Portfolio Financialization and Bank Performance: Panel Evidence from Listed Banks in Palestine (PEX).

Abstract

The study examines whether the financialization of banks' portfolios affects the financial performance and risk profile
of listed banks in Palestine. Financialization is operationalized as the ratio of investment portfolio to total assets, representing the
extent to which banks allocate balance sheet resources to other markets- based assets and securities rather than traditional lending,
which is their historical classic core business model. Using a balanced panel of six banks listed on the Palestine Exchange (PEX)

from 2016 to 2024 (54 banks- years observations) and audited annual financial statements, the study estimates heteroscedasticity-
robust pooled OLS models for three outcomes: return on assets (ROA), Tobin’s Q, and three-year rolling ROA volatility. The

results show that financialization is positive, but not significantly so, with ROA, suggesting that the allocation of the portfolio does
not provide robust evidence of higher accounting profitabilityBy contrast, financialization is negatively associated with Tobin’s Q,
which indicates that the investors in the equity market could penalize banks which are heavily exposed to securities in the context
of Palestinian’s frontier market. Furthermore and most significantly, financialization is positively associated with volatility of
earnings which suggest that investment earnings could intensify responses of firms’ cash flows to market shocks and to
macroeconomic variables. Overall, our finding of profitability–stability trade-off adds value to the literature of financialization and
to that on financial development in restricted conflict affected financial sector. Our results shed lights for Palestinian Monetary
Authority, Boards of Directors, Banks, and Investors concerning to concentrated portfolios, to disclose risks at capital markets, and
stress tests.