Sliced and diced: European banks’ business models and profitability

“Looking at the priorities for the year ahead of us, I think it is safe to say that the economic environment in which banks operate will remain challenging. In particular, the economic climate in the euro area poses challenges to banks’ profitability and many of them will have to review their business models in order to tackle this challenge. Business models in terms of their viability and profit drivers will remain a priority for us in 2016.” (Nouy, 2015). Economic recovery requires a strong and resilient banking system (BIS, 2013). European banking supervisors are addressing this issue by promoting frameworks to review and evaluate European banks, which include the assessment of the viability and sustainability of their business models (EBA, 2014; Nouy, 2015). Indeed, academic research has shown that different banks business models may expose banks to different risks (Cavelaars and Passenier, 2012; Kohler, 2015) and higher profitability may favour a sounder capital structure through retained earnings (Berger, 1995; Thakor, 2014). In assessing bank business models and profitability, two main questions must be answered: (i) what drives profitability (in a low or negative interest rate environment such as the current one)? (ii) are those profits sustainable? This paper aims to contribute to the recent debate on bank business models by slicing and dicing the profitability drivers of a sample of over 150 European banks, for a ten-year period, starting from the 30 banks which make up the Eurostoxx index. This enables us to use the market valuation of bank performance.