How does the financial market evaluate business models? Evidence from European banks

Abstract

This paper investigates the way in which the financial market defines and evaluates different business models, using a sample of listed European banking groups from 2006 to 2015. The main findings suggest that the financial market seems to associate a better risk-return trade-off to non-banking fees than to banking ones and that the performance of different business models varies depending on context conditions. In particular, in the current economic context, characterised by the combination of slow economic growth with historically low levels of interest rates, the market-oriented business model tends to over-perform. These findings have strategic implications for bank managers, regulators, and supervisors, due to the impact of the crises on banking business, profitability and risk and the new challenges they entail.