LIQUIDITY-PROFITABILITY DYNAMICS: IS THE BANKING INDUSTRY RESILIENT IN TIMES OF CRISIS?
Abstract
The banking industry contributes to the economic expansion since it is considered the keeper and supplier of liquid capital, essential for all commercial and industrial activity. The primary goal of commercial banks is to generate profits while serving clients and maintaining liquidity positions. Hence, this study aims to examine and evaluate the relationship between liquidity (measured through the Liquid assets and Liquid assets to short-term liabilities ratio) and profitability (measured through ROA and ROE) position of the commercial banking system in North Macedonia and Serbia in order to determine whether changes in liquidity levels influence profitability. Since the ten-year examination period (2012-2021) includes the emergence of the Coronavirus global health pandemic, additional tests were conducted to find out whether the sanitary crisis caused changes in the liquidity-profitability dynamics.
By employing descriptive, correlation and regression analysis, and observing two sub-periods (2010-2019 vs 2020-2021), we infer changes in the liquidity-profitability positions in times of crisis in both countries. These findings reinvigorate the knowledge on liquidity and profitability performance in times of instability as this is a pioneer study in evaluating the pandemic impact on liquidity and performance using empirics in these two markets. Furthermore, by scrutinizing the interrelationship between liquidity and profitability, the findings reveal that associations are time-dependent, with policy implications for banks and financial industry regulators.
Keywords
Full Text:
PDFReferences
Abbas, F., Iqbal, S., & Aziz, B. (2019). The impact of bank capital, bank liquidity and credit risk on profitability in post-crisis period: A comparative study of US and Asia. Cognet Economics and Finance, 7(1), 1605683. https://doi.org/10.1080/23322039.2019.1605683
Adelopo, I., Vichou, N., & Cheung, Y., K. (2022). Capital, liquidity and profitability in European banks. Journal of Corporate Accounting and Finance, 33, 23-35. https://doi.org/10.1002/jcaf.22522
Ahmad, R. (2016). A Study of Relationship between Liquidity and Profitability of Standard Chartered Bank Pakistan: Analysis of Financial Statement Approach. Global Journal of Management and Business Research: C Finance, 16(1), 76-82. Available at: https://globaljournals.org/GJMBR_Volume16/7-A-Study-of-Relationship.pdf
Al-Alawnh, N. A. K., Mohsin, H. J., Hani, L. Y. B., Al-Naser, B. M., Qurran, A. A., & Alzu’bi, S. K. (2022). The impact of Covid-19 on liquidity and profitability in commercial banks. International Journal of Advanced Research, 10(5), 490-496. http://dx.doi.org/10.21474/IJAR01/14731
Alali, S. M. (2019). The impact of bank liquidity on the profitability of commercial banks: An applied study on Jordanian commercial banks for the period (2013/2017). International Journal of Economics and Financial Issues, 9(5), 24-28. https://doi.org/10.32479/ijefi.8304
Alshatti, A. S. (2015). The effect of credit risk management on financial performance of Jordanian commercial banks. Investment Management and Financial Innovations, 12(1), 338-345. Available at: https://www.businessperspectives.org/images/pdf/applications/publishing/templates/article/assets/6515/Iimfi_en_2015_01cont_2_Alshatti.pdf
Arif, A., & Nauman Anees, A. (2012). Liquidity risk and performance of banking system. Journal of Financial Regulation and Compliance, 20(2), 182-195. https://doi.org/10.1108/13581981211218342
Ashraf, M., Nabeel, M., & Hussain, M. S. (2017). Liquidity management and its impact on banks profitability: A Perspective of Pakistan. International journal of business and management invention, 6(5), 19-27. Available at: https://www.ijbmi.org/papers/Vol(6)5/version-1/D0605011927.pdf
