Is soft worth it? Software investments, IT administrative expenses and profitability: evidence from European listed banks

This article investigates the effect of digitalization on profitability, using a dataset of 58 European listed banks over the period 2018 - 2023. Specifically, amortization and potential impairment of intangible software, together with IT administrative expenses - both standardized over operating costs - are used as a digitalization proxy. This proxy is found to be positively related to the most common accounting-based profitability indicators and market-based performance measures, although with possible non-monotonic patterns and non-trivial effects driven by the allocation of financial resources between IT administrative expenses and software investments. Additionally, the results confirm the positive role of intangibles in market valuations. Finally, insights from the same database, enriched with UK-listed banks, suggest interestingly that the introduction of the prudential rule under CRR 2 for the recognition of intangible software within the regulatory capital did not exert a push effect on such investments, which are rather linked to business development.