ Net Interest Income from Maturity Transformation and Other Interest Income: Communicating Vessels?

Hidden Risk

Using self-reported data from banks in mainland China, I apply a technique used in forensic accounting based on Benford’s Law to detect fraudulent manipulation of non-performing loan (NPL) figures. I find large data anomalies consistent with false reporting in mainland banks that do not appear in an identically structured survey of Hong Kong banks. A comparison of different types of data from mainland banks shows no statistically significant anomalies in data for total deposits from customers, operating expenses, net interest income, or non-interest income.

Determinant of net interest income of commercial banks in Indonesia

This study aims to identify the factors that contribute to the formation of Net interest income (NII) for commercial banks in Indonesia in the short and long-term using the Vector Error Correction Model (VECM). The results showed that in the short term all variables in each period tend to adjust to achieve long-term balance. In the short term, the variables that affect NII are credit and NPL of large and retail trade, construction credit, transportation credit and NPL warehousing and communication, as well as lending rate facility. While in the variable length figures that affect NII are credit variables and NPL large and retail trade, Credit and NPL Transportation, warehousing and communication, other credit and Third-Party Funds (Deposit) collected. The analysis of Impulse Response Function can be proven that NII most quickly achieves stability when dealing with the shocks of large trade and retail NPL. Meanwhile, in the Forecasting Variance Decomposition analysis, it can be concluded that the variable that gives the greatest contribution to NII is the amount of construction credit.

The Impact of Monetary Policy on Bank Profitability and the Moderating Role of Funding Patterns in Vietnam

The study investigates the effect of monetary policy on bank profitability while also taking into account the moderating role of bank funding patterns. Uniquely, the study focuses on disaggregate components of bank profits in an environment containing various monetary policy tools. Using a dataset of commercial banks in Vietnam, the results show that monetary policy drives bank profitability asymmetrically. Concretely, interest rates (i.e., lending rates and policy rates) exert positive effects on net interest income, but negative impacts on non-interest income. For quantitative-based policy tools, including the central bank’s security purchases and foreign exchange reserves, monetary policy is positively correlated with non-interest income but negatively associated with net interest income. The reaction of banks’ net interest income to monetary policy adjustments is translated into overall bank profits. Further analysis indicates that the monetary policy/bank profitability nexus across different proxies is less pronounced at banks with more diversified funding patterns. This finding sheds light on prior arguments attributing financially weaker banks’ greater sensitivity in facing monetary shocks to the limited alternative funding.

The pass-through effect of unconventional monetary policy to net interest income structure of European banks

Purpose: Financial banking intermediaries are sensitive to changes in market interest rates. The volatility of market interest rates affects the level of bank net interest income and determines the bank interest rate policy. Banks are actively managing structural interest rate risks to mitigate the negative effects of changes in market interest rates. The post-crisis period is characterised by unconventional monetary policy, and one of the basic objectives of the monetary instrument is a negative interest rate policy. This paper researches the effects on the bank net interest income structure with an impact on bank performance indicators. The basic research hypothesis is that during the financial crisis and a negative interest rate policy, the movement of bank interest income does not converge compared to a bank interest expense. Methodology: According to the characteristics of the dataset, which includes 32 listed banks from Great Britain, Switzerland and the European Union for the period 2002-2019, panel data analysis is applied. To analyse the effect of the interest rate level on total interest income and total interest expense, we formed two models. Fixed-effects models were used for parameter estimation. Results: A bank interest expense is more sensitive to unconventional macroeconomic policy than bank interest income. Conclusion: The traditional interest earning customer related business can enable banks to stabilise the bank performance indicator during market disruption.

