Macroeconomic factors of the Greek economy and the profitability of Greek banks in the period 2005-2016. The stock of Greek market loans adjusted for the effect of bad loan write-offs.
Introduction
- Problem Statement & Objectives
- Banking Industry
- Banking Industry Description
- Banking Industry Financial Statements
- Greek Banking Sector
- Banking Industry Profitability Indicators
- Return on Equity (ROE)
- Return on Assets (ROA)
- Net Interest Margin (NIM)
- Cost to Income Ratio (C:I)
- Risk-Adjusted Return on Capital (RAROC)
- Macroeconomic Factors and Critical Market Volumes
- Unemployment Rate
- Gross Domestic Product (GDP)
- Consumer Prices Index (CPI)
- Trade Balance
- Loans and Deposits Market Balances
- Rate of 10 year Greek Government Bond
Market risk: the volatility of the value of a bank's assets due to movements in market prices. NIM is equal to the net interest income (NII = interest income-interest expenditure) of a period divided by the average interest-bearing assets (IEAs) of the period.
Literature Review
Literature Review over International Banking Sector
According to the study, all profitability indicators show a strong positive relationship with inflation, while GDP growth and unemployment rate significantly affect only ROE and ROA, but not NIM. Bikker and Hu (2002) investigated the profitability of banks established in 29 OECD countries for the period 1979-1999 by relating profits to the unemployment rate, GDP growth and inflation, and the variance of long-term and short-term interest rates. According to the results of the study, GDP growth has a significant impact on profits, showing a strong correlation between performance and business cycles.
Different results were concluded by Samy Ben Naceur (2003) who tested the performance of the Tunisian banking sector for the period between 1980 and 2000 using the net interest margin (NIM) and return on assets (ROA) and expressed that inflation and GDP growth have no impact on the profitability and the interest margins of the banks. According to the results of his study, the lag of GDP growth and interest rates has a significant effect on the profits of banks. Inflation and GDP growth verified to have a positive influence on profit of banks, while GDP per capita does not affect bank performance.
Literature Review over Greek Banking Sector
Trujillo-Ponce (2013) tried to interpret the profitability of Banks in Spain for the period between 1999 and 2009 in terms of ROE and ROA. According to their findings, Net Interest Margin had a strong positive relationship with GDP growth for the initial two periods but not for the post-financial crisis period, perhaps related to the adequate risk management of banks and also NIM presents a positive association with inflation during the financial crisis period. GDP growth was detected, noting that the period examined was characterized by intense product expansion compared to the rest of the European Union.
Apergis (2007) examined the financial performance of fifteen Greek banks over the period and concluded that GDP growth affects the profits of the Greek banking sector in a positive direction, but estimates that the impact of GDP is greater during periods of expansion than during periods of recession. Alexiou and Voyazas (2009) examined the correlation between ROE/ROA and macroeconomic factors for six banks in Greece over the period 2000–2007. Giannopoulos, Zampara and Koufopoulos (2017) examined the profitability of the banking sector in Greece during the period 2001-2014 for the International Journal of Business and Economic Sciences.
Data Analysis
Dependent Variable
- Net Interest Margin (NIM) as the Dependent Variable
- Data Collection for Net Interest Margin
Our sample fully describes the population values in terms of profitability indicators as for the period 2005-2011 7 banks share more than 80% of total Greek banking assets and, after acquisitions and mergers, the four Greek systemic banks (Piraeus Bank, National Bank of of Greece, Alpha Bank, Eurobank) determine the profitability of the sector. Then, the NIM of the Greek Banking Sector was calculated as the weighted average over the average interest-bearing assets of each bank. Net interest income (NII) is the numerator of the NIM type, which means that interest expenses and interest income of a bank's liabilities and assets have a decisive contribution to the value of NIM.
The volume of loans, securities, interbank placements (active side) and their interest rates, as well as the volume of financing sources, such as deposits, debt issues, interbank liabilities.
Independent Variables
- Unemployment Rate
- Greek Market Deposits Balance
- Greek Market Loans Balance
- Rate of 10 year Greek Government Bond
- Gross Domestic Product (GDP)
- Consumer Prices Index (CPI)
- Trade Balance
- Selection of Independent Variables
To consider the Greek Market Loan Balance as quarterly observations for the period, monthly data released by the Bank of Greece were used to calculate the average Greek market loan balance for each quarter (expressed in €bn). To estimate the average 10-year GGB rate (expressed in basis points) in terms of quarterly observations for the period, daily data from the Bank of Greece and the financial website gr.investing.com were used. The Greek government's 10-year bond yield approached very high levels during the period examined (up to almost 32%), depicting Greece's exclusion from any type of funding and financial markets.
In order to estimate the amount of GDP (expressed in € billion) in terms of quarterly observations for the period, quarterly data from the Hellenic Statistical Authority were used in constant numbers with a reference basis of the year 2010. To estimate the average CPI in terms of quarterly observations for the period monthly data from the Hellenic Statistical Authority was used with reference basis for the year 2009 (CPI=100 for the year 2009). To consider the amount of trade balance (expressed in EUR billion) as quarterly observations for the period, quarterly data from the Hellenic Statistical Authority were used.
