How can the gap between the return on equity and the cost of equity of European significant banks be explained by their differences in business models ?

Abstract

This master thesis discusses the different business models that can be found in the European banking system and examines the performance related to each business model. It focuses on a sample of 41 significant listed banks over the period 2009 to 2016. This period was not haphazardly chosen, we ambition to assess the European banking business models with regard to the banking evolutions that are the consequences of the last financial crisis. Above all, we highlight the fact that a bank’s business model refers to the set of long-term decisions, made by the top management, underlying the strategy of a bank. We assume that the bank’s financial statements are a good representation of those decisions. Following a literature review of the banking business model, we have conducted our researches in two steps. First, respecting our conception of a bank’s business model, we run a cluster analysis method on the basis of six financial instruments (representing the asset, liability, liquidity, income and capital structure). Therefore, the banks sample was divided into groups (i.e. business models) on the basis of the bank’s similarities with respect to six financial ratios. In the second step of the study, we intend to explain the relation between bank’s business model and bank’s performance by measuring the return on equity. The value is then compared, by measuring the difference, to an ex-post cost of equity estimation. The interpretation of that comparison is the excess (or lack) of return that has been generated by the bank above (or below) what could be expected from the market data. Finally, we attempt to draw some conclusions with regard to the performances of the same type of business models prior to the crisis and during the crisis.