Bank profitability and macroeconomy: evidence from Lithuania
Abstract
The purpose of this paper is to investigate the relationship between profitability of the Lithuanian banking sector and its internal and external determinants. We use the panel error correction model to assess long-term and short-term determinants of items from bank income statements (net interest income, net fee and commission income and operating expenses). The results of the pooled mean group estimator show that bank size and real GDP are the main determinants in the long-term. Meanwhile, empirical examination suggests various variables as short-term determinants of income statement items. The pooled mean group estimation technique and the analysis of separate income statement items enable us to have a better insight into the Lithuanian banking sector and determinants of its revenue and expenses.
First published online: 16 Mar 2017
Keyword : bank profitability, dynamic panel data, panel error correction model, pooled mean group estimator
How to Cite
Naruševičius, L. (2018). Bank profitability and macroeconomy: evidence from Lithuania. Technological and Economic Development of Economy, 24(2), 383–405. https://doi.org/10.3846/20294913.2016.1213192
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Albertazzi, U.; Gambacorta, L. 2009. Bank profitability and the business cycle, Journal of Financial Stability 5(4): 393–409. https://doi.org/10.1016/j.jfs.2008.10.002
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Apergis, N. 2009. Bank profitability over different business cycles regimes: evidence from panel thresh¬old models, Banks and Bank Systems 4(3): 59–70.
Athanasoglou, P. P.; Brissimis, S. N.; Delis, M. D. 2008. Bank-specific, industry-specific and macroeconomic determinants of bank profitability, Journal of International Financial Markets, Institutions and Money 18(2): 121–136. https://doi.org/10.1016/j.intfin.2006.07.001
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Choi, I. 2001. Unit root tests for panel data, Journal of International Money and Finance 20(2): 249–272. https://doi.org/10.1016/S0261-5606(00)00048-6
Chronopoulos, D. K.; Liu, H.; McMillan, F. J.; Wilson, J. 2015. The dynamics of US bank profitability, The European Journal of Finance 21(5): 426–443. https://doi.org/10.1080/1351847X.2013.838184
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Coffinet, J.; Lin, S. 2010. Stress testing banks’ profitability: the case of French banks. Banque de France. Working paper No. 306.
Demirguc-Kunt, A.; Huizinga, H. 1999. Determinants of commercial bank Interest margins and profitability: some international evidence, World Bank Economic Review 13(2): 379–408. https://doi.org/10.1093/wber/13.2.379
Dickey, D. A.; Fuller, W. A. 1979. Distribution of the estimators for autoregressive time series with a unit root, Journal of the American Statistical Association 74: 417–431. https://doi.org/10.1080/01621459.1979.10482531
Dietrich, A.; Wanzenried, G. 2011. Determinants of bank profitability before and during the crisis: evi¬dence from Switzerland, Journal of International Financial Markets, Institutions and Money, 21(3): 307–327. https://doi.org/10.1016/j.intfin.2010.11.002
Dietrich, A.; Wanzenried, G. 2014. The determinants of commercial banking profitability in low-, mid¬dle-, and high-income countries, The Quarterly Review of Economics and Finance 54(3): 337–354. https://doi.org/10.1016/j.qref.2014.03.001
Gambacorta, L.; Scatigna, M.; Yang. J. 2014. Diversification and bank profitability: a nonlinear ap¬proach, Applied Economics Letters 21(6): 438–441. https://doi.org/10.1080/13504851.2013.866196
García-Herrero, A.; Gavilá, S.; Santabárbara, D. 2009. What explains the low profitability of Chinese banks?, Journal of Banking and Finance 33(11): 2080–2092. https://doi.org/10.1016/j.jbankfin.2009.05.005
Goddard, J.; Liu, H.; Molyneux, P.; Wilson, J. 2010. Do bank profits converge? European Financial Management 19(2): 346–365. https://doi.org/10.1111/j.1468-036X.2010.00578.x
Goddard, J.; Molyneux, P.; Wilson, J. 2004. The profitability of European Banks: a cross-sectional and dynamic panel analysis, Manchester School 72(3): 363–381. https://doi.org/10.1111/j.1467-9957.2004.00397.x
Haque, N. U.; Pesaran, M. H.; Sharma, S. 1999. Neglected heterogeneity and dynamics in cross-country savings regressions. International Monetary Fund Working paper No. 99/128.
