An Inquiry into the Determinants of the Profitability of Italian Banks

43 Pages Posted: 15 Feb 2017

Date Written: October 26, 2016

Abstract

This paper examines the history and the determinants of bank profits in Italy from 2005-15. We first identify a number of key stylized facts by comparing the income statement of Italian lenders with that of banks in other European countries. The comparison suggests that the profitability gap of Italian banks is partly related to a business model characterized by a more conservative positioning along the risk-return frontier. We then use the Bank of Italy’s Quarterly Model of the Italian Economy to provide quantitative estimates of the impact of four factors (the economic activity growth rate, taxation of bank income, dynamics of operating costs and dividend policy) on profits, regulatory capital and bad debt. Our counterfactual simulations suggest that the weak growth of the Italian economy is responsible for a sizeable share of the profitability gap of Italian banks, being by far the main driver of the increase in bad debts in the last decade; nonetheless, the impact of the other factors on their profitability (and capitalization) is far from negligible.

Keywords: bank profits, bank capital, non-performing loans, Italian banks, Italian economy

JEL Classification: E37, E44, E47, G21

Suggested Citation

Albertazzi, Ugo and Notarpietro, Alessandro and Siviero, Stefano, An Inquiry into the Determinants of the Profitability of Italian Banks (October 26, 2016). Bank of Italy Occasional Paper No. 364. Available at SSRN: https://ssrn.com/abstract=2917215 or http://dx.doi.org/10.2139/ssrn.2917215

Ugo Albertazzi

ECB -DG Monetary Policy ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Alessandro Notarpietro

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Stefano Siviero (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Studi-Divisione Biblioteca e Pubblicazion
00184 Roma
Italy

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