In this paper, the author outlines synthetically, first, landmarks of the manifestation of the global financial crisis effects with implications on the profitability of commercial banks, highlighting causal linkages which determine the return on assets (ROA) of the commercial banks. In this context it is deepened the research also in terms of the dynamics expressed by the evolution of banks&rsquo; ROA and of the correlations of the respective rate with some macro indicators (the changes in EUR/RON exchange rate, the unemployment rate, GDP variation etc.), by adapting and using an econometric model in which the changes in ROA is the dependent variable while the other indicators are determinant variables. The results obtained by processing the data corresponding to the variables included in this econometric model, including the change in non-performing loans volume, within the analysis aiming the situation in Romania in the period 2008-2013, basically highlight negative implications of the mutations occurring on the background of the current financial crisis manifestation, reflected in reducing the profitability of the banking activity

FILIP, Bogdan Florin

English

Danubius University, Romania: Danubius Journals

J o u r n a l  o f  A c c o u n t i n g  a n d  M a n a g em e n t J AM  v o l .  4 ,  n o . 3 ( 2 0 1 4 )21Implications on the Profitability of Banking Activity in the Context of theCurrent Global Financial CrisisBogdan Florin FILIP1Abstract:In this paper, the author outlines synthetically, first, landmarks of the manifestation of the global financial crisis effects withimplications on the profitability of commercial banks, highlighting causal linkages which determine the return on assets(ROA) of the commercial banks. In this context it is deepened the research also in terms of the dynamics expressed by theevolution of banks’ ROA and of the correlations of the respective rate with some macro indicators (the changes in EUR/RONexchange rate, the unemployment rate, GDP variation etc.), by adapting and using an econometric model in which thechanges in ROA is the dependent variable while the other indicators are determinant variables. The results obtained byprocessing the data corresponding to the variables included in this econometric model, including the change in non-performing loans volume, within the analysis aiming the situation in Romania in the period 2008-2013, basically highlightnegative implications of the mutations occurring on the background of the current financial crisis manifestation, reflected inreducing the profitability of the banking activity.Keywords: ROA; GDP; exchange rate; inflation rate; NPLsJEL Classification: G21, C20, M211 IntroductionThe banking activity conducted by the commercial banks interacts organically with other areas of thefinancial activity, having close relationships of determination with the functioning of the realeconomy, it reflecting also the impact of other phenomena, including those of the economic andfinancial crisis, which is confirmed both at the level of each country, and globally. In this regard, wenote that many authors (Demirgüҫ-Kunt & Huizinga, 1999; Alper & Anbar, 2011; Georgantopoulos &Tsamis, 2013) highlight the essential role played by banks in the sustainable development of thesociety.Simultaneously, it has to be admitted also the existence of some inverse relationships of determination,capable of generating either an increase in performance, and thus in the commercial banks’profitability, or its decrease, depending on the changes taking place, both at the global financial level,and in the real economy.On the other hand, considered distinctively, the weaknesses in banks' activity can lead to bankingcrises that transmit malfunctions in other areas of the overall financial and economic activity,contributing to the onset of global crisis (Kaminsky & Reinhart, 1999, p. 476). In turn, the latter implynegative effects that amplify the disturbances, including crises in the banking system, shaping thus avicious and dangerous spiral, respectively the twin crises phenomenon (Kaminsky & Reinhart, 1999,p. 474).1 Senior Lecturer, „Alexandru Ioan Cuza” University of Iaşi, Faculty of Economics and Business Administration, 11 CarolBlvd, 700506, Iaşi, Romania, telephone no +40-232-201448, fax no +40-232-201448, Corresponding author:bogdan.filip@feaa.uaic.ro.J o u r n a l  o f  A c c o u n t i n g  a n d  M a n a g em e n t J AM  v o l .  4 ,  n o . 