The determinants of bank profitability: empirical evidence from European banking sector

2016 ◽  
Vol 14 (1) ◽  
pp. 86-115 ◽  
Author(s):  
Elisa Menicucci ◽  
Guido Paolucci
Keyword(s):  
Banking Sector ◽  
Developed Countries ◽  
Policy Implications ◽  
Loan Loss ◽  
Data Set ◽  
Bank Profitability ◽  
Content Type ◽  
Loan Loss Provisions ◽  
European Banking ◽  
European Banks

Purpose The purpose of this paper is to investigate the relationship between bank-specific characteristics and profitability in European banking sector to find the role of internal factors in achieving high profitability. Design/methodology/approach A regression analysis is built on an unbalanced panel data set comprising 175 observations of 35 top European banks over the period 2009-2013. To this end, the empirical data are collected from Bankscope and a comprehensive set of internal characteristics is examined. Findings All the determinant variables included in the model have statistically significant impacts on European banks’ profitability. However, the effects are not uniform across profitability measures. Regression findings reveal that size and capital ratio are significant company-level determinants of bank profitability in Europe, while higher loan loss provisions result in lower profitability levels. Findings also suggest that banks with higher deposits and loans ratio tend to be more profitable but the effects on profitability are statistically insignificant in some cases. Practical implications This study has considerable policy implications, as the performance of the European banking sector depends on its efficiency, profitability and competitiveness. In view of these findings, some suggestions may be functional for bank regulatory authorities to intensify and sustain robustness and stability of the banking sector. Originality/value The results provide interesting insights into the characteristics and practices of profitable banks in Europe. Few econometric studies have empirically explored the determinants of bank profitability in Europe so far, even though similar studies have been conducted in several developed countries. Therefore, this paper tries to close an important gap in the existing literature improving the understanding of bank profitability in Europe.

Earnings management and equity incentives: evidence from the European banking industry

2019 ◽  
Vol 27 (2) ◽  
pp. 244-261 ◽  
Author(s):  
Mohammad Alhadab ◽  
Bassam Al-Own
Keyword(s):  
Earnings Management ◽  
Management Practices ◽  
Banking Industry ◽  
Future Research ◽  
Loan Loss ◽  
Content Type ◽  
Loan Loss Provisions ◽  
Equity Incentives ◽  
European Banking ◽  
European Banks

Purpose This study aims to examine the effect of equity incentives on earnings management that occurs via the use of loan loss provisions by using a sample of 204 bank-year observations over the period 2006-2011. Design/methodology/approach The authors use the data of 39 European banks to test the main hypothesis. Several valuation models and regressions are used to measure the main proxies for executives’ compensation and the determinant factors of loan loss provisions. Findings The empirical results reveal that earnings management that occurs via discretionary loan loss provisions is associated with equity incentives in the banking industry. In particular, European banks’ executives with high equity incentives are found to manage reported earnings upwards by reducing loan loss provisions. The results therefore show that income-increasing earnings management via discretionary loan loss provisions is widely practised by the executives of European banks and that this is partly motivated by executives’ compensation. Practical implications The findings of this paper present important implications for regulators in the European Union, who should take further steps to reform the regulatory environment to monitor and mitigate the earnings management practices that occur via the manipulation of loan loss provisions. Earnings management practices do not just negatively affect subsequent performance but are also found to lead to firms’ failure. Thus, regulators should take the necessary reforms to protect the wealth of stakeholders (investors, creditors, etc.). Originality/value This study provides the first evidence on the relationship between equity incentives and earnings management in the European banking industry. The study sheds more light on an issue of great interest to a broad audience that does not receive much attention in the prior research, thus opening new avenues for future research.

scholarly journals Bank loan loss provisioning during election years: cross-country evidence

2019 ◽  
Vol 16 (4) ◽  
pp. 413-431
Author(s):  
Peterson K. Ozili
Keyword(s):  
Banking Sector ◽  
Developed Countries ◽  
Income Smoothing ◽  
Bank Loan ◽  
Loan Loss ◽  
Political Factors ◽  
Content Type ◽  
Loan Loss Provisions ◽  
Provisioning Behavior ◽  
The Eu

