European Bank Profitability: A 15-Year Analysis (2000-2015)

This dissertation investigates the factors influencing the profitability of European banks between 2000 and 2015. The study employs secondary data, including annual reports from 12 European banks, and utilizes statistical tools like descriptive analysis, correlation, and regression to identify key drivers of profitability. The research aims to determine profitability trends, evaluate influencing factors, and recommend strategies for banks to manage micro and macro factors. The findings suggest that loan ratios and the quality of the credit portfolio significantly impact profit margins. The report includes a comprehensive literature review exploring internal and external factors, such as management policies, expenses, interest rates, bank structure, credit risk, liquidity, ROA, ROE, bank size, solvency, deposit ratios, GDP, and inflation. The research methodology involves both qualitative and quantitative approaches to data collection and analysis. The study concludes with recommendations for European banks to enhance their profitability and provides valuable insights for future research in the field. The dissertation is structured into five chapters: introduction, literature review, research methods, findings and discussion, and conclusion.

Accounting and Finance

ACKNOWLEDGEMENT
I am thankful to my tutor, friends and relatives who gave me guidance and support in
such project. In completing my dissertation on accounting and finance field they always
encouraged for completing the same prominently. In addition to this, I also appreciate my mentor
for giving me guidance in preparing dissertation. From his support and experience I was in the
position to complete dissertation in a right manner. Finally, I want to extend my sincere thanks to
everyone who have directly or indirectly supported me in completion of my dissertation.

ABSTRACT
The aim behind carry out such dissertation is to investigate factors that have an impact on
the profitability of European banks. In this, for addressing research questions secondary data
sources have been used by the researcher. On the basis of such aspect, by evaluating books,
journals and scholarly articles regarding the factors that impact bank’s profitability secondary
data has been gathered. In addition to this, annual reports of 12 European banks have also been
evaluated to gather data and attain research objectives. Further, statistical tools and techniques
such as descriptive evaluation, correlation and regression have been performed by the researcher
to derive suitable solution. From overall assessment or evaluation, it can be mentioned that loan
ratio is the main elements that contribute in profit margin but to the lower extent. Moreover,
quality of the credit portfolio also has an impact on the profitability of financial institutions.

TABLE OF CONTENTS
CHAPTER 1: INTRODUCTION....................................................................................................1
Background of the study..............................................................................................................1
Research aim and objectives........................................................................................................1
Rationale of the study..................................................................................................................1
Significance of the study.............................................................................................................2
Dissertation structure...................................................................................................................2
CHAPTER 2: LITERATURE REVIEW.........................................................................................3
Theme: Factors that impact profitability of banking units..........................................................3
CHAPTER 3: RESEARCH METHODS.........................................................................................6
Research type...............................................................................................................................6
Research approach and philosophy.............................................................................................6
Data collection.............................................................................................................................7
Sampling......................................................................................................................................7
Data analysis................................................................................................................................7
Reliability and validity................................................................................................................8
Research limitations.....................................................................................................................8
Ethical issues...............................................................................................................................8
CHAPTER 4: FINDINGS AND DISCUSSION.............................................................................9

Results..........................................................................................................................................9
Discussion..................................................................................................................................12
CHAPTER 5: CONCLUSION......................................................................................................15
REFERENCES..............................................................................................................................18

CHAPTER 1: INTRODUCTION
Background of the study
In the context of sustainable economic development, role and functions performed by
banking sector is highly significant. From assessment, it has been identified that banks play a
vital role in the economic aspects and their stability is also highly required for ensuring effective
financial system. Now, each and every sector including banking is filled up with the high level of
competition. In this regard, for the attainment of high margin banking units need to lay emphasis
on developing sound strategic framework by considering both financial and non-financial
aspects. Further, during the period of global crisis such as 2007-08, position of banking units
become worst. During and after the period of crisis, several banking units faced difficulty in
managing their operations. The present dissertation is based on 12 European banks. In this, study
will shed light on the factors that influenced profitability of such selected banking institutions
within the period of 15 years (from 2000 to 2015). Hence, this study will also present strategies
that can be undertaken by banking units for the maximisation of profit and growth.
Research aim and objectives
Aim: The aim of this dissertation is to determine profitability of European banks over the
period of 2000-2015.
Objectives: Considering above aim, following objectives have been drafted such as:
 To investigate the factors that has an influence on the profitability of banking firms.
 To evaluate profitability of European banks over the period of 2000-2015.
 To recommend the ways that assists banking units in dealing with both micro and macro
factors which influence profitability.
Rationale of the study
The main reason behind conducting present investigation is to ascertain the factors that
have an impact on banking unit’s profitability. This is considered as main issue because after the
period of financial or global crisis, several efforts were made by banking units for making