3 ( 2 0 1 4 )222. Theoretical ApproachesThe objective existence of the invoked interdependencies between the profitability of banking activity,conceived through covering the specific costs by the revenues, respectively by the obtainable financialresults, and the economic and financial environment of this activity, including with the phenomenon oftransmission of shocks generated by the financial crisis, justifies intensive concerns for investigatingthe involved factors of influence.Thus, some papers have analysed the influences of this kind of factors in a single country, such asTurkey (Alper & Anbar, 2011), Switzerland (Dietrich & Wanzenried, 2011), Spain (Trujillo-Ponce,2013), Tunisia (Rachdi, 2013), Greece (Georgantopoulos & Tsamis, 2013) and so on, while othersaimed groups of countries (Mendes & Abreu, 2003; Goddard et al., 2004; Athanasoglou et al., 2006).We note, also, the growing interest for investigating of the effects transmitted on the profitability ofbanking activity within the context of the current global financial crisis, reflected in some papers(Dietrich & Wanzenried, 2011; Georgantopoulos & Tsamis, 2013; Rachdi, 2013).Likewise, we notice that, both in the scientific literature and in banking practice, the profitability ofbanking activity is measured typically by the indicators ROA  (Athanasoglou et al., 2006; Babihuga,2007; Dietrich & Wanzenried , 2011; Georgantopoulos & Tsamis, 2013), ROE (Athanasoglou et al.,2006; Alper & Anbar, 2011; Trujillo-Ponce, 2013) and, sometimes, the net interest margin (Demirgüҫ-Kunt & Huizinga, 1999; Mendes & Abreu, 2003).A comparative approach of the conceptual meanings and of the ways of expressing the profitability ofbanking activity and of its determinants, stresses that banks’ indicator “the return on average bankassets” (ROA) is the most conclusive indicator for assessing the level of the profitability of each bankor banking system and for identifying its most important determining factors, including on thebackground of the global financial crisis.Consequently, in the analyses undertaken by us, we propose to report ourselves to ROA, which isconsidered to be the most relevant synthesizing expression of the profitability of banking activity,based on its way of determination by dividing the net profit of a commercial bank to its average totalassets. A similar interpretation is present also at other authors, who consider that ROA would be themost natural measure for evaluating the profitability of banking activity (Dietrich & Wanzenried,2011, p. 311).Also, we emphasize that it is noteworthy that, in the context of the global financial crisismanifestation, there take place multiple changes in economic and financial plan, for the affected states,which are reflected in macroeconomic indicators, out of which the most representative there appear tous: GDP inflation rate, unemployment rate, exchange rate and interest rate. They, in turn, areconsidered, however, also as (external) determinants of the profitability of the banking activity,influencing the level of ROA, among domestic factors, out of which we note, particularly in thecontext of the financial crisis, the structure and the quality of banks’ assets, which are affected by theincreased proportions of non-performing loans (NPLs). It is strongly recommended that the papershould have an even number of pages, but no longer than 4 to 14 pages. In some cases papers withmore than 14 pages will be accepted by the editorial board if they contain the report of a widerresearch activity which can not appear separated in two papers.3. Data and MethodologyIn line with the above considerations, we propose ourselves the development of research by analysingthe implications of certain factors of influence, transmitted on banking profitability on the basis of thecorresponding causality linkages, using econometric modelling and processing the data available forthe financial crisis period, in the case of Romania. In this respect, the proposed regression modelincludes the changes in ROA (ΔROA) as the dependent variable in relation to the relative variation ofNPLs (ΔNPL), the changes in exchange rate (ΔEXR), the inflation rate variation (ΔINFLR), theJ o u r n a l  o f  A c c o u n t i n g  a n d  M a n a g em e n t J AM  v o l .  4 ,  n o . 3 ( 2 0 1 4 )23unemployment rate (UNEM), the relative variation of GDP (ΔGDP) and the average interest rate onbank loans (LIR), designed as a determinant variables. Therefore the econometric analysis model willhave the following form:  LIREXRUNEMINFLRGDPNPLROA 6543210In the assessment of the causality linkages between the considered variables, for our analysis, weapplied, as method of data processing, OLS regression and Pearson correlation between thesevariables.The data used in the analysis are quarterly values of the respective variables, in Romania’s case, for2008-2013 period, which is specific for the manifestation of the global financial crisis, obtained fromReports of the National Bank of Romania, the National Institute of Statistics of Romania and the IMF(FSI).4. ResultsIn a first stage of the analysis, statistical data were processed in terms of correlations between theconsidered variables and the results are shown by their correlation matrix, shown in Table 1:Table 1 The correlation matrix of the variablesΔROA ΔEXR ΔNPL UNEM ΔINFLR ΔGDP LIRΔROA 1.000000ΔEXR -0.646997*** 1.000000ΔNPL -0.483223** 0.207237 1.000000UNEM 0.122393 -0.211467 -0.211254 1.000000ΔINFLR 0.058857 0.189025 -0.014693 0.029102 