Determining Factors Of Bank Performance Based On Return On Solvency And Efficiency: A Study Of Turkish Banks

Abstract

The performance of the banking industry is analyzed by applying a panel regression on Turkish Bank data. Profitability is measured as revenues per unit of risk and efficiency as revenues per unit of cost. Return on solvency is used to measure the profitability using risk weighted assets as defined in the current Basel Accord. Both measures take into account the effect of the cost of capital to arrive at the real performance of the banks. The analysis is made using a panel regression between 2003:1 and 2005:2 analyzing 18 banks offering full-fledged services. The analysis of the short-term data leads to some striking results. The performance of banks is mainly driven by macroeconomic factors; banks rely on income from securities business to compensate for their poor results from their core activities which seems to be a result of the highly competitive environment. The analysis of efficiency reveals that market share is the most significant determinant. This result supports the idea that banks will be profiting from economies of scale and as they increase their market share they will be able to better utilize their excess capacity. The negative relationship between commission income and efficiency also strengthens our view that excess capacity is a problem of the industry and results in negligible commission income as opposed to high fixed costs for the service oriented banks.