4. Results and analysis
4.1. Banks’ structural performance
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4.1. Banks’ structural performance
To get a better understanding of this analysis and comparison, it is necessary to alert about several key elements. Firstly, sustainable banks and systemic banks do not have the same size in terms of total assets. The sustainable banks’ total assets range is between 100 and 8,830 million dollars while systemicones are between 700 and 2,500 billion dollars. Hence, any variation in the growth percentages has a larger impact on systemic banks than on sustainable banks. Secondly, growth ratios are percentages. Thus, if a percentage is negative but the previous one was even more negative, the graph’s curve can show a rise between the previous and the actual value whereas it is only a “decrease of the decrease”. This is why it is essential to identify when the ratios’ values are positive or negative. Thirdly, due to the sample size, the individual management efficiency of the banks has a direct impact on the results. Indeed, a very good or bad year for a bank caused by its strategic views may create some extreme values and skew a bit the results as it has been chosen to use averages in the calculations. The decision of choosing averages rather than medians can again be justified by the sample size.
• Return on average assets (ROAA)
Table 1: Evolution of ROAA
As can be seen in table 1, sustainable banks ended in 2018 with a lower ROAA than systemic banks which saw an increase from 2014 to 2018. Nevertheless, a similar average over 5 years with an advantage for the sustainable banks (0.27% for sustainable banks and 0.21% for systemic banks). The ROAA is not very high but it is common in the banking industry to have a ROAA under 1% (Investopedia, 2019).
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Graph 1: Evolution of ROAA
Graph 1 shows that the evolution for the two categories (sustainable and traditional) is quite similar apart for 2017 where the ROAA remained constant for sustainable banks whereas it increased for the systemic banks. This difference can be simply explained by looking at the ROAA’s formula. Indeed, even if net income for sustainable banks slightly increased, their total assets grew a lot between 2016 to 2017, making the ROAA remained constant. Growth in total assets can either be positive or negative. For example, it can be due to the rise of liabilities and more particularly debts which is negative. However, in this case, total assets for sustainable banks raised due to a rise of 21,76% of loans (appendix 6), which is a positive indicator. This demonstrates the sustainable banks’ performance recognition and investors’ willingness to borrow money from these banks. A total assets’ growth of 9.49% (can also be observed for systemic banks also partially linked to their average loan growth (11.05%) (appendix 3).
The last point of this analysis is the comparison in the standard deviation of these values for five years. The standard deviation for sustainable banks is about 0.09% against 0.11% for systemic banks. The difference is not very big but is significant considering the incomparable
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size of the two types of banks, as mentioned in the warning done earlier. Also, these two values are quite high for a ROAA which do not go above 0.36% for the sustainable banks and 0.33%
for the systemic banks. The main source of volatility is due to the huge variations in net income, especially for systemic banks, which occurred during these five past years. Hence, even if systemic banks record higher net income growth (598.58% against 0.5%), it is mostly associated to their financial markets activities rather than lending ones which lead to a higher standard deviation, and thus level of risk.
Differences in ROAA from a year to another are usually very small. But, little variations in ROAA can result in large ones in ROAE.
• Return on average equity (ROAE)
Table 2: Evolution of ROAE
The situation for ROAE between 2014 and 2018 is similar to the ROAA’s one. Sustainable banks’ ROAE decreased from 2014 to 2018 whereas it increased for systemic banks in the same period. However, ROAE’s level remains higher in the first ones (table 2). The ROAE can be interpreted as follow. In average during the five years, sustainable banks’ shareholders could have got 4.40% of their shares’ value as extra income per year, compared to 3.55% for the systemic banks’ shareholders. Nevertheless, as some of the sustainable banks are private banks, this interpretation is only an image.
