UNIVERSITY OF RENNES 1

GRADUATE SCHOOL OF MANAGEMENT (IGR-IAE)

2021-2022

M2 ADVANCED STUDIES AND RESEARCH IN FINANCE

DU FINANCIAL AND QUANTITATIVE ANALYSIS

INTRODUCTION TO ECONOMETRICS/

BLOOMBERG REPORT

Group members

NGUYEN Xuan Vinh

TRAN Huynh Nguyen Pa Le

PHAM Ha An

Rennes, January 20, 2022

Contents
1. The necessary steps for analyzing our data ............................................................................ 2

1.1 Collect data from Bloomberg ............................................................................................ 2

1.2 Steps in Excel .................................................................................................................... 2

1.3 Steps in R .......................................................................................................................... 2

2. Report of our results in R ....................................................................................................... 5

2.1 Presentation of the sample ................................................................................................ 5

2.2 Descriptive statistics of the sample ................................................................................... 5

2.3 Correlations among the explanatory variables .................................................................. 4

2.4 The sign of these coefficients: α1;α2 ;α3 ............................................................................ 7

3. Result and Comment .............................................................................................................. 8

4. Comparison ........................................................................................................................... 11

4.1 Comparison of R and Excel ............................................................................................ 11

5. Conclusion ............................................................................................................................ 11

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1. The necessary steps for analyzing our data

1.1 Collect data from Bloomberg

To gather data to analyze for the year 2012 of all bank, from the world over

Type “EQS” in Bloomberg.

1. Choose the sector of “banks”. After these three steps, we find 216 banks.
2. Then, click on “customer”, add “ISIN” to show more details of those companies. After
that, download those tickers in excel.
3. Use the Bloomberg function in excel to find the data with different banks. We modify
the start date to be 2012/01/01, and the end date to be 2012/12/31. Then, with the
formula “=BDH (ticker, field, start date, end date, "cur=EUR", "per=cy", "dts=h")”, we
can get all the data for 2012.
4. Copy all the data in value. Replace N/A with blank, name this worksheet “Data-R”. This
step is preparing for the R file.

1.2 Steps in Excel

1. Create a new file named. Use “filter” to delete all the data with blank.
2. Use the formula to calculate all the ratio: EQTA, ROA, LnTA, and LOTA and their
Mean, Median, Min, Max, Standard deviation. There is one outlier in term of EQTA
ratio, which is less than 0, so remove this value so that the dataset is not biased.
3. Nextly, we do the regression analysis with the given data. Choose EQTA to be
Dependent variable Y, ROA, LnTA and LOTA to be Independent variable X. Confidence
level of 95% would be an optimal one. Finally, we can get the results of regression by
excel.

1.3 Steps in R

1. Read an Excel file in R

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2. Defining new variables, filter out banks based in Western E

3. How to remove missing values from the sample and create a panel with the same number
of observations for all variables

4. How to clean variables in R (removing outliers)

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5. Estimations within R

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2. Report of our results in R

2.1 Presentation of the sample

2.1.1 Filter out Countries in Western Europe

We create a new column by using R-software for 16 European countries banks over the
2012 period: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy,
Norway, Netherlands, Portugal, Sweden, Spain, Switzerland and the United Kingdom.

This step is carried out by defining the 2 abbreviated letters of each country.

2.2.2 Presentation of Distribution Table

Table 2.1 Distribution of European banks

Name of countries number of banks Banks included in our Total banks in final
final sample sample/total the
banking system (%)
Austria 7 6 86%
Belgium 6 4 67%
Britain (UK) 13 12 92%
Denmark 22 8 36%
Finland 3 3 100%
France 17 17 100%
Germany 8 7 88%
Greece 8 2 25%
Ireland 4 3 75%
Italy 31 20 65%
Netherlands 4 3 75%
Norway 28 21 75%
Portugal 2 2 100%
Spain 9 7 78%
Sweden 7 5 71%
Switzerland 47 42 89%
TOTAL 216 162

2.2 Descriptive statistics of the sample

EQTA: Ratio of total equity to total assets (%).

LnTA: Natural logarithm of total assets (Millions of Euros).

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 ROA: Return on assets defined as the ratio of net income to total assets (%).

LOTA: Ratio of net loans to total assets (%).

