Download Bank Performance, Efficiency and Ownership in Transition Countries

Bank Performance, Efficiency and
Ownership in Transition Countries
John P. Bonin
Wesleyan University
Iftekhar Hasan
Rensselaer Polytechnic Institute
Paul Wachtel
Stern School of Business,
New York University
Banking Developments
in Transition Countries




Rapid evolution from planned economy era
Fall in government ownership
Greenfield banks
Foreign participation
–
–
High compared to other emerging markets
Dramatic increase in late 1990s
Hypotheses explored

Banking sectors are becoming more efficient
–


Spillover effects of foreign participation
Foreign-owned banks perform better
Ownership matters
–
–
Government vs. Private
Foreign vs. Domestic
Related literature

On efficiency improvements in transition
banking
–

Buch (1997) and (2000), Fries and Taci (2002),
Fries, Neven and Seabright (2002), Drakos (2002),
Claessens, Demirguc-Kunt, and Huizinga (2001)
On importance of ownership
–
IMF(2002), Nikiel and Opiela (2002), Hasan and
Marton (2003)
Data

Bankscope bank data
–
–
–
–

11 advanced transition countries (Eastern Europe and the
Baltics)
Financial statements 1996-2000
Ownership information 1999
Exclude non-bank intermediaries
Total of 830 bank-year observations with financial data
and ownership information
–
Country coverage


Poland, Croatia, and Hungary ~ 45%
Baltics ~ 13%
Ownership Characteristics
(of bank observations)

Majority Foreign
–


10%
Largest in Slovakia 14%
Majority private domestic
–

Less than one-half in Croatia, Slovenia and Latvia
Majority government
–
59%
31%
Only Croatia, Slovenia and Latvia above one-half
Participation of international institutional investor 10%
–
Bulgaria, Estonia, Romania above 20%
Balance Sheet Characteristics
Aggregate
Majority
Foreign
Majority
Govt.
Majority International
Private
Log of
Assets
12.72
13.06
13.30
11.90
13.40
Loan /
Asset
0.4254
0.4370
0.3339
0.4317
0.4198
Deposit /
Asset
0.7623
0.7763
0.7399
0.7433
0.7526
Non-int.
expend /
Assets
0.0689
0.0604
0.0802
0.0813
0.0687
Efficiency Estimation


Stochastic Frontier analysis
Profit and Cost efficiency functions
–

Standard translog specification
Efficiency measures
–
–
Raw efficiency – distance from frontier
Relative efficiency – distance relative to mean for all
same country bank observations
Performance compared to overall
mean
ROA
Profit
Cost
Bulgaria
+
+
-
Croatia
-
+
+
Czech Rep.
-
-
+
Estonia
-
+
+
Hungary
-
-
-
Latvia
-
+
+
Lithuania
-
+
+
Poland
+
-
+
Romania
+
-
-
Slovenia
+
+
+
Slovakia
-
-
-
Performance Measures
Aggregate
Majority
Foreign
Majority
Govt.
Majority International
Private
ROA
0.0091
0.0118
0.0004
0.0070
0.0273
Raw Cost
Efficiency
0.4437
0.4005
0.7034
0.4133
0.4180
Raw Profit 0.8905
Efficiency
0.8887
0.8868
0.8934
0.8931
Regression analysis of
Performance measures

Independent variables
–
–
–

Log of asset in constant $
Fixed effects for year
Dummy variables for ownership characteristics
Additional robustness tests
–
–
Balance sheet ratios effects on ROA
Ratios to assets of loans, deposits, non-interest
expenditures
Real GDP growth
Explanations of Performance





ROA declines over time – banking becoming
more competitive
Efficiency improves after 1998
Better bank performance in countries with
higher growth
Larger banks generally less efficient
Banks with larger deposit base (retail banks)
have lower ROA
Ownership effects on performance



Govt. banks less efficient than private
Foreign-owned banks more efficient than other
private banks in same country
Presence of international institutional investors
(most frequently EBRD) has important impact
–
–
Higher ROA
More profit efficient but not more cost efficient
Why do international institutional
investors matter?

Cherry-picking
–

Technology and Knowledge Transfer
–

They successfully choose the most profitable banks
for their investment portfolios
Transfers facilitate the development of banks
Signaling or Screening
–
–
Investments provide information about quality of
banks
Imprimatur of ‘official’ investors attracts customers
Size and year effects
(Table 6, cols. 1 & 2)
ROA
Raw Profit
Efficiency
Log assets
0.001
-0.002*
1997
-0.003
-0.001
1998
-0.026*
-0.001
1999
-0.015
0.002+
2000
-0.014#
0.002#
Other variables
Constant, Foreign, Govt. and
Intl.ownership dummies
Adjusted R2
0.0349
0.1993
Ownership Effects
(Table 6, columns (1)-(3))
ROA
Raw Profit
Efficiency
Foreign
0.004
-0.001
Relative
Profit
Efficiency
0.001#
Government
-0.004
-0.002+
-0.002#
International
0.019*
0.005*
0.002*
Other
Variables
Constant, log of Assets, Fixed effects for
years
Adjusted R2
0.0349
0.1993
0.0881
Additional Tests
(Table 7, columns (1),(3) and (6))
Raw Profit
Efficiency
(1)
Raw Cost
Efficiency
(3)
ROA
(6)
Foreign
-0.001
-0.094#
-0.001
Government
-0.001
0.174#
-0.007
International
0.006*
-0.080
0.013#
Loan / Asset
-0.008
Loan / Deposit
-0.031#
Non-int exp / Asset
-0.268*
GDP growth
0.001*
-0.047*
Additional variables
Constant, log assets, year dummies
Adjusted R2
0.2401
0.0944
-0.005*
0.1273
Conclusions




Increased foreign participation leads to more
efficient and competitive banking sectors in
advanced transition countries
Private banks are more efficient than govt.
owned banks
Foreign owned banks are more efficient than
private banks
International institutional investors ‘cherry-pick’
Things to do

Differentiate foreign greenfield operations from foreign
ownership of formerly state owned banks

Additional dummies for country clusters, e.g., Baltics,
Northern-tier (Czech R., Hungary, and Poland)

Relative to maximum efficiency in country vs. average
efficiency

Random effects estimation