Contents of Volume 2, Number 2

December 2006

Determinants of Bank Profitability in the South Eastern European Region

P.P. Athanasoglou, M.D. Delis, Ch.K. Staikouras

Abstract: The aim of this study is to examine the profitability behaviour of bank-specific, industry-related and macroeconomic determinants, using an unbalanced panel dataset of South Eastern European (SEE) credit institutions over the period 1998-2002. The estimation results indicate that, with the exception of the balance sheet structure, all bank-specific determinants significantly affect bank profitability in the anticipated way. A key result is that the effect of concentration is positive, which provides evidence in support of the structure-conduct-performance hypothesis, even though some ambiguity arises given its interrelationship with the efficient-structure hypothesis. In contrast, a positive relationship between banking reform and profitability was not identified, whilst the picture regarding the macroeconomic determinants is mixed. The paper concludes with some remarks on the practicality and implementability of the findings.

Multi Criteria Credit Rating (MCCR): A Credit Rating Assignment Process for Italian

Enterprises According to Basel II

F. Bernè, M. Ciprian, M. Fanni, D. Marassi, V. Pediroda

Abstract: This paper discusses a specific model for assessing credit risk of industrial companies by using financial statement data and industry-specific information. In particular the model permits to associate a fundamental credit rating to each enterprise, giving an indication of the creditworthiness of industrial companies. In the definition of a rating system two phases are included: a) the first stage is the so called “rating assignment”; b) the second consists of a “rating quantification” (measurement of a range of probability of default, associated to each credit rating class). MCCR provides the first phase, a process of rating assignment. In fact with Basel II: a) each credit institution has to choose for an internal rating system or for a standard approach supported by external credit assessment institutions (so-called ECAIs); b) each corporate exposure (which is defined as a debt obligation of a corporation, partnership, or proprietorship) receives an evaluation of its credit risk (so-called credit rating). An accurate methodology based on the combination of different numerical models has been developed, in order to improve the usability of the default risk predictor with an significant connection between financial theory and new statistical methods. The core of MCCR (Multi Criteria Credit Rating) is a MCDM algorithm. To understand the importance of financial ratios in terms of default predictive power, three different methods are used: t-Student parameter, Self Organizing Maps and Default Frequency. By combining these three different methodologies, which show different aspects of the predictive power of each factor, it has been possible to identify the level of importance to be attached to each credit ratio. In order to explain the prediction power of each ratio for all levels of credit risk, a fuzzy approach has been adopted.

Determining Standard Cost by Estimating the Stochastic Real Cost of Overheads

I. Ananiadis, A. Vlachvei

Abstract: The objective of this paper is to estimate the mean expected real cost of overheads, in order to determine the standard cost as realistically as possible, by trying to approximate the expected real cost to the standard cost.  It attempts to link the expected real cost to the standard cost with a certain degree of probability, so that the standard cost does not greatly exceed the expected real cost. The probability of this relation being valid is also determined. We believe that the effectiveness of any company can be improved through this method, given that the present competitive business environment demands cost rationalization. Therefore, by knowing the parameters that determine this probability, a company can either proceed with corrective actions, in order to improve its method of calculating standard cost, or analyze the deviation and find the rates required, so that the deviation does not exceed the specific amount that was a priori set.

The Relation Between Earnings and Cash Flows: Evidence from the London Stock Exchange

D.V. Kousenidis, A.C. Ladas, Ch.I. Negakis

Abstract: The purpose of this paper is to examine which of two widely used valuation attributes, earnings or operating cash flows, is a better predictor of future cash flows. The paper uses 3 types of primary tests, tests based on the model proposed by Dechow et al. (1998) and the tests of Diebold and Mariano (1995) for predictive accuracy and Haley et al., (1998) for model encompassing using a sample of UK firms drawn from the period 1992 2004. The contributions of this paper are the use of a different institutional environment and the different period under investigation. Moreover, it extends the results of Dechow et al. by examining its robustness using direct tests of predictive and incremental ability (Biddle et al., 1995). Before proceeding to the estimation of the main results some preliminary tests on the integration of the variables show that earnings and operating cash flows are stationary processes. However, sales as predicted by the model are found to be I(1). The main results show that the forecasting ability of current cash flows for future cash flow is better than the forecasting ability of earnings for future cash flows irrespective of the method used.