Table 2.2 Summary descriptive statistics of the sample of European banks

Table 2.1 is the descriptive statistics we got from excel. We can find on the results that the
standard deviation of LnTA is relatively small showing that the difference between large and
small bank in our sample is rather insignificant. The largest bank in Europe is HSBC in United
Kingdom with Total Asset is EUR 2,692 billion while the smallest bank located in Switzerland
named Ersparniskasse Affoltern Im with just EUR 242 million. In term of ROA, we noticed
that the average ROA of bank in Europe is 0.19% with standard deviation is 0.99%. The
smallest ROA ratio belongs to a bank in Spain (-6.58%) while the highest ROA ratio belongs
to Secure Trust Bank Plc in the UK. Furthermore, the average loan over total asset is 65.95%.
The max of Loan to Total Asset ratio, which indicates how likely a bank to default due to low
in liquidity, is 92.42%, we can also say that this bank is loaned up. About EQTA, there exists
an outlier, a value of minumum EQTA less than 0 that we need to remove. Upon removal, the
smallest EQTA ratio we could find is 0.93%.

We can find correlations among the explanatory variables by using R. The correlation
between LnTA and ROA is negative which mean the profitability of the bank decrease when
the total asset of the bank increase. However, the absolute amount is -0.18 means the
relationship between LnTA and ROA is not very strong. Similarly, the correlation between
LOTA and LnTA is -0.40 suggesting that bank total asset and bank’s loan rate have a strong
negative relationship. The correlation between ROA and LOTA is 0.049 which mean that there
is no significant relationship between bank profitability and bank’s loan rate.

Table 2.4 Correlations among the explanatory variables

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 Besides that, we can also use scatterplot matrix
calculated by R to illustrate their relationships.
As with the correlation coefficient matrix, the
scatter plot where each row and column
intersection is represented by the relationship
between the row and column variables of the row.
Since the x-axis and the y-axis above and below
the diagonal are swapped, the graph above the
diagonal and the graph below are transposed.

It is even more useful if we add more

information to the scatter plot. Above the
diagonal, the scatter plot is replaced by a matrix
of correlation coefficients. On the diagonal, the
histogram depicts the numerical distribution of
each feature. The elliptical object in each scatter
plot is called the correlation ellipse, which
provides a visual representation of how closely
the variables are related. The point at the center
of the ellipse represents the point determined by
the mean of the x-axis variable and the mean of
the y-axis variable. The correlation between the
two variables is represented by the shape of the ellipse, and the more the ellipse is stretched,
the stronger its correlation.

2.4 The sign of these coefficients: α1; α2; α3

Large bank may benefit from economy of scale in screening and monitoring borrowers
and from greater diversification. These advantages help large bank to reduce financial risk itself
without increasing the proportion of equity. In addition, because of their “too-big-to-fail”
position, large bank might hold less equity compared to small and medium bank. Therefore, the
hypothesis 1 stated

1: Bank equity ratio (EQTA) is negatively related to bank size (LnTA)
Besides, the higher financial risk of borrowers will be compensated by the higher
interest rate the bank charge. Thus, if the bank has many risky assets, they tend to have higher
profitability. Furthermore, based on the “risk absorption” hypothesis, the higher equity enhance
the bank to accept more risky loan to their borrowers. Therefore, the high proportion of equity

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may allow the bank to have higher profitability. Thus, the hypothesis 2 stated:

H2: Bank equity ratio (EQTA) is positively related to bank profitability (ROA)

Based on the “financial fragility/crowding out” hypothesis, the relationship between

loan ratio of the bank and the bank capital is negative. The “financial fragility” effect is the
outcome of following process. Basically, the bank is a financial intermediation which collects
fund from depositors and lends to the borrowers. By monitoring the borrowers, the bank will
have information advantages on the borrower’s profitability and the risk of default. This create
an agency problem, when bank require greater share of the loan income from the depositors.
Consequently, the depositors will be reluctant to put the money in the bank which push the bank
to win depositor’s confident by a “financial fragility” structure which allow the bank to collect
more deposits and grant more loans. In contract, higher equity tends to mitigate the “financial
fragility” effect by enhancing the bargaining power of the bank. Thus, higher equity ratio tends
to decrease the liquidity creation, thus diminish the loan ratio.