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Graph 2: Evolution of ROAE
Graph 2 shows analogous trends than graph 1 for systemic banks. This proves that leverage is not the reason for the ROAA’s variations instead of loans and equity growth. Banks are the most leveraged entities and a debt’s increment is usually not well perceived by investors. But if we compare the ROAA and ROAE curves for the sustainable banks we can notice that ROAE’s curve is smoother than the ROAA’s curve. This can be explained by the fact that ROAE is only sensitive to the changes in equity and not in debt. ROAE for both categories is not very good as it should usually be above 5%.
About the standard deviation during these five years, it is of 1.11% for sustainable banks against 1.95% for systemic banks. The same results as for ROAA can be observed, thus the same conclusions can be drawn. Systemic banks have higher standard deviation which can be considered as higher volatility caused by the net income instability and maybe also important variations in equity growth for both kind of banks (appendix 4). However, again, standard deviation considering the banks’ size should have been higher for smaller banks like sustainable banks. But it is not the case due to the financial market activities of systemic banks.
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Now that the effect of net income volatility has been identified, the equity to total assets ratio will show if variations in equity are also responsible for the ROAA and ROAE’s standard deviation.
• Equity to total assets
Table 3: Evolution of equity to total assets
Equity is a key element to understand a bank’s financial health and solidity. In the case of sustainable banks, equity represents 18.86% of its total assets on average for the five years (table 3) and only 5.52% for the systemic banks. These percentages are pretty low when you think about the liabilities structure: debt, equity and deposits (which are a sort of debts). As already mentioned, banks’ level of leverage is huge because they have facilities to borrow.
Indeed, they can make arrangements with other banks to lend and borrow easily. Furthermore, banks are still considered as “too big to fail”, even after the subprime crisis which explains why regulators authorize them to be extremely leveraged, any company in any other industry could not have. But, as banks can also fail, a higher equity to total assets ratio is a positive indicator about a bank’s health and sustainability. Hence, sustainable banks based on this measure seem to be more stable.
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Graph 3: Evolution of equity to total assets
As can be noticed with graph 3, equity to total assets ratio remains constant for both types of banks even if the equity growth varies a lot. However, even if the two curves seem similar in their evolution, they do not represent the same situation. Indeed, equity growth is always positive for sustainable banks with impressive growth in 2017 (21.70%) (appendix 4), contrary to systemic banks that see their equity decreasing a bit more every year except in 2017. When looking at the growth between 2014 and 2018, sustainable banks are largely above systemic banks (34,76% against 0.03%). A rise in equity can generally be caused by the issuance of new shares or preferred shares, an increase of reserves and/or retained earnings. In the case of sustainable banks, the issuance of new shares is the main reason for the equity’s growth. Usually, issuing new shares is not always appreciated by actual shareholders who may see a decrease in their share price. However, in the case of banks which have high debt-to-equity ratios, whereas the optimal debt-to-equity position is 50%, every industry types confused, raising equity to finance new projects is a positive signal sent to shareholders and investors. It shows the willingness to reinforce its structure.
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About equity to total assets’ volatility, as said, it remains constant meaning the standard deviations are quite low. For sustainable banks, the standard deviation is 0.16% and almost the double for systemic banks, 0.30% (appendix 12). Again, systemic banks’ results are more volatile than their sustainable counterparts in the period 2014 to 2018.
Equity to total assets is not the own sustainability measure for a bank and needs to be completed by other similar indicators such as loans to total assets.
• Loans to total assets
Table 4: Evolution of loans to total assets
As can be seen in table 4, loans to total assets marginally raised between 2014 and 2018. What is more noticeable is the huge gap between systemic banks and sustainable banks. Indeed, the sustainable banks’ portion of loans to total assets is close to twice the systemic banks one on average during the five years period studied (71.84% against 39.27 %). This means that lending activities represent 71.84% of sustainable banks’ assets. This rate represents one of the bank’s key elements to analyze its balance sheet. Systemic banks are much more involved in trading securities on financial markets than sustainable banks. This is why it was totally expected that systemic banks’ loans to assets ratio would be lower than its sustainable counterparts. This measure is part of the risk analysis. Indeed, the higher the ratio, the more the bank contributes to the real economy (in opposition to financial markets). Also, in lending activities, the
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Thus, a bank is commonly considered safer when its loans to assets ratio is high. To complete this metric, the deposits to assets ratio is calculated. However, these data were available for only a few banks.