МОНІТОРИНГ ЕФЕКТИВНОСТІ ФУНКЦІОНУВАННЯ БАНКІВСЬКОЇ СИСТЕМИ УКРАЇНИ

The article considers the results of monitoring the efficiency of the banking system of Ukraine. Monitoring the effectiveness of the banking system is based primarily on the study of the profitability of the bank, which management achieves in the process of managing this bank. During the monitoring of the efficiency of the banking system of Ukraine, attention was focused on the studied indicators in terms of groups of banks depending on their owner. In the period 2015-2020, half of the domestic banking entities were inefficient. The management of such banks was unable to establish effective management, and therefore the vast majority of banks were declared insolvent and liquidated from the banking system. The crisis in the banking system showed the depth of the problems that banks had accumulated at that time. This crisis also had positive consequences for the economy, as only the most stable banks remained operational, with liquidity, solvency, profitability, and organization and business models effective. The absolute indicator of the efficiency of the banking system is the dynamics of net profit.The financial result of Ukrainian banks during 2015-2017 was negative, and the banking system was unprofitable. The banking system's total net profit was received in 2018. In 2019, profit increased significantly, but during 2020 the growth rate slowed down. The reason for the long-term losses of banks in recent years was, first of all, the decline in asset quality. The spread of the pandemic in 2020 worsened the financial condition of banking institutions, but the number of unprofitable banks did not increase. Over the last three years, there has been a tendency to increase both total operating income and their main components, namely net commission and net interest income. Only foreign banks in terms of groups had a consistently high operational efficiency during 2018-2020. The results of the study allow us to conclude that in general the banking system at the end of the study period is working effectively. The future of the banking system in Ukraine cannot be accurately predicted. Banks need to be able to adapt quickly to changes in the factors that affect their profitability.

On comprehensive balance sheet stress testing and net interest income risk attribution

On comprehensive balance sheet stress testing and net interest income risk attribution

What Factors Drive the Banks Systemic Risk among South Asian Countries?

Purpose: This study designs to examine the determinants (size, liquidity ratio, leverage ratio, deposit ratio, asset growth, net interest income ratio and return on asset ratio) of bank’s systemic risk. We use the data of listed commercial banks of the South Asian countries (Pakistan, Bangladesh, and India). Design/Methodology/Approach: The sample consists 30 banks from Bangladesh, 87 banks from India and 22 banks from Pakistan. This study covers the period from 2006 to 2018. The data is collected from the published annual reports of banks and stock exchanges of respective country. The panel data analysis is performed for the estimation of research models. Findings: The findings demonstrate that larger banks contribute lower in the systemic risk of banks. Additionally, highly liquid banks enhance the systemic risk of the banking system. Moreover, the banks with greater reliance on the deposits, net interest income and with high return on asset reduce the systemic risk contribution of the banks. Implications/Originality/Value: This study provides the justification to devise the banking policies like enhance the proportion of liquidity among assets, reliance on net interest income and promote the financing needs through deposits to limit the systemic risk contribution of the banking system.

German banks’ behavior in the low interest rate environment

Using data from a quantitative survey of German banks at three points in time (2015, 2017 and 2019), we analyze the impact of changes in the interest rate level on banks’ net interest income and the countermeasures they take. A decline in the interest rate level has a more negative impact on net interest income, the longer the decline lasts and the lower the interest rate level is. This impact softens with increasing risk of changes in the present value of banking books. We do not find that banks generally increase their risks following a drop in income. However, poorly capitalized banks subsequently increase the credit risk of their bond portfolio. After a fall in operational income, banks increase their fee and commission income and reduce their costs. In addition, banks tend to extend their mortgage lending after a drop in their interest income.

Key determinants of deposits volume using CAMEL rating system: The case of Saudi banks.

CAMEL is considered one of the well-known banking rating systems used to build a proper bank ranking. In our paper, we investigate the CAMEL rating for Saudi banks, which is considered the second largest banking sector in GCC. The Saudi banking sector consists of 11 banks and is the leading sector in the Saudi stock index (TASI). In this research, we aim to determine the ranking of Saudi banks according to CAMEL composite and CAMEL overall ratings and explore the effects of these ratings on banks’ total deposits for the period from 2014 to 2018. The methodology involves four phases. In the first phase, we calculate the key financial ratios of CAMEL’s composites for each bank. In the second phase, we rank the banks from 1 to 11 to each one of CAMEL’s composites for each bank per year. In the third phase, we rank Saudi banks according to CAMEL composite and CAMEL overall. Finally, in the fourth phase, we run a regression model using CAMEL financial ratios rank as independent variable and banks’ total deposits as a dependent variable. Using the stepwise regression method, the results indicated that the best regression model has an adjusted R2 of 73.4% and a standard error of around 0.58. The results further indicated that capital measured by CAR, management as an efficiency ratio, earning with ROE proxy, and liquidity as loans to deposits have positive effects on banks’ total deposits. Meanwhile, earnings as net interest income to net revenue and liquidity calculated by CASA have a negative effect on banks’ total deposits. Finally, asset quality ratios and the rest of the ratios have no significant effect on banks’ total deposits.