However, based on the “risk absorption” hypothesis, the higher equity enhances the
bank ability to absorb the risk from their borrowers. Thus, this will lead the bank to increase
the liquidity creation, thus rise the loan ratio. Therefore, the hypothesis 3 stated:

H3: Bank equity ratio (EQTA) is positively/negatively related to loan ratio (LOTA)

3. Result and Comment

Using this dataset, we estimate the following model indicating the determinants of bank
capital structure:

EQTAi= α0 + α1 LnTAi +α2 ROAi+ α3 LOTAi+ εi, (1)

Firstly, â0, â1, â2 and â3 are linear estimators: they are linear functions of the explained
variable Y. Secondly â0, â1, â2 and â3 are unbiased estimators. E(â0)=α0, E(â1)=α1, E(â2)=α2,
E(â3)=α3. Thirdly, â0, â1, â2 and â3 are minimum variance estimators: they have the lowest
variance among all possible linear unbiased estimators.

Using OLS method to estimate the model by R and Excel, we can get the results in the
following results.

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Table 2.4 Using OLS method to estimate the model by R

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 Table 2.5 Using OLS method to estimate the model by Excel Regression Statistics

The “Standard error” is the estimated standard deviation of epsilon, which provides the
main statistics for prediction errors. The “degrees of freedom” is the number of observations in
the sample minus the number of parameters to estimate.

The “R-square” value (coefficients of determination) provides a way to measure the

performance of the model, and how much the model can interpret the value of the dependent
variables. The closer the coefficient is to 1, the better the model is. The value of R2 equals to
15.56%, which shows our model does not explain the dependent variable well since the higher
R-squared, the better the model. The “adjusted R-squared” is the adjusted R square, with the
(1−𝑅2 )(𝑁−1)
formula: R2=1-(RSS/TSS). The value of adjusted R square is calculated as 1 - . In
𝑁−𝑝−1
this case, it is 14.06%, lower than the value of R2

In addition, we can obtain the regression analysis table. The second column “standard
error” estimated standard deviation of the estimators. The column “t stat” is student statistics of
the different coefficients (T=coefficients estimates/sigma hat of the corresponding coefficient).
It is the calculated value of the student statistic that must be compared to its tabulated value.
Finally, an asterisk (for example, ***) indicates the predictive power of each feature in the
model. The last column “P-value” is the probability level above which we can reject the H0.

The “P-value” of α0 equals to nearly 0 which mean that there is a significant relationship
between the intercept and EQTA. This is true because normally, all the firm must have the
minimal proportion of capital structure is equity. Based on this model, the intercept value α0 is
11.46%.

The “P-value” of α1 also equals to nearly 0, that means there is a significant relationship
between bank total asset and bank equity. The coefficient α1 is -0.0038. If other variables stay
the same, if we increase the natural logarithm of total asset by 1%, the equity ratio of the firm
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will be decreased by -0.0038%. Therefore, this result confirm our hypothesis that”Bank equity
ratio (EQTA) is negatively related to bank size (LnTA)”.

In term of ROA, the “P-value” of α2 is nearly 0 while the coefficient is 0.938. Therefore,
the ROA has a positively influence on EQTA at 5% level of confident. If we increase the ROA
by 1%, the equity ratio of the bank will be increased by 93.8%. This result also confirm our
hypothesis that banks possess higher equity in their capital structure tend to have higher
profitability

Similarly, the coefficient of LOTA is -0.0099 indicated that LOTA has a negative effect
on EQTA at 5% level of confident also. If the loan ratio of the bank increase by 1%, the equity
ratio will be decreased by 0.99% respectively.

4. Comparison

4.1 Comparison of R and Excel

The advantages of Excel The disadvantages of Excel

• Easy to find the results.
• Much easier to find and delete the
outliers.
• When the data is huge, using excel
is very time consuming.
• Excel can only do simple regression
analysis of the model.
• If the previous work is wrong, the
latter will be affected

The advantages of R only by fixed the code.

• Data filtering is faster and more The disadvantages of R

accurate with code with large
• R language programming is
amount of data
relatively difficult to understand,
• The function in R is more
and easy to have errors.
comprehensive than excel.
• Not very intuitive to check the
• The data on R is easy to be modified
results of data

5. Conclusion
This paper analyze the determinants of bank capital structure. The data sample include
162 banks in European countries in 2012. Using OLS method, we can see that equity ratio has
a negative relationship with total asset which confirmed the “financial fragility/crowding out”
hypothesis. In contrast, the profitability (ROA) has a positively influence on bank’s equity ratio.
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This result supported the “risk absorption” hypothesis: higher equity enhance the bank to accept
more risky loan to their borrowers. However, the drawback of this paper is that R-square
indicator is quite low and we believe that there are other factor might impact the bank equity
ratio or the data sample.

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