Purpose The purpose of this paper is to examine bank loan loss provisioning behavior during election years – focusing on the effect of elections on banking sector loan loss provisioning. Design/methodology/approach Regression analysis was used to analyze the behavior of bank loan loss provisioning in developed countries during election years. Findings The findings reveal that the banking sectors in developed countries have higher loan loss provisions (LLPs) in election years. Also, income smoothing is present in election years which supports the income smoothing hypothesis. Also, banking sectors with high capital levels have higher LLPs. Although, there were no significant differences in bank loan loss provisioning during election years across the four bloc, the EU banking sectors and the banking sectors of BIS member countries generally have higher LLPs while the non-EU banking sectors and the banking sectors of the G7 member countries generally have fewer LLPs. Originality/value The literature has not explored the effect of political factors such as “election-year risk” on the managers’ discretion in banks. This is the first study that explores the effect of political change on managerial discretion in banks.

scholarly journals Impact of IAS 39 reclassification on income smoothing by European banks

2019 ◽  
Vol 17 (3) ◽  
pp. 537-553
Author(s):  
Peterson K. Ozili
Keyword(s):  
Income Smoothing ◽  
International Accounting ◽  
Loan Loss ◽  
Content Type ◽  
Loan Loss Provisions ◽  
Before And After ◽  
European Banking ◽  
European Banks ◽  
Ias 39 ◽  
The Impact

Purpose The purpose of this study is to examine the impact of the reclassification of International accounting standard (IAS) 39 on income smoothing using loan loss provisions among European banks. Design/methodology/approach Regression methodology is used to determine the extent of income smoothing using loan loss provisions before and after IAS 39 reclassification. The authors predict that the strict recognition and re-classification requirements of IAS 139 reduced banks’ ability to smooth income using bank securities and derivatives, motivating them to rely more on loan loss provisions to smooth income. The authors test this hypothesis over a sample of 114 European banking institutions over the period 2005 to 2013. Findings The findings do not support the prediction for income smoothing through loan loss provisions. Also, there is no evidence for income smoothing in the pre- and post-IAS 39 reclassification period. Research limitations/implications The implication of the findings is that the European banks did not use loan loss provisions to smooth income during the period examined, and rather rely on other accounting numbers to smooth income. This implies that the International Accounting Standards Board’s strict disclosure regulation improved the reliability and informativeness of loan loss provision estimates among European banks during the period of analysis. Originality/value This study is the first attempt to analyze the effect of IAS 39 re-classification on bank’s ability to smooth income in Europe.

scholarly journals Does the New European Banking Regulation discourage Earnings Management?

2017 ◽  
Vol 10 (10) ◽  
pp. 45 ◽  
Author(s):  
Giuseppe Di Martino ◽  
Grazia Dicuonzo ◽  
Graziana Galeone ◽  
Vittorio Dell'Atti
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Banking Sector ◽  
Banking Regulation ◽  
Regulatory Framework ◽  
Loan Loss ◽  
Minimum Capital ◽  
Loan Loss Provisions ◽  
European Banking ◽  
Single Rulebook

In the recent past, the financial crisis has shown important lacks in the EU regulation relating to the banking sector, making the introduction of a unified regulatory framework necessary. Since June 2009 the European Council has recommended a “Single Rulebook”, that is a unique and harmonizing discipline applicable to all financial institutions in the Single Market, become effective on January 2014. This prudential discipline requires much more minimum capital, liquidity and information transparency and it defines format and minimum standards of contents.The aim of this research is to investigate the relation between the new mandatory disclosure and earnings management policies in banking sector realized through Loan Loss Provisions (LLP), the component of income statement mainly subject to manipulations, especially in form of earnings smoothing. Because the new integrated regulatory framework requires a more transparent disclosure, we expected that accruals manipulation (basically LLP) could be discouraged. The empirical analysis is based on a sample of 116 listed European banks over the period prior (2011-2012-2013) and after (2014-2015-2016) the effective date of the Single Rulebook. The evidence confirm our hypothesis suggesting that this banking reform discourages earnings manipulation and improves earnings quality, making financial reporting more useful for investors. The results are important to the regulatory institutions (such as European Union and European Central Bank) supporting more stringent discipline introduced by Basel III.