Avramova, S., & Le Lesle, V. (2012). Revisiting Risk-Weighted Assets: Why Do RWAs Differ Across Countries and What Can Be Done About It?, IMF Working Paper No. 12/90. Available at: https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Revisiting-Risk-Weighted-Assets-25807
Awulo, T., Alemu, A., & Chala, W. B. (2019). Impact of liquidity on profitability of bank: A case of Commercial Banks of Ethiopia. Research Journal of Finance and Accounting, 10(1), 26-34. https://doi.org/10.7176/RJFA/10-1-04
Ayaydin, H., & Karakaya, A. (2014). The Effect of Bank Capital on Profitability and Risk in Turkish Banking. International Journal of Business and Social Science, 5(1), 252-271. Available at: https://www.researchgate.net/publication/312902787
Banerjee, R. N., & Mio, H. (2018). The impact of liquidity regulation on banks. Journal of Financial intermediation, 35(B), 30-44. https://doi.org/10.1016/j.jfi.2017.05.008
BCBS (2008). Principles for Sound Liquidity Risk Management and Supervision. Bank for International Settlements, Basel, Switzerland. Available at: https://www.bis.org/publ/bcbs144.pdf
BCBS (2009). International framework for liquidity risk measurement, standards and monitoring. Bank for International Settlements, Basel, Switzerland. Available at: https://www.bis.org/publ/bcbs165.pdf
Bordeleau, E., & Graham, C. (2010). The Impact of Liquidity on Bank Profitability. Bank of Canada Working Paper No. 2010-38, Available at: https://www.bankofcanada.ca/wp-content/uploads/2010/12/wp10-38.pdf
Chen, Y. K., Shen, C. H., Kao, L., & Yeh, C. Y. (2018). Bank liquidity risk and performance. Review of Pacific Basin Financial Markets and Policies, 21(1), 1-40. https://doi.org/10.1142/S0219091518500078
Dang, D. V. (2021). The Basel III Net stable funding ratio and a risk-return trade-off: Bank-level evidence from Vietnam. Asian Academy of Management Journal of Accounting and Finance (AAMJAF), 17(2), 247-274. https://doi.org/10.21315/aamjaf2021.17.2.10
Danisman, G. O., Demir, E, & Zaremba, A. (2021). Financial resilience to the covid-19 pandemic: the role of banking market structure. Applied Economics, 53(39), 4481-4504. https://doi.org/10.1080/00036846.2021.1904118
Demirgüç-Kunt, A., Pedraza, A., & Ruiz-Ortega, C. (2021). Banking sector performance during the COVID-19 crisis. Journal of Banking & Finance, 133, 106305. https://doi.org/10.1016/j.jbankfin.2021.106305
Demirgüç-Kunt, A., & Levine, R. (2008). Finance, Financial Sector Policies, and Long-Run Growth. Policy Research Working Paper No.4469, Available at: https://openknowledge.worldbank.org/bitstream/handle/10986/6443/wps4469.pdf?sequence=1&isAllowed=y
Dietrich, A., Hess, K., & Wanzenried, G. (2014). The good and bad news about the new liquidity rules of Basel III in Western European countries. Journal of Banking & Finance, 44, 13-25. https://doi.org/10.1016/j.jbankfin.2014.03.041
Donev, B. (2021). Macroeconomic and macro-financial factors of the stability of the banking sector - The case of the Republic of North Macedonia. 2nd international conference "Economic and Business Trends Shaping the Future", Skopje, N. Macedonia, 11-12 November 2021 (online), 216-228. http://doi.org/10.47063/EBTSF.2021.0022
Ehiedu, C. V. (2014). The impact of liquidity on profitability of some selected companies: The financial statement analysis (FSA) approach. Research Journal of Finance and Accounting, 5(5), 81-90. Available at: https://iiste.org/Journals/index.php/RJFA/article/view/11414/11746
Eljelly, A. (2004). Liquidity - profitability tradeoff: An empirical investigation in an emerging market. International Journal of Commerce and Management, 14(2), 48-61. http://dx.doi.org/10.1108/10569210480000179
Filipović, M., & Hadžić, M. (2012). Banking Sector in Serbia: Impacts of late transition and Global Crisis, in Bojnec, Š., Brada, C. J., & Kuboniwa, M. ed(s), Overcoming the Crisis: Economic and Financial Developments in Asia and Europe, (Online), Koper: University of Primorska Press, 65-75. Available at: https://hippocampus.si/ISBN/978-961-6832-32-8/papers/hadzic.pdf
Golubeva, O., Duljic, M., & Keminen, R. (2019). The impact of liquidity risk on bank profitability: some empirical evidence from the European banks following the introduction of Basel III regulations. Accounting and Management Information Systems, 18(4), 455-485. http://dx.doi.org/10.24818/jamis.2019.04001
Gomes, T., & Wilkins, C. (2013). The Basel III Liquidity Standards: an Update. Bank of Canada -Financial system review, 37-43. Available at: https://www.bankofcanada.ca/wp-content/uploads/2013/06/fsr-0613-gomes.pdf
Government of the Republic of Serbia. (2015). NPL Resolution Strategy. Available at: https://mfin.gov.rs/upload/media/qGkXCU_6016d5622cde9.pdf
Growe, G., DeBruine, M., Lee, Y. J., & Maldonado, T. F. J. (2014). The Profitability and Performance Measurement of U.S. Regional Banks Using the Predictive Focus of the “Fundamental Analysis Research”. Advances in Management Accounting, 24, 189-237. http://dx.doi.org/10.1108/S1474-787120140000024006
Hartlage, A. (2012). The Basel III Liquidity Coverage Ratio and Financial Stability. Michigan Law Review, 111(3), 454-483. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2270891
Kalanidis, D. (2016). The Impact of Liquidity on Bank Profitability: Post Crisis Evidence from European Banks. International Hellenic University. Available at: https://core.ac.uk/download/pdf/236165448.pdf
Kimondo, C. N. (2014). The relationship between liquidity and profitability of nonfinancial companies listed in Nairobi securities exchange. MA Dissertation. University of Nairobi. Available at: http://erepository.uonbi.ac.ke/bitstream/handle/11295/74951/Kimondo%20_The%20relationship%20between%20liquidity%20and%20profitability%20of%20non%20financial%20companies.pdf?sequence=2
King, M. R. (2013). The Basel III net stable funding ratio and bank net interest margins. Journal of Banking & Finance, 37(11), 4144-4156. https://doi.org/10.1016/j.jbankfin.2013.07.017
Kumbirai, M., & Webb, R. (2010). A financial Ratio Analysis of Commercial Bank Performance in South Africa. African Review of Economics and Finance, 2(1), 30-53. Available at: https://www.ajol.info/index.php/aref/article/view/86945
Mashamba, T. (2018). The effects of Basel III liquidity regulations on banks’ profitability. Journal of Governance and Regulation, 7(2), 34-48. https://doi.org/10.22495/jgr_v7_i2_p4
Molyneux, P., & Thornton, J. (1992). Determinants of European bank profitability: A note. Journal of Banking and Finance, 16(6), 1173-1178. https://doi.org/10.1016/0378-4266(92)90065-8
Munteanu, I. (2013). Optimizing Bank Liquidity in Central and Eastern Europe. Review of Economic and Business Studies, 6(1), 83-90. Available at: https://www.researchgate.net/profile/Dr-Vikas-Gautam/publication/298790048
NBRM. (2021). Report on risks in the banking system of the Republic of North Macedonia in 2020. Available at: https://www.nbrm.mk/content/Regulativa/Godisen_BS_31_12_2020_ENG.pdf
NBRM. (2022). Report on risks in the banking system of the Republic of North Macedonia in 2021. Available at: https://www.nbrm.mk/content/Regulativa/Godisen_BS_31_12_2021_ENG.pdf
NBS. (2022). Annual Financial Stability Report 2021. Available at: https://www.nbs.rs/export/sites/NBS_site/documents-eng/publikacije/fs/fsr_2021.pdf
Nguyen, M., Perera, S., & Skully, M. (2017). Bank market power, asset liquidity and funding liquidity: International evidence. International Review of Financial Analysis, 54, 23-38. https://doi.org/10.1016/j.irfa.2017.09.002
Okaro, C. S., & Nwakoby, C. N. (2016). Effect of liquidity management on performance of deposit money banks in Nigeria. Journal of policy and development studies, 10(3), 156-169. http://dx.doi.org/10.12816/0032106
Olagunju, A., David, A. O., & Samuel, O. O. (2011). Liquidity Management and Commercial Banks' Profitability in Nigeria. Research Journal of Finance and Accounting, 2(7-8), 24-38. Available at: https://www.iiste.org/Journals/index.php/RJFA/article/view/1283/1204
Öndeş, T., & Osman, B.A. (2020). Is Liquidity An Influencing Factor for Profitability of Banks? An Empirical Study. IBAD Journal of Social Sciences, 7, 394-402. https://doi.org/10.21733/ibad.686734
Raykov, E. (2017). The liquidity-profitability trade-off in Bulgaria in terms of the changed financial management functions during crisis. Management, 22(1), 135-156. https://doi.org/10.30924/mjcmi/2017.22.1.135
Roy, S., Misra, A. K., Padhan, P. C., & Rahman, M. R. (2019). Interrelationship among liquidity, regulatory capital and profitability - A study on Indian banks. Cogent Economics and Finance, 7(1), 1664845. https://doi.org/10.1080/23322039.2019.1664845
Said, M. R. (2018). Basel III New Liquidity Framework and Malaysian Commercial Banks Profitability. Jurnal Pengurusan, 52, 111-120. Available at: http://journalarticle.ukm.my/20172/1/17333-88577-1-PB.pdf
Saif-Alyousfi, A., Saha, A., & Md-Rus, R. (2017). Profitability of Saudi commercial banks: A comparative evaluation between domestic and foreign banks using Capital Adequacy, Asset Quality, Management Quality, Earning Ability and Liquidity Parameters. International Journal of Economics and Financial Issues, 7(2), 477-484. Available at: https://www.econjournals.com/index.php/ijefi/article/view/4165/pdf
Sayegh, A. & Afentaous, S. (2021). COVID-19 Impact on Bank Profitability in the Nordic Countries. Bachelor Thesis. Jonkoping University International Business School. Available at: https://www.diva-portal.org/smash/get/diva2:1677308/FULLTEXT01.pdf
Shahchera, M. (2012). The impact of liquidity on Iranian bank profitability. Journal of Money and Economy, 7(1), 139-160. Available at: https://jme.mbri.ac.ir/files/site1/user_files_10c681/admin_t-A-10-25-40-e97f635.pdf
Shi, Z. (2018). Impact of Basel III on Chinese firms access to credit. MA Dissertation. Georgetown University. Available at: https://repository.library.georgetown.edu/bitstream/handle/10822/1050888/Shi_georgetown_0076M_13986.pdf?sequence=1&isAllowed=y
Toutou, J., & Xiaodong, X. (2011). The relationship between liquidity risk and performance: An empirical study of banks in Europe 2005-2010. MA Dissertation. Umeå School of Business. Available at: http://www.diva-portal.org/smash/get/diva2:523854/FULLTEXT01.pdf
Trujillo‐Ponce, A. (2013). What determines the profitability of banks? Evidence from Spain. Accounting & Finance, 53(2), 561-586. https://doi.org/10.1111/j.1467-629X.2011.00466.x
Vesic, T., & Petronijevic, J. (2018). Trends in profitability of banks in Republic of Serbia through rational analysis, in Cogoljević, D., Piljan, I., & Salamzadeh, A. (ed.) Finance and insurance sector industry, Silver and Smith Publishers, London, UK, 138-155. Available at: https://www.researchgate.net/publication/328739071_Trends_in_profitability_of_banks_in_Republic_of_Serbia_through_rational_analysis
Vodova, K. P. (2013). Determinants which Affect Liquid Asset Ratio of Czech and Slovak Commercial Banks. Financial Assets and Investing, 4(1), 25-41. https://doi.org/10.5817/FAI2013-1-2
Vodova, K. P. (2016). Bank liquidity and profitability in the Polish banking sector. Scientific Journal of Bielsko-Biala School of Finance and Law (ASEJ), 20(1), 19-33. https://doi.org/10.19192/wsfip.sj1.2016.2
Wilner, S. B. (2000). The Exploitation of Relationships in Financial Distress: The Case of Trade Credit. The Journal of Finance, 55(1), 153-178. https://doi.org/10.1111/0022-1082.00203
Yaacob, S. F., Aisyah, A. R., & Abdul Karim, Z. (2016). The determinants of liquidity risk: A panel study of Islamic banks in Malaysia. Journal of Contemporary Issues and Thought, 6, 73-82. Available at: https://ejournal.upsi.edu.my/index.php/JCIT/article/view/1073/765
DOI: https://doi.org/10.22190/FUEO231129001S
Refbacks
- There are currently no refbacks.
© University of Niš, Serbia
Creative Commons License CC BY-NC-ND
ISSN 0354-4699 (Print)
ISSN 2406-050X (Online)