The aim of this chapter is to investigate the main value creation drivers in European banks. We start by identifying three business models using balance-sheet characteristics of a large sample of European banks. We then seek to analyse the most important accounting profit and capital absorption drivers. In particular for retail- funded banks we try to assess the impact of loan-loss provisioning (LLP) together with a wide array of credit-risk exposure on value creation measured by EVA. We also endogenise the effect of growth opportunities. Our results suggest that provisioning policies are positively and significantly related to EVA through the impact on asset returns volatility and equity betas. We also account for a relation between betas and growth opportunities.