1.000000ΔGDP -0.070790 -0.016017 -0.070694 -0.011433 -0.361807* 1.000000LIR -0.243242 0.258482 0.680116*** -0.359921* 0.273163 -0.359330* 1.000000The data in Table 1 indicate the existence of some significant negative correlations between changesin ROA and the exchange rate variation, respectively the NPLs’ relative variation, which expresses thefact that during the financial crisis, the profitability of the banking activity has evolved in the oppositedirection with the both variables, while the other variables appear to be poorly correlated with changesin ROA, in the particular considered conditions.Testing the model for determining the impact of the determining variables of the changes in ROA, ledto the results presented in Table 2:Table 2 Results for the proposed regression modelDependent Variable: ΔROAVariable Coefficient Std. Error t-Statistic Prob.ΔEXR -2.664325 0.714039 -3.731346 0.0018ΔNPL -0.019268 0.008712 -2.211537 0.0419UNEM -0.334462 0.145288 -0.237195 0.8155ΔINFLR 0.057949 0.093984 0.616588 0.5462ΔGDP 6.39E-05 0.004130 0.015470 0.9878LIR 0.052274 0.062673 0.834066 0.4165β0 -0.213192 1.717559 -0.124125 0.9028R-squared 0.600780 Mean dependent var -0.020000Adjusted R-squared 0.451073 S.D. dependent var 0.567593Log likelihood -8.538523 Hannan-Quinn criter. 1.438090F-statistic 4.013032 Durbin-Watson stat 2.442306Prob(F-statistic) 0.012130J o u r n a l  o f  A c c o u n t i n g  a n d  M a n a g em e n t J AM  v o l .  4 ,  n o . 3 ( 2 0 1 4 )24According to Table 2 it results, first, a good degree of viability of the proposed equation, the change inROA being determined in a high proportion (R-squared of 0.6008, Adjusted R-squared of 0.4511) bythe determinant variables, which confirms also the relevance of the applied model.At the same time, the results highlight the change in ROA reverse dependence on the relative variationof NPLs, at a significance level below 5% and on the changes in the exchange rate at a significancelevel below the 1 %. This expresses that in Romania, during the financial crisis, the values recorded bysome factors considered as determinant variables have negative influences on banking profitability,reflected by the change in ROA. We emphasize that the negative effect of NPLs on ROA is consistentwith other findings or assessments of some previous studies (Filip, 2013), which is more pronouncedin the context of the financial crisis (Babihuga, 2007; Trujillo-Ponce, 2013). On the other hand, it isconfirmed that the sharp decline (in the context of the financial crisis) of the exchange rate has theeffect of worsening the profitability of banks, especially if local banks are using funds raised abroad togrant loans in foreign currency (Mendes & Abreu, 2003, p.16) such as in Romania. It also can beanticipated that this effect of banking profitability deterioration, when the exchange rate increases, feltby diminishing the ability of banks to recover loans from the debtors, to be accentuated, if the share ofloans in foreign currency is high (Davydenko, 2010, p.14), which corresponds to Romania’s case.The other variables appear to have a less relevant impact on the change in ROA, but some havepositive influence (the variation of inflation, the interest rate on loans, GDP variation), and othersnegative ones (unemployment rate).The implications of positive nature on banking profitability are highlighted also in studies in whichthere are considered as determining variables either the interest rate on bank loans (Athanasoglou etal., 2006; Alper & Anbar, 2011) or inflation (Molyneux & Thornton, 1992; Athanasoglou et al., 2006).In this case, GDP variation appears to have little but positive influence on the change in ROA, whichis in line with many previous studies (Bikker & Hu, 2002; Athanasoglou et al., 2006; Dietrich &Wanzenried, 2011), as a growth in GDP creates favorable conditions for rising the banking activity,including lending growth, and boosts banks’ revenue. But, especially during crisis, the activities whichcreate GDP are reducing themselves, in conjunction with the limitation of lending, on one hand, andare growing, especially, the costs of managing the higher NPLs, which implies, in principle, areduction of ROA.At the same time, it results that unemployment rate has a negative impact (although less significant)on banking performance, but its growth as a phenomenon typical for the financial crisis, determinesROA’s reduction, both by restricting the access of unemployed people to bank loans and by reducingthe capacity of those become unemployed to repay their active loans.5. ConclusionsOur research highlights the necessity for approaching the profitability of banking activity in terms ofits objective causal linkages with the economic and financial environment, especially, in the currentglobal financial crisis. These connections are marking the conduct and the results obtainable withinbanking activities, out of which lending / financing the economy has a central role.An analysis