improvement in monetary aspects. Hence, through the means of quantitative investigation, such
study presents micro / macro and internal as well as external factors that impact profitability
aspect of European banking institutions.
Significance of the study
The present study and its outcome are significant for European banking units which in
turn provides deeper insight to them about the factors that have an impact on profit margin.
Hence, by understanding and evaluating such factors, banking firms would become able to
develop appropriate strategies and policies for the near future. In addition to this, concerned
study and its findings will also assist other scholars who want to conduct study on such topic.
Dissertation structure
Specifically, five chapters have been included by the researcher in dissertation for
analysing and evaluating research issue in a structured way. In the introductory section,
background, aim and objectives have been included by the scholar. Under second chapter, brief
thesis has been prepared the scholar through making assessment of books, journals and scholarly
articles. In the third, chapter researcher identifies and mentions research strategies that are
appropriate for the concerned issue being investigated. Chapter 4 of dissertation presents
findings and supports the same with secondary data set. In chapter 5, researcher concludes
findings and gives suggestions for further improvements.

CHAPTER 2: LITERATURE REVIEW
Literature review implies for the evaluation of books, journals and scholarly articles
which in turn provides assistance in developing brief thesis. Hence, literature review may be
served as an attempt to meet research objectives via secondary sources. This chapter of
dissertation is highly effectual which in turn provides assistance in developing brief thesis and
doing analysis of gathered data set.
Theme: Factors that impact profitability of banking units
According to the views of Borio Gambacorta and Hofmann, (2017), profitability aspect
of banking units is highly influenced from both internal and external factors. In this regard,
internal factors consist for management policies, objectives, decisions and actions. Hence, when
business or banking unit fails to make effective and strategic plan then it may be result into lower
profit margin. On the other side, Maudos, (2017) presented in their study that expense is one of
the main factors that impact profitability aspect. Hence, if business or banking unit fails to exert
effectual control on both direct and indirect expenses then it may result into lower margin.
Further, Ozkan Cakan and Kayacan, (2017) assessed in their study that interest rates also have
significant impact on profit margin. Moreover, interest charged by banking institution on loan
considered as income. On the basis of such aspect, when lower interest rate exists then it closely
influences the margin of banking unit.
Sigmund Gunter and Krenn, (2017) claimed that structure which is followed by banking
unit has high level of influence on its profitability. Along with this, findings of such study
presents that profitability aspect is negatively influenced by both credit risk and liquidity.
Moreover, in the case of high liquidity, company is not in position to invest money in other
productive activities. Thus, high liquidity is considered as one of the main cause that impacts
firm’s profitability. Further, such study presents that non-performing loans and amount of credit
also have greater impact on the profitability of banking units. Rowley Shipilov and Greve,
(2017) identified in their study that ROA and ROE are the most effectual measures that helps in
making assessment of profitability aspects. Moreover, ROA presents the return which is
generated by the firm through using assets. Further, ROE presents the extent to which, firm has

made effectual use of shareholders fund during specific accounting period. Hence, through
evaluating the outcome of such financial tool banking units can assess whether they need to
make modifications in the existing strategic framework or not.
Anginer Cerutti and Pería, (2017) investigated that size is another main factors that
impact profitability of banking units. Such study entails that profitability persists to a balanced
size. When size of banking units are large then it gets high economies of scale. For instance:
Increasing or high size allows banking units to spread their fixed cost over a greater assets base.
This in turn may result into reduction in average costs. In addition to this, when scale of
operation enhances then banking unit would become able to use specialized inputs more
effectually. In other words, it can be depicted that in the case of large size, banking can enhance
efficiency by undertaking input provided by loan officers. However, on the critical note, Saif-
Alyousfi Saha and Md-Rus, (2017) stated that size is not only the factor that have an impact on
long term profitability of banking units. In accordance with such evaluation, profitability of
banking sector impacts from both characteristics of bank and market in which it is operating.
Hence, bank specific factors and characteristics include both business strategies as well as
organizational structure. On the other side, market specific factors include both market
competition and local economic conditions (Islam and et.al., 2017). Thus, considering such
aspects, it can be depicted that both bank and market specific factors has greater impact on firm’s
profitability. Further, Isik Kosaroglu and Demirci, (2018) argued that solvency position and
profitability of European banks. Moreover, high debt position imposes fixed monetary burden in
front of firm regarding interest payment. Thus, by taking into account such aspect, it can be
mentioned that financial structure and level of debt as well as equity has impact greater impact
on organization’s profitability.
Further, Demirgüç-Kunt and Singer, (2017) found in their study that deposit ratio helps is
one of the most effectual factors that can be undertaken to examine and evaluate profitability
aspects. Moreover, when banking units collect or get more deposit then they become able to
offer more loan opportunities to the customers and thereby attain higher margin. In other words,
higher deposit level makes significant contribution in business development and leads
profitability. Thus, considering such aspects, it can be said that higher deposit ratio proves to be
more advantageous for banking unit over the lower one. In the study, Borio Gambacorta and