scholarly journals Challenges of accountability in Nigeria: the role of deposit money bank

2020 ◽  
Vol 23 (2) ◽  
pp. 477-492 ◽  
Author(s):  
Abiola Ayopo Babajide ◽  
Adedoyin Isola Lawal ◽  
Lanre Olaolu Amodu ◽  
Abiola John Asaleye ◽  
Olabanji Olukayode Ewetan ◽  
...  
Keyword(s):  
Deposit Insurance ◽  
Banking Sector ◽  
Bank Lending ◽  
Annual Reports ◽  
Loan Loss ◽  
Bank Profitability ◽  
Content Type ◽  
Significance Level ◽  
Long Run ◽  
Corruption Index

Purpose The unhealthy drive for deposit in the banking sector has pushed many banks into unethical practices, thereby resulting in high-level corruption cases in the banking sector. The purpose of this study is to investigate the short- and long-run linkages between bank net interest income and deposit liabilities interacted with corruption, to establish the influence of corruption in deposit mobilisation drive of banks in Nigeria. Also, the study analysed the causal relationship between selected bank variables and fraud. Design/methodology/approach The study used quarterly data on selected variables from 1Q 1993 to 4Q 2017 sourced from Nigerian Deposit Insurance Corporation (NDIC) annual reports and Central Bank of Nigeria (CBN) Statistical Bulletin of various issues. Deposit Money Bank various deposit liabilities are interacted with a corruption index and used as the independent variables, while bank earnings serve as the dependent variable. Error Correction Model (ECM) and Engel Granger approach to co-integration technique were used to analyse the data. Findings The findings reveal that various bank deposit liabilities interacted with corruption index has a negative effect on bank profitability in the long run, though only corrupt fixed deposit is statistically significant at the 5 per cent significance level. Bank total asset, total loan and advances and fraud have a significant effect on bank profitability at 1 and 10 per cent significance level. The findings also reveal that banks profit from corrupt fixed deposit and demand deposit in the short run. Social implications Text Originality/value The literature is awash with bank lending corruption and various institutional factors such as competition among banks, credit bureau and information sharing about borrowers, bank supervisory policies, loan loss provisioning, bank ownership structure and regulatory environment and anti-corruption measures. The aspect of deposit mobilisation and corruption has not been well researched in literature; this study, therefore, fills the gap in the literature by examining the extent deposit money banks contributed to corruption in Nigeria through their cutthroat deposit mobilisation drive.

scholarly journals Factors influencing bank profitability in a developing economy- Panel evidence from Bangladesh

2021 ◽  
Vol 12 (3) ◽  
pp. 0-0
Keyword(s):  
Commercial Banks ◽  
Fixed Effect Model ◽  
Loan Loss ◽  
Data Set ◽  
Bank Profitability ◽  
Loan Loss Provisions ◽  
Efficient Management ◽  
Income Ratio ◽  
Internal And External Factors ◽  
The Cost

The purpose of this paper is to investigate the relationship between bank-specific characteristics and profitability of commercial banks operating in Bangladesh to find the role of both internal and external factors in achieving high profitability. The Fixed Effect Model is built on a balanced panel data set comprising 135 observations of 27 commercial banks over the period 2014-2018. Regression findings reveal that size and capital ratio are significant bank-specific determinants of bank profitability in Bangladesh where the effect of loans ratio is statistically insignificant. Findings also suggest that banks with higher deposits tend to be more profitable and small banks have efficient management. The cost to income ratio and loan loss provisions are statistically insignificant on the performance of banks. On the other hand, macroeconomic variables such as GDP growth have a significant impact on profitability whereas the effects of inflation on profitability are statistically insignificant in some cases.

