Breaking the Bank? A Probabilistic Assessment of Euro Area Bank Profitability

Selim Elekdag, Sheheryar Malik and Srobona Mitra

No 2019/254, IMF Working Papers from International Monetary Fund

Abstract: This paper explores the determinants of profitability across large euro area banks using a novel approach based on conditional profitability distributions. Real GDP growth and the NPL ratio are shown to be the most reliable determinants of bank profitability. However, the estimated conditional distributions reveal that, while higher growth would raise profits on average, a large swath of banks would most likely continue to struggle even amid a strong economic recovery. Therefore, for some banks, a determined reduction in NPLs combined with cost efficiency improvements and customized changes to their business models appears to be the most promising strategy for durably raising profitability.

Keywords: WP; profitability distribution; bank profitability; NPL ratio; standard deviation; bank ROE probability distributions; banks performance; loan growth; Ulster bank Ireland DAC; alpha bank AE; probability distributions; bank capital; indebted bank borrower; probability distributions for a representative; bank return on assets; Bank soundness; Nonperforming loans; Personal income; Yield curve; Loan loss provisions; Global; Europe (search for similar items in EconPapers)
Pages: 38
Date: 2019-11-22
New Economics Papers: this item is included in nep-ban and nep-eff
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Citations: View citations in EconPapers (2)

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