EFFICIENCY of BANKS in SOUTH EAST ASIA: The INFLUENCE of OWNERSHIP and RISK

1. EFFICIENCY of BANKS in SOUTH EAST ASIA:The INFLUENCE of OWNERSHIP and RISK Thierno Amadou Barry Santos Jose Dacanay III Laetitia Lepetit Amine Tarazi International Conference on Safety and Efficiency of the Financial System EDSA Shangri-La Hotel, Ortigas Center, Mandaluyong City 27 August 2007

2. Objectives • Examines cross-country differences in efficiency among South East Asian banks in the post-crisis period 1999-2004; and, • Investigates the efficiency scores in relation to bank- and country-specific efficiency drivers.

3. Methodology • Employs a two-stage procedure; • First stage involves the calculation of bank efficiency scores using DEA; • Second stage entails regression of bank- and country-specific variables on the efficiency scores.

4. Methodology Equation 1: DEA VRS Input-Oriented

5. Methodology Equation 2: DEA VRS Input-Oriented with Input Prices

6. Methodology Equation 3: Influence of Bank Characteristic Variables Effi = ßBankChari + η Equation 4: Influence of Environmental and Country Dummy Variables Effi = ßCounEnvj + γCountry Dummyj +η

7. Data • Pooled data from BankScope: • 80 banks in 6 South East Asian countries; • 6-year period 1999-2004; • 358 observations; • Country environmental variables from Asian Development Bank.

8. Data No. of Banks No. of Obs. Hong Kong 17 58 Indonesia 12 48 Korea 13 71 Malaysia 20 90 Philippines 12 60 Thailand 631 Total 80 358

9. Results: DEA Calculations Equation 1: DEA VRS Input-Oriented

10. Results: DEA Calculations Comparison of Efficient and Inefficient Groups Cumulative Distribution Null Hypothesis Score of No Difference Scale Economies CRS vs IRS and DRS D=0.9472*** Rejected CRS vs IRS D=0.9387***  Rejected CRS vs DRS D=0.9775*** Rejected Input Separability (3 Output-1Input) (x1 and x2) D=0.3324*** Not Rejected (x1 and x3) D=0.7933*** Rejected (x2 and x3) D=0.8184*** Rejected *** indicates significance at p<0.01.

11. Results: DEA Calculations Figure 1: Kolmogorov-Smirnov Test Percentile Plot

12. Results: DEA Calculations Comparison Test for Equation 2 Results Kolmogorov-Smirnov Spearman Rank Statistic Order Coefficient Technical versus Allocative D=0.6554*** ρ=0.5544*** Technical versus Cost D=0.7712*** ρ=0.5500*** Allocative versus Cost D=0.1864*** ρ=0.6511*** *** indicates significance at p<0.01.

13. Results: DEA Calculations Equation 2 Results: Cross-Country Comparisons

15. Results: OLS Specifications Regression of TE score with bank characteristic variables: • Average Total Assets, • SD of ROAA, and • Widely-held Ownership Type are significant efficiency drivers.

17. Results: OLS Specifications Regression of TE score with environmental and country dummy variables: • Real GDP growth rate, • CoV of FOREX, and • All country dummies are significant.

18. Conclusions • There are persistent cross-country differences in bank efficiency in South East Asia; • Differences can be explained by domestic macroeconomic conditions such as Real GDP and CoV of FOREX; • Efficiency is positively driven by bank size and to a lesser extent risk-taking; • Banks which are owned by minority private shareholders appear to be more efficient than other banks.

19. Thank you We would like to acknowledge the support of the following: