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Determinants of profit efficiency: evidence from Korean savings banks

Author

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  • Yongseung Han
  • Myeong Hwan Kim
  • Won-Joong Kim
Abstract
This article shows the profit efficiency and its determinants in Korean savings banks in the period 2002--2008 using a three-step estimation procedure: profit efficiency, computed in the second step after the first step Generalized Method of Moments (GMM) estimation, is regressed on the environmental variables in the third step. We found that industry-average profit efficiency dropped in 2004--2005 and quickly rebound in the subsequent years. We also found that unit banks and small banks are more efficient than affiliated banks and large banks. This article then analyses determinants of profit efficiency and presents three findings: (1) interest rate is the most important factor, with a 1% point increase in interest rate leading to a 20% point increase in profit efficiency; (2) profit efficiency declines as bank assets increase, implying that the expansionary strategy is not profit-enhancing unless current technology for financial intermediation changes; and (3) an increase in noncollateral loans lowers profit efficiency, implying that a policy drive for an increase in noncollateral loans requires a priori appropriate credit rating system and transparent accounting practices.

Suggested Citation

  • Yongseung Han & Myeong Hwan Kim & Won-Joong Kim, 2012. "Determinants of profit efficiency: evidence from Korean savings banks," Applied Financial Economics, Taylor & Francis Journals, vol. 22(12), pages 1003-1016, June.
    • Handle: RePEc:taf:apfiec:v:22:y:2012:i:12:p:1003-1016
    DOI: 10.1080/09603107.2011.636019
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    2. Cepi Pahlevi & Andi Ruslan, 2019. "Effect of Market Structure and Financial Characteristics on Bank Performance in Indonesia," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 9(3), pages 128-139, July.
    3. Lutfi, & Suyatno,, 2019. "Determinants of Bank Efficiency: Evidence from Regional Development Banks," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 53(3), pages 59-74.
    4. Tuti Zakiyah maimun & Arya Samudra Mahardhika, 2021. "Effectiveness of Islamic Bank Earning: Paramatic Stochastic Frontier Approaches," Agregat: Jurnal Ekonomi dan Bisnis, Universitas Muhammadiyah Prof. DR HAMKA., vol. 5(1), pages 113-127.
    5. Md. Asif Nawaz, 2021. "Impact of Specialization, Ownership Structure, and Size on Cost and Profit Efficiency of US Commercial and Savings Banks," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 11(3), pages 1-4.
    6. Richard Simper & Maximilian J.B. Hall & Wenbin B. Liu & Valentin Zelenyuk & Zhongbao Zhou, 2014. "How Relevant is the Choice of Risk Management Control Variable to Non-parametric Bank Profit Efficiency Analysis?," CEPA Working Papers Series WP122014, School of Economics, University of Queensland, Australia.
    7. Richard Simper & Maximilian J. B. Hall & WenBin Liu & Valentin Zelenyuk & Zhongbao Zhou, 2017. "How relevant is the choice of risk management control variable to non-parametric bank profit efficiency analysis? The case of South Korean banks," Annals of Operations Research, Springer, vol. 250(1), pages 105-127, March.

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