Hausman, J. A. 1978. Specification tests in econometrics, Econometrica 46(6): 1251–1271. https://doi.org/10.2307/1913827
Im, K. S.; Pesaran, M. H.; Shin, Y. 2003. Testing for unit roots in heterogeneous panels, Journal of Econometrics 115(1): 53–74. https://doi.org/10.1016/S0304-4076(03)00092-7
Kanas, A.; Vasiliou, D.; Eriotis, N. 2012. Revisiting bank profitability: a semi-parametric approach, Journal of International Financial Markets, Institutions and Money 22(4): 990–1005. https://doi.org/10.1016/j.intfin.2011.10.003
Lee, C.; Hsieh, M. 2013. The impact of bank capital on profitability and risk in Asian banking, Journal of International Money and Finance 32: 251–281. https://doi.org/10.1016/j.jimonfin.2012.04.013
MacKinnon, J. G. 1996 Numerical distribution functions for unit root and cointegration tests, Journal of Applied Econometrics 11: 601–618. https://doi.org/10.1002/(SICI)1099-1255(199611)11:6<601::AID-JAE417>3.0.CO;2-T
Maddala, G. S.; Wu, S. 1999. A comparative study unit root tests with panel data and a new simple test, Oxford Bulletin of Economics and Statistics 61(S1): 631–652. https://doi.org/10.1111/1468-0084.61.s1.13
Mirzaei, A.; Moore, T.; Liu, G. 2013. Does market structure matter on banks’ profitability and stability? Emerging vs. advanced economies, Journal of Banking and Finance 37(8): 2920–2937. https://doi.org/10.1016/j.jbankfin.2013.04.031
Molyneux, P.; Thornton, J. 1992. Determinants of European Bank Profitability: a note, Journal of Banking and Finance 16(6): 1173–1178. https://doi.org/10.1016/0378-4266(92)90065-8
Pasiouras, F.; Kosmidou, K. 2007. Factors influencing the profitability of domestic and foreign commercial banks in the European Union, Research in International Business and Finance 21(2): 222–237. https://doi.org/10.1016/j.ribaf.2006.03.007
Pedroni, P. 1999. Critical values for cointegration tests in heterogeneous panels with multiple regressors, Oxford Bulletin of Economics and Statistics 61(S1): 653–70. https://doi.org/10.1111/1468-0084.61.s1.14
Pedroni, P. 2004. Panel cointegration: asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis, Econometric Theory 20(3): 597–625. https://doi.org/10.1017/S0266466604203073
Perman, M.; Pelivan, I.; Arnerić, J. 2015. Profit persistence and determinants of bank profitability in Croatia, Economic Research 28(1): 284–298.
Pesaran, H.; Shin, Y.; Smith, R. J. 1999a. Bounds testing approaches to the analysis of long run relationships. Cambridge working papers in Economics, No. 9907.
Pesaran, H.; Shin, Y.; Smith, R. P. 1997. Pooled estimation of long-run relationships in dynamic heterogeneous panels. Cambridge working papers in Economics, No. 9721.
Pesaran, H.; Shin, Y.; Smith, R. P. 1999b. Pooled mean group estimation of dynamic heterogeneous panels, Journal of the American Statistical Association 94(446): 621–634. https://doi.org/10.1080/01621459.1999.10474156
Pesaran, H.; Smith, R. P. 1995. Estimating long-run relationships from dynamic heterogeneous panels, Journal of Econometrics 68(1): 79–113. https://doi.org/10.1016/0304-4076(94)01644-F
Pesaran, M. H.; Shin, Y. 1999. An autoregressive distributed lag modelling approach to cointegration analysis, Chapter 11 in S. Strom (Ed.). Econometrics and Economic Theory in the 20th Century: The Ragnar Frisch Centennial Symposium. Cambridge University Press.
Rumler, F.; Waschiczek, W. 2012. Have changes in the financial structure affected bank profitability? Evidence for Austria. Oesterreichische Nationalbank. Workink paper series, No. 180.
Shehzad, C. T.; De Haan, J.; Scholtens, B. 2013. The relationship between size, growth and profitability of commercial banks, Applied Economics 45(13): 1751–1765. https://doi.org/10.1080/00036846.2011.637896
Sufian, F. 2011. Profitability of the Korean banking sector: panel evidence on bank-specific and macro¬economic determinants, Journal of Economics and Management 7(1): 43–72.
