Breaking the Bank? A Probabilistic Assessment of Euro Area Bank Profitability

By Selim A Elekdag, Sheheryar Malik, Srobona Mitra

November 22, 2019

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Selim A Elekdag, Sheheryar Malik, and Srobona Mitra. Breaking the Bank? A Probabilistic Assessment of Euro Area Bank Profitability, (USA: International Monetary Fund, 2019) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper explores the determinants of profitability across large euro area banks using a novel approach based on conditional profitability distributions. Real GDP growth and the NPL ratio are shown to be the most reliable determinants of bank profitability. However, the estimated conditional distributions reveal that, while higher growth would raise profits on average, a large swath of banks would most likely continue to struggle even amid a strong economic recovery. Therefore, for some banks, a determined reduction in NPLs combined with cost efficiency improvements and customized changes to their business models appears to be the most promising strategy for durably raising profitability.

Subject: Bank soundness, Banking, Financial institutions, Financial regulation and supervision, Financial sector policy and analysis, Financial services, Loan loss provisions, National accounts, Nonperforming loans, Personal income, Yield curve

Keywords: Alpha bank AE, Bank capital, Bank profitability, Bank return on assets, Bank ROE probability distributions, Bank soundness, Banks performance, Europe, Global, Indebted bank borrower, Loan growth, Loan loss provisions, Nonperforming loans, NPL ratio, Personal income, Probability distributions, Probability distributions for a representative, Profitability distribution, Standard deviation, Ulster bank Ireland DAC, WP, Yield curve

Publication Details

Pages:

38
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/254
Stock No:

WPIEA2019254
ISBN:

9781513516141
ISSN:

1018-5941

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