The Effect of Covid-19 on Bank Profitability Determinants of Developed and Developing Economies

Abstract

We have learned from the Covid 19 crisis that pandemics are inevitable, and the financial systems need to be ready to withstand such global shocks. This study aims to uncover determinants that are vital in maintaining bank profitability during such a crisis by providing evidence on how Covid-19 impacted bank profitability. Additionally, we test whether the crisis moderated the relationship between typical determinants and bank profitability across developed and developing economies. The study uses generalized least squared dummy variable model estimation. Six-year quarterly bank specific data of the top 10 countries from South Asia and Europe based on the highest GDPs is used. The study finds evidence of a significant impact of the pandemic on bank return on assets and equity. Additionally, the evidence suggests that covid-19 impacted bank profitability differently across the developed and developing countries. Covid-19 caused profitability to fall in the homogeneous European banks, whereas profitability increased for South Asian banks during the Covid crisis. We find that the pandemic moderated the relationship between bank profitability and its determinants. Credit quality and bank efficiency became less important in determining bank profitability during the Covid period. In contrast, bank size and maintaining liquidity became more important determinants. Additionally, the magnitude of capital ratio as a determinant of return on assets decreased during Covid. The moderating role of covid-19 on bank profitability determinants would be of value to both academicians and practitioners.