Trujillo-Ponce, A. 2013. What determines the profitability of banks? Evidence from Spain, Accounting and Finance 53(2): 561–586. https://doi.org/10.1111/j.1467-629X.2011.00466.x
Albertazzi, U.; Gambacorta, L. 2009. Bank profitability and the business cycle, Journal of Financial Stability 5(4): 393–409. https://doi.org/10.1016/j.jfs.2008.10.002
Andersen, H.; Berg, S. A.; Jansen E. S. 2008. The dynamics of operating income in the Norwegian banking sector. Norges Bank Working Paper 13.
Apergis, N. 2009. Bank profitability over different business cycles regimes: evidence from panel thresh¬old models, Banks and Bank Systems 4(3): 59–70.
Athanasoglou, P. P.; Brissimis, S. N.; Delis, M. D. 2008. Bank-specific, industry-specific and macroeconomic determinants of bank profitability, Journal of International Financial Markets, Institutions and Money 18(2): 121–136. https://doi.org/10.1016/j.intfin.2006.07.001
Berlemann, M.; Oestmann, M.; Thum, M. 2014. Demographic change and bank profitability: empirical evidence from German savings banks, Applied Economics 46(1): 79–94. https://doi.org/10.1080/00036846.2013.829262
Choi, I. 2001. Unit root tests for panel data, Journal of International Money and Finance 20(2): 249–272. https://doi.org/10.1016/S0261-5606(00)00048-6
Chronopoulos, D. K.; Liu, H.; McMillan, F. J.; Wilson, J. 2015. The dynamics of US bank profitability, The European Journal of Finance 21(5): 426–443. https://doi.org/10.1080/1351847X.2013.838184
Claeys, S.; van der Vennet, R. 2004. Determinants of bank interest margins in Central and Eastern Europe: a comparison with the West, Economic Systems 32(2): 197–216. https://doi.org/10.1016/j.ecosys.2007.04.001
Coffinet, J.; Lin, S. 2010. Stress testing banks’ profitability: the case of French banks. Banque de France. Working paper No. 306.
Demirguc-Kunt, A.; Huizinga, H. 1999. Determinants of commercial bank Interest margins and profitability: some international evidence, World Bank Economic Review 13(2): 379–408. https://doi.org/10.1093/wber/13.2.379
Dickey, D. A.; Fuller, W. A. 1979. Distribution of the estimators for autoregressive time series with a unit root, Journal of the American Statistical Association 74: 417–431. https://doi.org/10.1080/01621459.1979.10482531
Dietrich, A.; Wanzenried, G. 2011. Determinants of bank profitability before and during the crisis: evi¬dence from Switzerland, Journal of International Financial Markets, Institutions and Money, 21(3): 307–327. https://doi.org/10.1016/j.intfin.2010.11.002
Dietrich, A.; Wanzenried, G. 2014. The determinants of commercial banking profitability in low-, mid¬dle-, and high-income countries, The Quarterly Review of Economics and Finance 54(3): 337–354. https://doi.org/10.1016/j.qref.2014.03.001
Gambacorta, L.; Scatigna, M.; Yang. J. 2014. Diversification and bank profitability: a nonlinear ap¬proach, Applied Economics Letters 21(6): 438–441. https://doi.org/10.1080/13504851.2013.866196
García-Herrero, A.; Gavilá, S.; Santabárbara, D. 2009. What explains the low profitability of Chinese banks?, Journal of Banking and Finance 33(11): 2080–2092. https://doi.org/10.1016/j.jbankfin.2009.05.005
Goddard, J.; Liu, H.; Molyneux, P.; Wilson, J. 2010. Do bank profits converge? European Financial Management 19(2): 346–365. https://doi.org/10.1111/j.1468-036X.2010.00578.x
Goddard, J.; Molyneux, P.; Wilson, J. 2004. The profitability of European Banks: a cross-sectional and dynamic panel analysis, Manchester School 72(3): 363–381. https://doi.org/10.1111/j.1467-9957.2004.00397.x
Haque, N. U.; Pesaran, M. H.; Sharma, S. 1999. Neglected heterogeneity and dynamics in cross-country savings regressions. International Monetary Fund Working paper No. 99/128.
