Estonian Banking Sector Performance Analysis Using Malmquist Indexes And DuPont Financial Ratio Analysis

Abstract

Banks and other financial institutions are a unique set of business firms whose assets and liabilities, regulatory restrictions, economic functions, and operating make them an important subject of research. Banks performance monitoring, analysis and control needs special analysis in respect to their operation, productivity and performance results from the viewpoint of different audiences, like investors/owners, regulators, customers/clients, and management themselves. In this paper, productivity change in Estonian banking is estimated using the Malmquist productivity index. The data used in this study covers the period from 1999 to 2002. One purpose of this research is to introduce the Malmquist productivity index, which is first used for productivity analysis of Estonian banks. The present study shows that Estonian banks experienced average a 25.6 percent annual productivity growth rate during 1999-2002, what was the result of technological progress. Generally, all Estonian banks have increased productivity as a result of technological progress on this period. Some historical notes on the development of the Estonian banking system and the capital structure of banks are presented in this article. The usage of a modified version of DuPont financial ratio analysis is discussed also in the article. Empirical results of the Estonian commercial banking system performance analysis are presented in the article (1994-2002).