Efficiency comparison of operational and profitability: a case of Hong Kong commercial banks.

Author:Wu, Cheng-Ru
Position:Report
 
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INTRODUCTION

The Hong Kong had a long tradition of being a laissez-faire economy and has committed to maintaining the free market stance since its sovereignty was returned to China in 1997. As a major international financial center in Asia and as a gateway to mainland China, Hong Kong has a very high density of financial institutions and that is characterized by its high degree of internationalization, business-friendly environment and comprehensive financial network, sophisticated support services. Because of the globalization effect, the competition among worldwide financial corporations is more and more serious. Therefore, they will play a major force in financial services industry and to analyze the advantage of the banks in Hong Kong and the optimal efficiency. However, the Hong Kong bank is none other than the pursuit of a greater scope of business and the generation of more profit. Thus, in facing a highly competitive environment, the formulation of a competitive strategy, the strengthening of corporate operations and the upgrading of the quality of service have become essential for survival. In formulating competitive strategies, one major problem is the measurement of management performance in the industry, prior to an assessment of advantages and disadvantages. Another problem that is encountered is the determination of factors that affect managerial efficiency.

Based on two-stage Data Envelopment Analysis (DEA) we used multiple inputs and outputs to measure the managerial efficiency of the banks. This analysis used the two stages of Operational Efficiency (OE) and Profitability Efficiency (PE) to compare the banks performance. We investigated and analysed the efficiency differences based on different characteristics of the firms and compared the efficiency of older banks with newer banks, as well as any differences in efficiency based on the size of the banks. In addition, management performance was not restricted to production efficiency or cost minimization, but was a more general assessment, involving management and marketing services and sales. However, banks provide financial services through the use of a non-price competition model to meet the needs of customers with high quality services. The development of a bank's investment portfolio will help the banks overall operating performance.

Based on the measurement of managerial efficiency, a management decision matrix was developed to serve as the basis for an assessment of the competitive strategy of the eighteen banks in Hong Kong. This will aid each bank in the industry to gain a greater understanding of the gap between the banks and improve their operational efficiency by providing future operational strategies through analysis. Finally, this research will provide conclusions, recommendations and follow-up research proposals.

Literature review: Because there are many applications of the data envelopment analysis method given in the literature, this study focused only on those that discuss the operating efficiency of a bank. There have been several articles published in journals on the use of DEA in determining efficiency levels in the banking industry. The efficiency approach has been applied to numerous settings over several years, including the financial services sector. Seiford and Zhu (14) first suggested using the two-stage DEA method to divide a commercial banks production process into two stages, marketability and profitability. Subsequently, Lu and Lo (7) used DEA with a two-stage production process that included profitability and marketability performance. In addition, Luo (8) applied DEA to a sample of 245 large banks. This study provided evidence that large banks were achieving relatively low levels of marketing efficiency. There were 34 banks (about 14%) that achieved high levels of profitability performance, but low levels of marketing performance. The results also indicated that the geographical location of the banks did not seem to be related to either the profitability or marketability efficiency levels.

The Overall Technical Efficiency (OTE) of the profitability performance may predict the likelihood of bank failure. Manandhar and Tang (10) combined the service-profit chain into their research model and reached the conclusion that the profitability of a firm will ultimately increase when a firm improves the quality of the service delivered to customers. This is because good service quality will have good effects on customer satisfaction and thus indirectly have a positive influence on profitability. Chen (3) assessed the management performance of banks in Taiwan, incorporating operating efficiency, marketing efficiency and financial achievements in the study. The results of this research showed significant differences with the pre-calculated efficiencies. Banks in public ownership exhibited superior profitability performance; whereas privately owned banks tended to perform better with regard to operational capabilities. Furthermore, the relatively large banks exhibited superior performance on profitability; whereas the smaller banks tended to perform better with regard to operational capabilities. Halkos and Salamouris (5) explored the efficiency of Greek banks using a number of suggested financial efficiency ratios and found that the banks with the largest total assets had the highest efficiency levels. Wide variations in performance showed that increases in efficiency accompanied increases in the size of banks due to mergers and acquisitions. Zhu (17) used the DEA method to calculate the efficiency of 364 companies and found that top-ranked companies in terms of revenue do not necessarily hold the top performance rankings for profitability and marketability. Numerous other studies have also used the DEA method, including (4), (6), (9), (11), (12). In addition, Sathye (13) offered the important conclusion that government deregulation and the leadership strategies of merging banks provided operations with significant impact.

MATERIALS AND METHODS

The intermediation approach treats banks as intermediary bodies, were non-depository account offer businesses financial resources, which they may borrow against in the form of business loans, in order to make a profit. Thus many lenders invest their money through banks, investing for the duration of projects by paying various costs, such as costs, interest charges and the cost of funds for projects, in which banks have invested. Most scholars have used the intermediation approach because the project is relatively easy to calculate, the information is easily obtained and it can show the bank's asset by type, size differences and multiple output characteristics. However, it should be noted that the definition and measurement of bank inputs and outputs has long been debated among researchers and...

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