Hausman, J. A. 1978. Specification tests in econometrics, Econometrica 46(6): 1251–1271. https://doi.org/10.2307/1913827
Im, K. S.; Pesaran, M. H.; Shin, Y. 2003. Testing for unit roots in heterogeneous panels, Journal of Econometrics 115(1): 53–74. https://doi.org/10.1016/S0304-4076(03)00092-7
Kanas, A.; Vasiliou, D.; Eriotis, N. 2012. Revisiting bank profitability: a semi-parametric approach, Journal of International Financial Markets, Institutions and Money 22(4): 990–1005. https://doi.org/10.1016/j.intfin.2011.10.003
Lee, C.; Hsieh, M. 2013. The impact of bank capital on profitability and risk in Asian banking, Journal of International Money and Finance 32: 251–281. https://doi.org/10.1016/j.jimonfin.2012.04.013
MacKinnon, J. G. 1996 Numerical distribution functions for unit root and cointegration tests, Journal of Applied Econometrics 11: 601–618. https://doi.org/10.1002/(SICI)1099-1255(199611)11:6<601::AID-JAE417>3.0.CO;2-T
Maddala, G. S.; Wu, S. 1999. A comparative study unit root tests with panel data and a new simple test, Oxford Bulletin of Economics and Statistics 61(S1): 631–652. https://doi.org/10.1111/1468-0084.61.s1.13
Mirzaei, A.; Moore, T.; Liu, G. 2013. Does market structure matter on banks’ profitability and stability? Emerging vs. advanced economies, Journal of Banking and Finance 37(8): 2920–2937. https://doi.org/10.1016/j.jbankfin.2013.04.031
Molyneux, P.; Thornton, J. 1992. Determinants of European Bank Profitability: a note, Journal of Banking and Finance 16(6): 1173–1178. https://doi.org/10.1016/0378-4266(92)90065-8
Pasiouras, F.; Kosmidou, K. 2007. Factors influencing the profitability of domestic and foreign commercial banks in the European Union, Research in International Business and Finance 21(2): 222–237. https://doi.org/10.1016/j.ribaf.2006.03.007
Pedroni, P. 1999. Critical values for cointegration tests in heterogeneous panels with multiple regressors, Oxford Bulletin of Economics and Statistics 61(S1): 653–70. https://doi.org/10.1111/1468-0084.61.s1.14
Pedroni, P. 2004. Panel cointegration: asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis, Econometric Theory 20(3): 597–625. https://doi.org/10.1017/S0266466604203073
Perman, M.; Pelivan, I.; Arnerić, J. 2015. Profit persistence and determinants of bank profitability in Croatia, Economic Research 28(1): 284–298.
Pesaran, H.; Shin, Y.; Smith, R. J. 1999a. Bounds testing approaches to the analysis of long run relationships. Cambridge working papers in Economics, No. 9907.
Pesaran, H.; Shin, Y.; Smith, R. P. 1997. Pooled estimation of long-run relationships in dynamic heterogeneous panels. Cambridge working papers in Economics, No. 9721.
Pesaran, H.; Shin, Y.; Smith, R. P. 1999b. Pooled mean group estimation of dynamic heterogeneous panels, Journal of the American Statistical Association 94(446): 621–634. https://doi.org/10.1080/01621459.1999.10474156
Pesaran, H.; Smith, R. P. 1995. Estimating long-run relationships from dynamic heterogeneous panels, Journal of Econometrics 68(1): 79–113. https://doi.org/10.1016/0304-4076(94)01644-F
Pesaran, M. H.; Shin, Y. 1999. An autoregressive distributed lag modelling approach to cointegration analysis, Chapter 11 in S. Strom (Ed.). Econometrics and Economic Theory in the 20th Century: The Ragnar Frisch Centennial Symposium. Cambridge University Press.
Rumler, F.; Waschiczek, W. 2012. Have changes in the financial structure affected bank profitability? Evidence for Austria. Oesterreichische Nationalbank. Workink paper series, No. 180.
Shehzad, C. T.; De Haan, J.; Scholtens, B. 2013. The relationship between size, growth and profitability of commercial banks, Applied Economics 45(13): 1751–1765. https://doi.org/10.1080/00036846.2011.637896
Sufian, F. 2011. Profitability of the Korean banking sector: panel evidence on bank-specific and macro¬economic determinants, Journal of Economics and Management 7(1): 43–72.
Trujillo-Ponce, A. 2013. What determines the profitability of banks? Evidence from Spain, Accounting and Finance 53(2): 561–586. https://doi.org/10.1111/j.1467-629X.2011.00466.x