Multimarket Competition and Profitability: Evidence from Ukrainian banking

This paper examines the impacts of non-price competition on bank performance in the Ukrainian banking industry from 2009 Q1 to 2015 Q4. The competition is proxied by three measures of multimarket contacts. Our data reveal that banks with higher level of multiple market contacts are more likely to be profitable. The findings support the mutual forbearance hypothesis. When banks compete with rivals that are similar in size in multiple markets, they have incentives to cooperate instead of competing aggressively. Moreover, the effect is stronger when multimarket competitors are highly similar in size and interact in more competitive markets. Furthermore, we develop an identification strategy in which military actions are treated as an exogenous shock to banks with branches in those regions. The results suggest that after the conflict, the less affected banks do not have incentives to mutual forbear with more affected banks that experienced a sharper decline in number of branches.