Vahagn Melik-Parsadanyan

Type of the article: Research Article

Abstract
Bank profitability, as measured by return on equity (ROE), may arise from different combinations of operating efficiency, risk costs, and capital intensity, making headline profitability comparisons potentially misleading. Understanding the sources of cross-bank profitability differences is therefore important for performance evaluation and supervisory interpretation.
The purpose of this study is to assess how accounting-based performance components explain cross-bank variation in ROE among Armenian banks using year-end 2023 IFRS data and a Shapley variance decomposition applied to these components. The empirical analysis uses published IFRS financial statements for ten banks representing approximately 75% of total sector assets. ROE is mapped into cost efficiency, leverage, income margins, and provisioning using an accounting identity, and a Shapley variance decomposition is applied to attribute cross-bank variation in pre-tax ROE, excluding tax effects from variance attribution.
The results indicate that cost efficiency accounts for 49.6% of cross-bank pre-tax ROE variation in 2023, followed by leverage at 22.6% and provisioning at 14.8%, while income-related components jointly account for the remaining 13%. Importantly, these variance shares reflect both the role of each component in the accounting transmission from income to profitability and the magnitude of its cross-sectional variation across banks. These results describe the structure of cross-bank profitability differences in the Armenian banking sector in 2023 and support transparent peer comparison and consistent supervisory interpretation of bank profitability. All variance shares are reported for pre-tax ROE to improve comparability by abstracting from institution-specific tax effects.