An Analysis of the Determinants of Commercial Bank Profitability in the Eurozone in 2009-2016

Abstract

By using fixed effects estimator with the robust standard errors, this paper analyses 586 commercial banks from the Eurozone during the period from 2009 to 2016. In order to take the European sovereign debt crisis into account, the sample is further divided into three groups, the whole Eurozone, the countries heavily hit by the debt crisis, and the rest of the Eurozone. Results are compared in order to see different trends, which these determinants follow. Chosen drivers of profitability are widely examined proxies representing both internal and external factors. Comparison of evidence from the whole Eurozone with the literature shows persisting importance of the bank size, equity ratio, level of loan loss reserves and the GDP growth. The result comparison between three sets of countries indicates that banks headquartered in the vulnerable countries benefit from the high loan ratio, whereas the banks from the rest of the Eurozone seem to be more conservative. Also, banks from the whole Eurozone seems to be more influenced by the external drivers, concretely GDP growth and inflation, whereas the banks in the vulnerable countries are mainly influenced by the internal factors. Cost to income ratio was also proved to be significant primarily for banks in vulnerable countries. These differences might be caused by the impact of the European sovereign debt crisis. To conclude, the detailed analysis and the usage of recent data brings up-to-date findings from the constantly changing European banking sector.