Hofmann, (2017) mentioned that GDP and inflation rate is another main external factor that
affects organisational profitability. Findings of such study presents that positive relationship
takes place between GDP and profit margin. The rationale behind this, poor economic condition
places negative impact on the quality of loan portfolio. Moreover, such kind of situation may
cause of credit loss which in turn impacts bank profitability. In contrast to this, when economic
condition enhances then it may result into improvement in the solvency of borrowers. Along
with this, improved economic condition increases the demand for credit needed by households.
Thus, all such aspects positively contribute in the profit margin of banking institutions. On the
contrary to this, Maudos, (2017) presented in their research inflation also has significant impact
on bank’s profitability. However, level of impact is highly influenced from the extent to which
inflationary tendencies take place. This can be evaluated or measured through analysing the
effect of inflation on salaries and other operating cost of banking units.
However, as per the views of Ozkan Cakan and Kayacan, (2017), one can assess the
impact of inflation on bank’s profitability when it is fully anticipated. The reason behind this,
when banking units have information about inflation rate then it can adjust interest rates. This in
turn increases revenue significantly as compared to cost and thereby enhances overall
profitability. Thus, inflation also has positive impact on the profit margin of banking units.
Sigmund Gunter and Krenn, (2017) argued that inflationary environment impacts profitability of
banking units when they have high capital ratio. Under such situation, cost increase faster in
comparison to revenue.

CHAPTER 3: RESEARCH METHODS
In this, research tools that have been employed by the scholar for addressing questions
and meeting objectives included. Hence, this chapter of dissertation presents research approach
and philosophy that suits to the research issue. Further, such chapter also exhibits techniques that
can be used for the purpose of data collection and analysis.
Research type
Qualitative and quantitative are the main two research types that can be undertaken by
scholar. Under qualitative research, scholar lays emphasis on evaluating and assessing uncover
trends in thoughts as well as opinion. On the other side, quantitative investigation focuses on the
evaluation of numeric facts and figures (Friese, 2012). Hence, in this, to analyse the profitability
of European banks from the period of 2000 to 2015, quantitative investigation has been selected.
On the basis of such research type, by making assessment of quantitative data set regarding
profitability solution has been presented by the researcher.
Research approach and philosophy
Approaches of the research can be distinguished into two types such as inductive and
deductive. Inductive approach is highly suitable for qualitative investigation that ends with the
generalization of new theoretical framework. On the other side, deductive approach starts with
existing theoretical framework and ends on the confirmation of hypothesis (Punch, 2009).
Further, there are mainly two philosophies that researchers usually employ namely positivism
and interpretivism. Hence, selection of both approaches and philosophies are highly influences
from the type of investigation carried out. In this, considering quantitative research type,
deductive approach and positivism philosophy has been selected by the researcher. Hence, as per
positivism philosophy through analysing numeric figures suitable solution of the issue has
assessed. The main reason behind considering the selection of such approach and philosophy is
that it highly suitable for the quantitative research type. In addition to this, through employing
deductive technique researcher has proved hypothesis framed or developed by taking into
account existing theoretical framework.

Data collection
Specifically, there are mainly two sources that can be used for the purpose of data
collection such as primary and secondary. Primary sources imply for the one that researcher
undertakes for the collection of data set as per objectives such as survey, observation, focus
group etc. On the contrary to this, secondary data sources include books, journals and scholarly
articles that has already been gathered as well as published by the researcher (Mackey and Gass,
2015). In this, for addressing research questions secondary data sources have been used by the
researcher. On the basis of such aspect, by evaluating books, journals and scholarly articles
regarding the factors that impact bank’s profitability secondary data has been gathered. In
addition to this, annual reports of 12 European banks have also been evaluated to gather data
pertaining to profit margin, liquidity, solvency and efficiency. Hence, such data set and findings
presented by other scholars assist in presenting the factors that affect profitability of firms
operating in banking sector.
Sampling
In research, due to the lack of having enough time and financial resources, it is not
possible for the researcher to conduct study on whole population. Thus, there are mainly two
sampling techniques such as probabilistic and non-probabilistic that can be employed for sample
selection (Panneerselvam, 2014). Hence, as per quantitative research type, considering simple
random sampling technique 10 European banks have been selected by the researcher. This in
turn includes Barclays Plc, Standard Chartered plc, Lloyds banking group, Deutsche, Royal bank
of Scotland, Commerzbank AG, Erste, UBS, HSBC and BNP Paribas. Such sampling technique
is the part of probabilistic which in turn helps in assessing optimal outcome by avoiding the level
of biasness.
Data analysis
It refers to the systematic process that is used to analyse and discover suitable
information from data set. Tools and techniques of data analysis vary in accordance with the type
of investigation selected (Gast and Ledford, 2014). Moreover, thematic perception test technique
is highly suitable when qualitative investigation conducted. In contrast to this, SPSS tools offer
optimal solution when outcome is based on numeric figures. In this, solution of concerned
research issue or problem is based on quantitative data set. Referring such aspects, statistical