Evaluating profitability strategies and the determinants of the risk performance of sectoral and banking institutions

2018 ◽  
Vol 34 (3) ◽  
pp. 174-186 ◽  
Author(s):  
Walter Amedzro St-Hilaire ◽  
Patrick Boisselier
Keyword(s):  
Fixed Effects ◽  
Banking Sector ◽  
Risk Measures ◽  
Relevant Literature ◽  
Generalized Least Squares ◽  
Loan Loss ◽  
Content Type ◽  
Explanatory Variables ◽  
Loan Loss Provisions ◽  
Banking Institutions

Purpose The purpose of this paper is to evaluate the need to incorporate the loan loss provisions (LLPs) and risk measures in order to examine the repercussions on advancing approach and profitability. Design/methodology/approach The study investigates the effect of explanatory variables on profitability and advancing approach of the banks. The variables used in this study were determined, based on the review of relevant literature and established according to the availability of data for measurement purposes. Inspired by previous research, Hausman test is used in this study to determine whether a random or fixed effects generalized least squares model is best. The linear regression model is applied to strongly balanced panel data obtained from the ten commercial banks. Findings The findings demonstrate that Nigerian banking sector considers LLPs in terms of its decision making of advancing approach, while proper inclusion of credit, market and operational risk is more important for South Africa’s banks rather than the maintenance of provisions. Originality/value Moreover, the credit risk proves to be more needed factor of consideration for Nigerian rather for South African banks. This is an answer to the strong economy of South Africa as compared to Nigeria and more chances of default faced by Nigerian banks.

scholarly journals Discretionary provisioning practices among Western European banks

2017 ◽  
Vol 9 (1) ◽  
pp. 109-118 ◽  
Author(s):  
Peterson K. Ozili
Keyword(s):  
Financial Crisis ◽  
Credit Risk ◽  
Income Smoothing ◽  
Least Square ◽  
Loan Loss ◽  
Content Type ◽  
Crisis Period ◽  
Loan Loss Provisions ◽  
European Banks ◽  
Western European

Purpose The purpose of the study is to investigate whether discretionary ‘loan loss provisioning’ by Western European banks is driven by income smoothing or credit risk considerations. Design/methodology/approach To test the income smoothing hypothesis, the study uses ordinary least square regression to examine the relation between loan loss provisions and earnings before tax and loan loss provisions in the post-financial crisis period. Findings The authors find evidence that discretionary provisioning by Western European banks is driven by income smoothing incentives in the post-financial crisis period, particularly, among listed banks. Also, it is observed that discretionary provisioning is significantly influenced by credit risk factors, mainly, non-performing loans and loan growth. Also, it is found that discretionary provisioning by Western European banks is procyclical with fluctuations in the economic cycle. Overall, the implication of the findings is that discretionary provisioning among Western European banks is driven by both income smoothing and credit risk considerations. Originality/value This study focus on banks in Western Europe in contrast to prior European studies.

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

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Peterson K. Ozili
Keyword(s):  
Earnings Management ◽  
Banking Sector ◽  
Income Smoothing ◽  
Loan Loss ◽  
Content Type ◽  
Eu Countries ◽  
Loan Loss Provisions ◽  
Country Level ◽  
Show Evidence ◽  
Second Wave

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.

scholarly journals Factors Influencing Bank Profitability in a Developing Economy

2021 ◽  
Vol 12 (3) ◽  
pp. 333-346
Author(s):  
Saeed Sazzad Jeris
Keyword(s):  
Commercial Banks ◽  
Fixed Effect Model ◽  
Loan Loss ◽  
Data Set ◽  
Bank Profitability ◽  
Loan Loss Provisions ◽  
Efficient Management ◽  
Income Ratio ◽  
Internal And External Factors ◽  
The Cost

The purpose of this paper is to investigate the bank-specific and macroeconomic determinants of commercial banks profitability operating in Bangladesh to explore the role of both internal and external factors in achieving high profitability. The fixed effect model is built on a balanced panel data set comprising 135 observations of 27 commercial banks over the period 2014-2018. Regression findings reveal that size and capital ratio are significant bank-specific determinants of bank profitability in Bangladesh where the effect of loans ratio is statistically insignificant. Findings also suggest that banks with higher deposits tend to be more profitable, and small banks have efficient management. The cost-to-income ratio and loan loss provisions are statistically insignificant on the performance of banks. On the other hand, macroeconomic variables such as GDP growth have a significant impact on profitability whereas the effects of inflation on profitability are statistically insignificant in some cases.

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