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What drives the profitability of banking sectors in the European Union? The machine learning approach

Author

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  • Bernardelli Michał

    (Department of Management, Economy and Finance, Bialystok University of Technology, Kleosin, Poland)

  • Korzeb Zbigniew

    (Collegium of Economic Analysis, SGH Warsaw School of Economics, Warsaw, Poland)

  • Niedziółka Paweł

    (Collegium of Socio-Economics, SGH Warsaw School of Economics, Warsaw, Poland)

Abstract

The study aims to establish patterns of relations between the profitability of the European Union (EU) banking sectors between 2007 and 2021 and sets of variables appropriate for clusters of countries into which the 27 countries of the EU are divided. The random forest method is deployed to identify the factors influencing the value of the return on equity. Shapley additive explanations are exploited to add interpretability to the results. The results show that the sets of variables shaping the profitability of banking sectors in the EU grouped by use of sovereign rating criterion are different. However, there are variables common to all banking sectors. These include cost efficiency and default risk. The study’s novelty lies in the reliance on a broad spectrum of explanatory variables assigned to three groups of factors, reference to all EU countries, and decomposition of the sample to identify similarities among the determinants of profitability.

Suggested Citation

  • Bernardelli Michał & Korzeb Zbigniew & Niedziółka Paweł, 2024. "What drives the profitability of banking sectors in the European Union? The machine learning approach," International Journal of Management and Economics, Warsaw School of Economics, Collegium of World Economy, vol. 60(4), pages 272-284.
    • Handle: RePEc:vrs:ijomae:v:60:y:2024:i:4:p:272-284:n:1003
    DOI: 10.2478/ijme-2024-0022
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    Keywords

    banking sector; machine learning; profitability; random forest; SHAP;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • Z10 - Other Special Topics - - Cultural Economics - - - General

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