Bank profitability under uncertainty

The paper examines how uncertainty affects bank profitability, which has been surprisingly underexplored in the existing literature. Concretely, we focus on uncertainty in the banking sector and measure it via the cross-sectional dispersion of shocks to key bank-level variables. Using panel data from Vietnam during 2007–2019 and the two-step system generalized method of moments estimator in dynamic panel models, we find consistent evidence that banking uncertainty hampers the overall return of banks. In more detail, our analysis suggests that the adverse impact of banking uncertainty on net interest income dominates the favorable ones on aggregate non-interest income and loan loss provisions. While decomposing non-interest income into disaggregate components, we document that banks tend to improve income sources from fees, commissions, foreign exchange transactions, and other non-traditional segments amid uncertainty in banking, as opposed to the depreciation in securities trading revenues. Our additional examination further indicates that all effects are more pronounced for banks suffering more credit risk and default risk. This finding offers new evidence to support the notion that banking uncertainty leads banks to act cautiously as a precautionary motive.

The evolution of bank revenue and risk in the Asia-Pacific Region

We model the simultaneous determination of bank non-interest income and net interest income while considering bank risk, capital holdings and regulatory quality. Declines in net-interest income are associated with increased non-interest income. In contrast, net interest income shows negligible sensitivity to changes in non-interest income. Increased non-interest income is associated with increased capital holdings after the GFC (with no evidence of volatility increasing regulatory arbitrage). Non-interest income is associated with worsening loan quality. Thus, bank conglomeration does not reduce information asymmetry in the loan portfolio. We establish that the Chinese banking system did not adjust its revenue mix in the same manner as other banks in our regional sample. We argue that increased non-interest income should result in increased prudential surveillance by national regulatory authorities, with a particular focus on loan quality.

An Empirical Study on the Factors Affecting the Interest Rate Spread of Listed Conventional Commercial Banks of Bangladesh

This paper aims to explore the factors affecting the interest rate spread of the listed conventional commercial banks of Bangladesh from 2011 to 2019. For this, banks' interest rate spread has been considered a dependent variable while bank-specific, industry-specific, and macroeconomic factors have been considered independent variables. Bank-specific factors are credit risk, bank size, operating cost, liquidity risk, net interest income, capital adequacy, return on equity. The bank industry-specific factor is market share, while macroeconomic factors are GDP and Inflation. Pooled Ordinary Linear Regression analysis and the random-effect method have been used to investigate the impact of the factors on interest rate spread. The results demonstrate that credit risk, operating costs, and liquidity risk positively impact interest rate spread. The asset size and GDP have both positive and negative relationships depending on the circumstances. In contrast, net interest income, capital adequacy, return on assets, and market share have a negative relationship. The study's findings will assist the regulatory body of the banks in developing strategies to maintain a satisfactory level of interest rate spread.

The channels of banks’ response to negative interest rates

Faced with a potential zero lower bound on deposit interest rates, how do banks pass on the fall in net interest income due to negative interest rates? This paper aims to investigate the different channels of banks’ responses to negative interest rates using a detailed breakdown of the profit and loss account of 3637 banks in 59 countries from 2011 to 2018. We find that the decrease in interest income due to negative interest rates is mitigated by an increase in non-interest income, but only partially. We find that banks respond to that shock by reducing the interest paid on non-customer deposit liabilities and their personnel expenses. We also show that banks’ responses are not instantaneous and that they adjust their response as negative interest rates persist over time such that how long negative interest rates are implemented matters. Finally, our results suggest that large banks with higher deposits and higher leverage ratios are the most affected by the implementation of negative interest rates.

