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Do Non-Performing Loans Influence the Profitability of Banks? Evidence from a European Banking Group

Author

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  • Adela Socol

    (“1st of December 1918†University of Alba Iulia)

  • Nina Sinitin

    (“1st of December 1918†University of Alba Iulia)

Abstract

Banking system in the time of the COVID-19 pandemic is likely to be particularly affected especially in terms of profitability. The crisis has revealed various economic and even psychological mechanisms which can contribute to the increase of Non-Performing Loans (NPL). This paper intends to find if there is any significant relationship between Return on allocated capital, as a marker for banking profitability and NPL coverage ratio. We include in the model developed on the basis OLS method (with robust standard errors, consistent with panel-specific autocorrelation and heteroskedasticity), a few other explanatory variables. Our research is based on the Erste Group database 2016-2021. The empirical results reveal that there is a negative and a significant relationship between Return on allocated capital and first two variables - NPL coverage ratio and Cost to income ratio - while GDP growth have a positive impact on Return on allocated capital.

Suggested Citation

  • Adela Socol & Nina Sinitin, 2021. "Do Non-Performing Loans Influence the Profitability of Banks? Evidence from a European Banking Group," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(1), pages 823-832, August.
    • Handle: RePEc:ovi:oviste:v:xxi:y:2021:i:1:p:823-832
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    More about this item

    Keywords

    banks; profitability; COVID-19; loans; capital;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts

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