Graph 4: Evolution of loans to total assets
With graph 4, it can be noticed that for both types of banks, the loans to assets ratio does not vary much from a year to another. Indeed, while comparing total assets growth and loans growth graphs, the curves evolve jointly. Hence as the metric is a ratio, the variations of the two metric’s components canceled themselves. This is due to the finding mentioned earlier. Total assets growth may be directly related to loans growth.
About the measure of volatility, loans to total assets ratio is the first metric for which the sustainable banks’ standard deviation is higher than the systemic banks (2.09% against 1.51%) (appendix 12). Nevertheless, it is important to remind that, because of the huge difference in the two categories of banks’ in terms of total assets value, a standard deviation of 1.51% for systemic banks has a larger impact in amounts than a 2.09% for sustainable banks. Indeed, the largest sustainable bank’s assets are at least one hundred times lower in value than the smallest systemic bank.
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Other metrics can be used to assess a bank’s performance, but the ones presented above are some of the most relevant. Also, calculating these ratios, in particular, will permit to compare the results found in this thesis to previous studies (Fondazione Finanza Etica, 2017) (GABV, 2017) and highlight the impact of the years 2017 and 2018 as the previous reports stopped in 2016. Using the five-year average to do these comparisons was a way to compare more easily the results of previous studies and these ones. As can be noticed, when an average is in favor of one of the two types of banks, all the years individually are in majority (three years out of five at least) in favor of the same type of banks. This means that there is no extreme value that particularly affects the five-year average. Hence, the five-year average can have some significant value and be exploited.
About the results, considering our sample and the chosen period (2014 to 2018), seven out of eight average in five years ratios are in favor of the sustainable banks. Some of the ratios such as three of the growth rates experience important differences between the two categories studied, on a five-year average. The total assets growth and loans growth rates are even negative for systemic banks which tend to show the systemic banks’ deterioration of their situation. The other ratios of this study which are favorable to sustainable banks. The own ratio in favor of systemic banks is the net profit growth. As mentioned previously, systemic banks take more risks in their investments than sustainable banks. Yet, higher risks usually lead to higher returns which are the reason for a higher net profit growth ratio but also a higher standard deviation, as higher risks also increase the probability of losses. It would have been interesting to get the net profit only from the lending activities to make this comparison fairer. One year notably, 2017,
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their net profits for the third year in a row while systemic banks saw a decrease in their growth rate by 260% compared to the previous year. These observations are not a coincidence and can be explained by a tense political context in Europe and a fragile economy. 2017 followed 2016 which was the year of Trump election and Brexit vote. Even if these events happened in 2016, the European Union’s economy was impacted in 2017 too. The political context in Europe was also tense with the approach of the presidential elections of two of the main figures of the European Union, Germany and France. The French case was especially worrisome with the rise of the nationalist party which was favorite during a time. On the economic side, in 2017, Europe passes close to another economic crisis with Italian banks considered as nonperforming, which directly affected the other European banks. UniCredit SpA faced a falling off of its profits by almost 800% in 2016. Deutsche Bank in Germany was also not in good shape. This year proved the fragility of the systemic banks that we have already observed with somehow lower performance and sustainability rates than sustainable banks. Also, the standard deviations for the period studied tend to demonstrate the volatility and unpredictability of some ratios. To conclude, even if the systemic banks record higher net profits and net profit growth, it is at the cost of higher risks which weaken the already fragile equilibrium they managed to establish.
Hence, even if smaller, sustainable banks seem to be in a healthier position than their systemic competitors.
Graph 5: Ratios five-year average