The Czech banking sector: Determinants of Profitability

• Název práce v češtině: Český bankovní sektor: Determinanty ziskovosti
• Název v anglickém jazyce: The Czech banking sector: Determinants of Profitability
• Klíčová slova: Determinant ziskovosti banky, ROA, ROE, kapitalizace, úvěrové portfolio, struktura deposit, velikost banky, provozní efektivita, poměr provozních nákladů a výnosů, nevýkonné úvěry, úrokové prostředí, dvoutýdenní repo sazba, růst hrubého domácího produktu, změna spotřebitelského indexu cen
• Klíčová slova anglicky: Bank profitability determinant, ROA, ROE, capitalization, loan portfolio, deposit structure, bank's size, operational efficiency, cost-to-income ratio, non-performing loans, interest rate environment, the two weeks repo rate, GDP growth, CPI change
• Akademický rok vypsání: 2020/2021
• Typ práce: diplomová práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: Mgr. Magda Pečená, Ph.D.
• Řešitel: skrytý - zadáno vedoucím/školitelem
• Datum přihlášení: 24.06.2021
• Datum zadání: 24.06.2021
• Datum a čas obhajoby: 15.06.2022 09:00
• Místo konání obhajoby: Opletalova - Opletalova 26, O314, Opletalova - místn. č. 314
• Datum odevzdání elektronické podoby: 03.05.2022
• Datum proběhlé obhajoby: 15.06.2022
• Oponenti: prof. PhDr. Petr Teplý, Ph.D.

Seznam odborné literatury

Menicucci, E. and Paolucci, G. (2016), „The determinants of bank profitability: empirical evidence from European banking sector“, Journal of Financial Reporting and Accounting, Vol. 14 No. 1, pp. 86-115, https://doi-org.ezproxy.is.cuni.cz/10.1108/JFRA-05-2015-0060
Menicucci, E. and Paolucci, G. (2016), “Factors affecting bank profitability in Europe: An empirical investigation”, African Journal of Business Management, Vol. 10(17), pp. 410-420, https://www.academicjournals.org/AJBM
Rasiah, Devinaga (2010), “Review of Literature and Theories on Determinants of Commercial Bank Profitability”, Journal of Performance Management, Vol. 23 Issue 1, pp. 23-49.
Messai, A. S., Gallali, M. I., Jouini, F. (2015), “Determinants of Bank Profitability in Western European Countries: Evidence from System GMM Estimates”, International Business Research, Vol. 8 No. 7, https://dx.doi.org/10.5539/ibr.v8n7p30
Dietrich, A. and Wanzenreid, G. (2011), “Determinants of bank profitability before and during the crisis: Evidence from Switzerland”, Journal of International Financial Markets, Institutions and Money, Vol. 21 Issue 3, pp. 307-327, https://doi-org.ezproxy.is.cuni.cz/10.1016/j.intfin.2010.11.002
Trujillo-Ponce, Antonio (2013), “What determines the profitability of banks? Evidence from Spain”, Accounting & Finance, Vol. 53, pp. 561-586

Předběžná náplň práce v anglickém jazyce

Motivation

The Czech banking sector differs from other banking sectors in the region (EA, EU, Eastern Europe, Nordic banking) in many aspects and has lately enjoyed greater profits than the other sectors, mainly the sectors adopting the Euro. Suffering the credit crunch times and going through 4 years of FX interventions against appreciation of the domestic currency, the Czech sector recovered, and the central bank began to increase the key rates after a long period of a practical zero. However, this came to its end when the COVID pandemic hit Europe in March 2020.

Therefore, it is indeed desirable to study the profitability of the sector in detail to uncover the possible determinants of high profitability of the banks. Identification of the main determinants and quantification of their effects may help to understand what had been done well in the sector to establish a firm basis upon which profits were being made which may not only help both the banks and the regulatory authorities get a detailed view of what is economically important and significant, but also where the main loopholes are and whether there potentially exist any unanticipated relationships that may be used to increase both individual and sectoral performance.

