Is digital transformation profitable for banks? Evidence from Europe

• Examine the impact of digitalization on European bank performance. • Introduce a novel digitalization index for comprehensive analysis. • Identify conditions where digital channel development enhances profitability. • Explore the moderating effects of Covid-19 and national digital infrastructure. Studies on the impact of digital transformation (DT) on bank performance are typically restricted to single countries and present mixed findings. Using data on 279 EU-27 banks from 2017-2022 and employing a novel DT index, we demonstrate that DT is associated with higher bank profitability, and that IT and network efficiency are key drivers. Furthermore, Covid-19 and the level of country IT positively moderate this relationship. Interestingly, additional analyses also reveal nonlinear relationships, which suggest that profitability gains from DT investments can take time to materialize and that there are diminishing marginal returns to some DT investments.