Methodology of Research
Data collection
Model Selection and Description
The betas of the formula are the coefficients of the exogenous/independent variables and Y (the dependent variable) is linearly dependent on these parameters. The random error (or random disturbance) εi is a random variable with zero mean, constant variance, and the observations of the disturbance term are uncorrelated with each other. The random disturbance term is normally distributed, implying combined with the second assumption that the disturbances are mutually independent, although the OLS method does not require the random error to have a normal distribution in order to derive unbiased estimates that have the most variance low (optional).
Variables and Descriptive Statistics
Mean is calculated as the sum of the values of a variable divided by the total number of values and is used to show the trend of the variable. The median is the value for which half of the observations are below this value and determines the value that divides the observations into two equal groups. Maximum and Minimum values are respectively the upper and lower observation levels found in our sample.
Kurtosis is a metric that indicates the peakedness of the distribution of the observations of the sample and, according to its value, defines the distribution as platykurtic, normal-mesokurtic or leptokurtic.
Ordinary Least Square Method and Diagnostic Tests
- Ordinary Least Square Method equation
- Coefficient of determination R-squared
- Coefficient of determination R-squared Adjusted
- Statistical Significance Test
- Residual Analysis and Distribution
- Correlation Coefficients
- Collinearity Test
- Updated OLS Model for Collinearity
- Regression Specification Error Test
- Heteroskedasticity Test
- Updated Homoskedastic Model
- Autocorrelation Test Durbin-Watson
- Corrected model OLS for Autocorrelation
- Cointegration Test
- The Chow Break Test
- Autoregressive Integrated Moving Average (ARIMA)
The residual (e) is the difference between the observation and the expected value of the dependent variable according to the regression model. Collinearity or multicollinearity is the phenomenon of the intense correlation between the independent variables in a regression model that leads to the reduction of the prediction reliability of our model (Halikias, 2001). The R-squared metric of the OLS model run by GRETL is 0.745, which shows that almost 75% of the variance of the NIM of Greek banks is explained by the three independent variables selected, indicating a sufficient correlation between the dependent variable and the independent variables.
All coefficients of the dependent variables are statistically significant, and the F-statistic of our updated regression model specifies that the corrected model is statistically significant. The R-squared metric is 0.898, indicating that almost 90% of the variance of the Net Interest Margin of the Greek Banking Industry is explained by the three selected independent variables, indicating a sufficient correlation between the dependent variable and the independent variables. All coefficients of the dependent variables are statistically significant, and the F-statistic of our updated regression model indicates that the corrected model is statistically significant.
The R-squared metric is 0.604, which indicates that almost 60% of the development of Greek banks' NIM is explained by the three selected independent variables, which show sufficient correlation between the dependent variable and the independent variables. In addition, an ARIMA model is constructed using three independent variables (the stock of deposits in the Greek market, the unemployment rate, and the 10-year Greek government bond rate), two autoregressive terms of the dependent variable, and two lagged errors.
Rejected Independent Variables
The ARIMA model forecast is more accurate and closer to the actual values for the four quarters of 2016 when independent variables are added in addition to the dependent variable lags and error terms, showing the dependence of Net Interest Margin on three the independent ones. variables selected for our research (Greek Market Deposit Balance, Unemployment Rate & 10-year GGB Rate).
Conclusions and Proposals
Conclusions and Findings of Research
The balance of deposits in the Greek market: The impact of the growth of the balance of deposits in the Greek market is negative on profitability in terms of NIM, which is explained by the increased expenses for interest paid by banks to customers (based on volume) during periods of growth in deposits. According to the developed model, an increase in the balance of deposits on the Greek market by EUR 1 billion results in a decrease in NIM by 0.8 basis points. According to the regression model, a 1 basis point increase in the 10-year Greek government bond rate results in a higher NIM of almost 0.02 basis points, demonstrating a positive association with bank profitability.
Loan balances in the Greek market: Despite the significant positive impact of the loan balances of the Greek market on the NIM, this parameter was removed by our model due to its strong correlation with another independent variable, the deposit balance of the Greek market. The results of the Chow Break Test confirmed that in both periods the independent variables Unemployment rate, Greek market deposits and 10-year Greek government bond yield have the same dependence on NIM, despite the intense volatility of economic conditions. In addition, an ARIMA (Autoregressive Integrated Moving Average) model was applied with two autoregressive terms of Net Interest Margin and the three independent variables mentioned above. This model confirmed their connection with the profitability of Greek banks, yielding similar results with the Ordinary Least Squares method.
Proposals and challenges
Determinants of Bank Profitability before, during and after the financial crisis, International Journal of Managerial Finance. Determinants of Bank Profitability: Evidence from the Greek Banking Sector, Economic Annals, Volume LIV No. Determinants of Bank Profitability Before and During the Crisis: Evidence from Switzerland, http://ssrn.com/abstract=1370245.
The Determinants of Commercial Bank Profitability in Sub-Saharan Africa, International Monetary Fund Working Paper. The Determinants of Banks' Profits in Greece during the Period of Financial Integration in the EU, Managerial Finance Vol.34 No. Macroeconomic and Industry-specific Determinants of Greek Bank Profitability, International Journal of Business and Economic Sciences.