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Bank profitability and macroeconomic conditions: Are business models different?

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  • Emilia Bonaccorsi di Patti
  • Francesco Palazzo

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.

Suggested Citation

  • Emilia Bonaccorsi di Patti & Francesco Palazzo, 2020. "Bank profitability and macroeconomic conditions: Are business models different?," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 49(2), July.
    • Handle: RePEc:bla:ecnote:v:49:y:2020:i:2:n:e12155
    DOI: 10.1111/ecno.12155
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    1. Ozili, Peterson K & Arun, Thankom, 2022. "Does economic policy uncertainty affect bank profitability?," MPRA Paper 114403, University Library of Munich, Germany.
    2. Danilo Liberati & Francesco Vercelli, 2019. "As long as the bank gains: expanding the retail distribution activity," Questioni di Economia e Finanza (Occasional Papers) 510, Bank of Italy, Economic Research and International Relations Area.
    3. Ozili, Peterson, 2021. "Bank profitability determinants: comparing the United States, Nigeria and South Africa," MPRA Paper 105638, University Library of Munich, Germany.

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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