of the factors involved in determining bank profitability, acting from inside or outside canbe made appealing to the most relevant form of expression of its size, which we consider to be ROA.Developing research through an econometric analysis of the relationships between change in ROA asdetermined variable and certain macroeconomic indicators considered as determinant variables led usto shape a regression model validated by processing of data, on Romania’s case, during the currentcrisis, respectively to the assessment of the direction and intensity of the causal linkages betweenthem, including to noting some implications arising from the global financial crisis manifestation.J o u r n a l  o f  A c c o u n t i n g  a n d  M a n a g em e n t J AM  v o l .  4 ,  n o . 3 ( 2 0 1 4 )25In this framework, it resulted that the global financial crisis had significant implications on theprofitability of the banking activity in Romania. Thus, change in ROA was negatively andsignificantly influenced by the exchange rate variation and by the sharp increase in the volume ofNPLs, but to a lesser extent also by rising unemployment. In contrast, the interest rate on bank loans,GDP variation and inflation rate variation had positive, but insignificant, influences on change inROA.However, a much consistent involvement of banks in fighting the effects of the crisis and increasingprofitability on medium and long term may be focused on reducing their exposures to excessiveforeign exchange risks and on reducing of NPLs, especially those in foreign currencies, butparticularly on improving credit conditions.6. ReferencesAlper, D., & Anbar, A. (2011). Bank Specific and Macroeconomic Determinants of Commercial Bank Profitability:Empirical Evidence from Turkey. Business and Economic Research Journal, Vol. No. 2(2), pp. 139-152.Athanasoglou, P. & Delis, M., &bStaikouras, C. (2006). Determinants of Bank Profitability in the Southern Eastern EuropeanRegion. Bank of Greece Working Paper, No. 47.Babihuga, R. (2007). Macroeconomic and Financial Soundness Indicators: An Empirical Investigation. IMF Working Paper07/115, pp. 1-30Bikker, J., & Hu, H. (2002). Cyclical patterns in profits, provisioning and lending of banks and procyclicality of the newBasel capital requirements. BNL Quarterly Review, No. 221, pp.143-175.Davydenko, A. (2010). Determinants of Bank Profitability in Ukraine. Undergraduate Economic Review, Vol. No. 7 (1), pp.1-31.Demirguc-Kunt, A., & Huizinga, H. (1999). Determinants of commercial bank interest margins and profitability: Someinternational evidence. World Bank Economic Review, Vol. No. 13 (2), pp. 379-408.Dietrich, A., & Wanzenried, G. (2011). Determinants of bank profitability before and during the crisis: Evidence fromSwitzerland. Journal of International Financial Markets, Institutions and Money, Vol. No. 21 (3), pp.307-327.Filip, B.F. (2013). Creditele bancare neperformante şi feedback-ul acestora / Non Performing Loans and Their Feedback.Proceedings of the EFM 2013 International Conference, Financial and Monetary Research Centre - Victor Slăvescu,Bucharest, august 2013, pp. 124-137.Georgantopoulos, G., & Tsamis, A. (2013). Assesing the efficiency of commercial banks in Greece during the financialcrisis: A linear approach in conjunction with financial analysis. Journal of Money, Investment and Banking, Vol. No.28,pp.31-46.Goddard, J. & Molyneux, P., & Wilson, J. (2004). The profitability of European banks: A cross-sectional and dynamic panelanalysis. The Manchester School, Vol. No. 72(3), pp. 363-381.Kaminsky, G.L., & Reinhart, C.M. (1999). The Twin Crises: The Causes of Banking and Balance of Payments Problems.American Economic Review, Vol. No. 89(3), pp. 473–500.Mendes, V. & Abreu M. (2003). Do macro-financial variables matter for European bank interest margins and profitability?.2nd CIEF Workshop European Integration and Banking Efficiency, Lisbon, 30-31 October 2003, retrieved fromhttp://www.repository.utl.pt/bitstream/10400.5/1365/1/MA-EcoMod2003.pdf at 15th of March 2014Molyneux, P., & Thornton, J. (1992). Determinants of European bank profitability: A note. Journal of Banking and Finance,Vol. No. 16 (6), pp.1173-1178.Rachdi, H. (2013). What determines the profitability of banks during and before the international financial crisis? Evidencefrom Tunisia. International Journal of Economics, Finance and Management, Vol.No. 2(4), pp. 330-337.Trujillo-Ponce, A. (2013). What determines the profitability of banks? Evidence from Spain. Accounting and Finance, Vol.No. 53(2), pp. 561–586.J o u r n a l  o f  A c c o u n t i n g  a n d  M a n a g em e n t J AM  v o l .  4 ,  n o . 3 ( 2 0 1 4 )26

Implications on the Profitability of Banking Activity in the Context of the Current Global Financial Crisis

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Implications on the Profitability of Banking Activity in the Context of the Current Global Financial Crisis

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