Veronika Belousova (Higher School of Economics): The determinants of banking profitability in Russia: Macroeconomic and institutional perspectives
Today, macroeconomic factors are playing a key role in determining banking profitability and efficiency. These indicators used as both control variables (Dietrich & Wanzenried, 2014) and key explanatory indicators (Lozano-Vivas & Pastor, 2010) when the profitability ratios of banks are assessed and forecasted. The recent study (Belousova & Kozyr, 2016) reviewed how macroeconomic indicators were important for banking profitability in the USA and the European Union and showed how macroeconomic factors contributed to banking profitability in Russia, particularly.
The type of ownership is another important determinant of banking efficiency and profitability, especially in Russia. The structure of the Russian banking market, including the share of state- and foreign- owned banks, have significantly changed during the last decade. There still exists a room for comparing performance of banks with different types of ownership due to controversial empirical results. For example, Fries and Taci (2005) found that state-owned banks were the least efficient. Karas et al. (2013) demonstrated that state-owned banks were as efficient as private while foreign banks were the most efficient. Finally, Mamonov and Vernikov (2015) concluded that state-owned banks were more efficient than others and foreign banks were the least ones.
To fill this gap in the literature, we look at banking profitability from both macroeconomic and institutional sides. In addition, we analyze branch network and location of Russian banks. Furthermore, we compare how sensitive different groups of Russian banks are to changes in these factors.
We find that foreign-owned banks are less profitable than banks with other types of ownership. These banks tried to follow the “cherry-picking” strategy especially in the pre-crisis period when profitability in the Russian market was significantly higher than profitability in developed countries, so a lot of foreign banks joined the Russia market but the crisis disrupted their plans. Moreover, some foreign-owned banks, which left the Russian market, declared that they could not compete with state-owned banks after the crisis. These results are in line with the recent study on cost efficiency and ownership types of Russian banks (Mamonov & Vernikov; 2015).
In addition, we show that state-owned banks become more profitable than others when the macroeconomic factors took into account. The government supports, implicit guaranties, deposit insurance and other advantages (as unsecured loans from the Central bank) are possible reasons for this. In particular, as deposit insurance increased moral hazard risk for private banks, public ones became more profitable and efficient (Karas et al., 2013).
Moreover, we modify a standard regional classification of Russia banks and analyze not just location of their main office, but also include the branch network diversity. We categorize banks in three groups (multiregional banks, center located banks and regional banks) and find that center located banks are the less profitable while multiregional banks are the most ones. This implies that the banks with a weak branch network from Moscow and Saint Petersburg face with serve competition on local markets and have to spend more funds on advertising campaigns, developing new products and attracting clients. At the same time, center located banks are less popular than multiregional banks and even than regional ones, so they have to attract low-quality borrowers (high-quality borrowers operate with multiregional banks) and more expensive funds because of this high competition rate.
Thus, these results might help the Russian banks be strategically oriented when forecasting profitability ratios. For the policy maker, this study might shed some lights on developing stress-testing approaches which incorporate macroeconomic and institutional effects on banking profitability in Russia in both the stable and the crisis periods.
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