Bank Profitability and Macroeconomic Conditions: Are Business Models Different?

37 Pages Posted: 15 Jul 2018

Date Written: June 15, 2018

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

JEL Classification: G21

Suggested Citation

Bonaccorsi di Patti, Emilia and Palazzo, Francesco, Bank Profitability and Macroeconomic Conditions: Are Business Models Different? (June 15, 2018). Bank of Italy Occasional Paper No. 436. Available at SSRN: https://ssrn.com/abstract=3212633 or http://dx.doi.org/10.2139/ssrn.3212633

Emilia Bonaccorsi di Patti (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Francesco Palazzo

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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