Abstract
This paper examines the relation between bank profit performance and business models, using a machine learning–based approach. The analysis contributes to the literature on this relation by considering the bank portfolio’s ability to yield profits as the identification criterion of strategic profiles and by including all the components of the business model simultaneously in the identification process. Our research strategy is applied to the European Union banking system from 1997 to 2021. The paper’s primary finding indicates that specialization seems to be a strategy that results in banks adopting business profiles with better profit performance, particularly if the banks specialize in the standard retail-oriented model.

Introduction

      What characteristics of bank business models enhance profitability? The search for answers has been among supervisory authorities’ priorities since the end of the Great Recession and is likely to maintain its relevance in the aftermath of the COVID-19 pandemic. The reasons for such interest lie in the fact that the relation between business models and profitability can reveal the viability of banks’ strategic plans and, hence, the viability of banks themselves. In this regard, the Anon (2016) links poorly adapted business models to low bank profitability in advanced economies, identifying the former as an eroding agent of bank resilience over time. However, concern about the profitability of banks’ business profiles has been especially strong in the European Union (EU), as reflected by the fact that the European Central Bank launched a thematic review in 2016 to assess the relation between profitability and business models (European Central Bank, 2018).

      Banking research has examined this relation in two broad and different ways, using regression analysis to explore the effects of the characteristics of the bank business profile on profitability or grouping banks into business models by means of clustering techniques.

Conclusion

     The ability of business models to generate profits is an ongoing concern for banking authorities, especially in the EU. Closely related to this concern, we propose a new methodological strategy to identify business models and to assess their relation to profit performance. Previous works on business models have assumed the business models as a given or have identified them using similarities in balance sheet components. In either of these cases, profit performance is a byproduct of the business model. By contrast, in our identification strategy, profitability is at the core of the definitions of banks’ strategic choices. In particular, business models are obtained using the contributions of the bank portfolio components to profitability as the instruments of clustering analysis.

      The empirical exercise focuses on the EU banking system in 1997–۲۰۲۱٫ According to the classification of business profiles based on their overall contributions to profit performance, the best profile is a standard retail-oriented model, the second-best one is a standard wholesale model, and the worst profile, which has only equity as a characteristic component, does not match any standard model. Therefore, specialization seems to be a strategy that results in banks adopting business profiles that perform better in terms of their contributions to profitability, particularly if the banks specialize in the standard retail-oriented model.