The Czech banking sector features several specific aspects, the main of which are the following:
1. Czech banks are on general – and compared to other neighbouring and related sectors – highly capitalized.
2. Czech banks are very profitable.
3. The Czech banking sector features very low credit risk in both retail and corporate lending which is demonstrated by a very low level of NPL.

Comparison of the results of this thesis’ research and its contextual positioning among other existing research may offer explanation on why the Czech banks have been enjoying greater profitability than for example majority of the EU-located banks. The Czech sector also provides an unprecedented opportunity to study the profitability of the banking sector which has went through several significantly different time periods lately – credit crunch, 4 years of FX interventions, a long period of zero rates and a short recovery followed by quick return to the previously imposed zero rates caused by the COVID pandemic.

Hypotheses

The thesis is going to test the following hypotheses:

Bank-specific effects
H1: There is a positive relationship between Loans-to-assets ratio and the bank’s profitability.
H2: There is a positive relationship between a bank’s capitalisation and its profitability.
H3: There is a positive relationship between a share of customer deposits in total liabilities and the bank’s profitability.
H4: Efficiency positively affects bank profitability.
H5: Size of a bank positively affects its profitability.

Macroeconomic effects
H6: Economic growth positively affects bank profitability
H7: Inflation positively affects bank profitability.
H8: Interest rates positively affects bank profitability.

Regulatory framework effects
H9: Emergence of the resolution fund has been negatively affecting bank profitability.

Methodology

The hypotheses are going to be tested in the following ways:

H1: Loans-to-assets ratio [%] is going to be calculated for every bank in every time period. The loans used for the variable definition are the total loans, no deductions of non-performing loans will be made. The variable is expected to have a positive effect on the outcome variable.
H2: Equity-to-assets ratio [%] is going to be used as a measure of a bank’s capitalisation and will be assessed for every bank in every time period. The variable is expected to have a positive effect on the outcome variable.
H3: Depo-to-liabilities ratio [%] will be calculated as deposits of retail and corporate depositors to total liabilities of the bank. The variable is expected to have a positive effect on the outcome variable.
H4: Cost-to-income ratio [%] is going to be used as a measure of a bank’s (operational) efficiency and is expected to have a positive effect on its profitability.
H5: Size of a bank will be measured by its total assets
H6: Annual real GDP growth rate is going to be used as a measure of economic growth and is expected to have a positive effect on the outcome variable.
H7: CPI annual inflation rate is going to be used as a measure of economic growth and is expected to have a positive effect on the outcome variable.
H8: CNB’s 2W repo rate is going to be used as a measure of interest rate environment in the Czech banking sector and is expected to have a positive effect on the outcome variable.
H9: A dummy variable specified through existence of banks’ duty to contribute to the national resolution fund is going to be used to capture the effect of substantial additional cost banks have been facing since the fund’s emergence in 2015.

The thesis is going to begin with simple OLS, however based on the literature and previous research on the topic it will most probably be necessary to deploy more complex methods, mainly GMM.

Expected contribution

The thesis has an ambition to offer both identification and quantification of effects of the main profitability determinants of Czech banks. There has been broad research on the topic done in other European and non-European countries, but none has yet focused on the Czech banking sector – which indeed features several specifics as described in the previous sections of the proposal. As stated above, comparing the thesis’ results to results of other existing research may shed more light on the differences between the Czech and other sectors as to explain what the main drivers of the differences in profitability are, implied indirectly from identification of the main drivers of the profitability of Czech banks.

Begun to be explained in detail in the section Motivation already, the Czech sector features the following three aspects that are in pure theory incompatible: high capitalisation, high profitability, low level of risk. Despite the theories, Czech banks have been able to achieve all three at once which is a good opportunity to study their profitability closely in order to uncover the channels via which profitability was being achieved along with very low risk and maintaining high levels of capital.

Moreover, the dataset that will be created may also be perceived as a contribution since there is currently no dataset available that would include as many variables and important performance measures as the one planned to be collected and formed.

Outline

1. Introduction
2. Literature review
3. Czech banking sector review
4. Methodology & Data
5. Empirical analysis & Results
6. Discussion & Suggestion for further research
7. Conclusion