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Bank profitability and macroeconomic conditions: are business models different?

Emilia Bonaccorsi di Patti () and Francesco Palazzo ()
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Emilia Bonaccorsi di Patti: Bank of Italy

No 436, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: The paper investigates the impact of macroeconomic conditions on the profitability of EU banks, by testing for differential effects according to the business model. We group banks into three business models using a hierarchical cluster analysis, and find that using clusters based on the share of assets invested in loans reveals heterogeneity in the sensitivity of bank profitability to economic growth across business models. Our main result is that GDP growth, credit growth and the risk-free yield curve influence profitability as expected, but we also find that the effect of GDP growth is only significant for banks that have a high and medium share of assets invested in loans, and not for banks that hold large portfolios of securities. This difference depends on the impact of growth on asset write downs, especially those on loans and, to a lesser extent, on revenues. The results suggest that studies relating bank profitability to macroeconomic conditions should take the heterogeneity of business models into account.

Keywords: bank profitability; bank business model; income statement; revenues; net interest income (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-eec
Date: 2018-06
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