Management and legal aspects of the symbiosis of banking institutions and fintech companies in the credit services market in the context of digitization

The article examines the features of banks' lending activities and substantiates the prerequisites for strengthening their cooperation with financial companies, systematizes internal and external innovations used in the process of digitalization of the banking business. The periodization of the banking system from 2005 to the present in accordance with the strategic development goals and stages of the bank's life cycle has allowed to justify the relevant digitalization policy, appropriate for each period. It has been proved that the symbiosis of banks and fintech companies helps to increase the competitiveness and profitability of business in the long run. The importance of introduction of banking innovations in the crediting market as the most profitable direction of banking activity has been substantiated, the forecast of change in net interest income of Ukrainian banks for the post-pandemic period has been made. Based on the fact that the indicator of the country's success in implementing the norms and measures of the Digital Agenda for the EU and Digital Single Market is the Digital Economy and Society Index (DESI), which is determined for each EU country annually, the paper makes forecast changes in its components: Connectivity, Human Capital, Use of Internet, Integration of Digital Technology, Digital Public Services. The main factors that inhibit the processes of strengthening the interaction between banks and FinTech companies in Ukraine have been identified. The expediency of improving the current legislation of Ukraine taking into account the best European practices in the field of cooperation between banks and FinTech companies has been substantiated.

IMPLICATIONS OF LOW INTEREST RATES ON BANK PROFITABILITY AND RISK-TAKING

This paper investigates the effect of low interest rates on bank profitability and risk-taking. A comprehensive depiction of the current state of research was developed based on systematic literature review and qualitative content analysis. A low interest rate environment, as present in many economies, has various implications on bank profitability and risk-taking. A positive relationship is found between interest rates and net interest income, while the relationship with non-interest income is negative. Also, banks increase risk-taking in search for yield. The influence on bank profitability is highly dependent on several factors, but in most papers a negative influence is found. Throughout the world banks have managed to limit the impact through mitigation strategies, such as diversification, which are presented as guidance.

Do local labor market conditions impact bank profitability?

AbstractThis paper studies the impact of local unemployment shocks on bank profitability. Our work advances on previous studies that use national‐ or state‐level data, as we create a bank‐specific measure of local unemployment in which the bank has exposure. Using this novel measure, we determine how shocks to unemployment affect each individual bank's profitability. Our results indicate that an increase in the local market unemployment rate decreases bank profitability on average by 3.2%. The impact of local market conditions on profitability is stronger for banks that are large, operate in more markets, face more competition, and have a greater reliance on lending. We further examine what components of bank profitability are most impacted by local labor market conditions and find that net interest income is most impacted.

TINJAUAN STABILITAS KEUANGAN BANK MELALUI TINGKAT PERSAINGAN DAN DIVERSIFIKASI PENDAPATAN: STUDI PADA BANK UMUM YANG TERDAFTAR DI BURSA EFEK INDONESIA

This study investigated the relationship between the level of competition between banks and revenue diversification on financial stability of commercial banks during 2008- 2013. The level of competition in this study measured by the market share of net interest income. Revenue diversification measured using Hirscman Herfindhal Index, while the bank's financial stability is measured by ZScore for banking industry. Models were analyzed using a fixed effect regression models. The results showed that the bank samples is vurnerable to the intense of competition. Although the research sample has relatively high market share, but its has not shown the resilience to face the competition. Low level of revenue diversification on bank samples showed that they did not implement a diversification strategy, then can not gain benefit from revenue diversification strategy

Оценка влияния факторов на процентный риск коммерческого банка

In modern conditions of the rapid industrial development the banks have to forecast their risks and profitability precisely, to apply information technologies to assess their activities. To evaluate the bank's income, it is necessary to carry out an internal analysis of its assets and liabilities and determine the factors effecting the bank's profitability by managing interest rate risk. The hypothesis of the study is the analysis of the impact on the net interest income and interest rate risk of a commercial bank of factors such as the exchange rate and the key rate of the Bank of Russia (for example, Sberbank, PJSC). There has been studied the impact of the factors (exchange rate and key interest rate of Central Bank of Russia) on the bank's net interest income by using correlation and regression analysis and building a regression model. Many tools are found to be used by the experienced analysts. One of the main tools is GAP analysis of interest rate risk. There have been illustrated the graphs of changes in interest rates of savings and loan associations during the crisis in the United States in the 1950-1960, of realization of interest rate risk with an increase in interest rates, the distribution of assets and liabilities according to the maturity of the balance sheet structure, the impact of changes in the interest rate GAP on net interest income, etc. A matrix of correlations of all variables in the sample (rates of growing values) was constructed. Conclusions are drawn on the need to use hedging instruments (interest rate swaps, interest rate options), as well as of attracting the most reliable data on the state of interest rate risk in the commercial banks.