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What Drives Profitability of Banks: Do Interest rate, and Fee and Commissions impact the profitability of Banks? Evidence from the European Countries

Author

Listed:
  • el Alaoui, AbdelKader
  • Diwandaru, Ginanjar
  • Rosly, Saiful Azhar
  • Masih, Mansur

Abstract

Traditionally, the main role of the bank is to offer loans to its customers, to facilitate the intermediary role in the financial market between the investors and feed the need of the big corporations in terms of investment. This study is an attempt to analyze, at the same time, the impact of three factors that are involved in the income of the European banks. The first two are endogenous to the bank and the third one is deemed, a priori, to be exogenous to the bank. Our objective is to look at the influence of “Fee & commissions”, the “Net Non-interest income” and the interest rate on banks’ profitability in a panel data of 34 banks chosen from different European countries. The interest rate of reference is supposed to be under the control of the central bank but subject to movement due to the interactions between the cross-border countries and the competitive framework within the same country. The “Fee & commissions” and the “Net Non-interest income” are more related to the efficiency of the management team and the effectiveness of the processing inside the same bank. Our main finding is that the “Fee & commissions” are not really influencing the profitability of the European banks. However, the “Net Non-interest income” and the interest rate are significantly impacting the profitability of the European banks.

Suggested Citation

  • el Alaoui, AbdelKader & Diwandaru, Ginanjar & Rosly, Saiful Azhar & Masih, Mansur, 2014. "What Drives Profitability of Banks: Do Interest rate, and Fee and Commissions impact the profitability of Banks? Evidence from the European Countries," MPRA Paper 59606, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:59606
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    File URL: https://mpra.ub.uni-muenchen.de/59606/1/MPRA_paper_59606.pdf
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    References listed on IDEAS

    as
    1. Mansor H. Ibrahim & Hassanuddeen Aziz, 2003. "Macroeconomic variables and the Malaysian equity market: A view through rolling subsamples," Journal of Economic Studies, Emerald Group Publishing, vol. 30(1), pages 6-27, January.
    2. Mansor H. Ibrahim and Wan Sulaiman Wan Yusoff, 2001. "Macroeconomic Variables, Exchange Rate And Stock Price: A Malaysian Perspective," IIUM Journal of Economics and Management, IIUM Journal of Economis and Management, vol. 9(2), pages 141-164, December.
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    More about this item

    Keywords

    Banking System; Regulation; Fee and commissions; Bank Profitability; panel data;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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