A Timely Comparison of Foreign Banks in China Against Domestic Banks

35 Pages Posted: 13 Aug 2013 Last revised: 23 Nov 2013

See all articles by Necmi K. Avkiran

Necmi K. Avkiran

University of Queensland - Business School; Financial Research Network (FIRN)

Yushu Zhu

University of Queensland - Business School

Date Written: August 8, 2013

Abstract

We employ the efficient frontier methods of data envelopment analysis (DEA) and stochastic frontier analysis (SFA) to estimate efficiency of Chinese bank production in a study that directly compares locally incorporated foreign banks with domestic banks. Both methods reveal that, on average, foreign banks are less efficient than domestic banks, although SFA identifies a stronger contrast between the two cohorts. A break-down of the sources of inefficiency identifies interest income among the foreign banks as an area for major potential improvement, whereas the domestic banks appear to suffer mostly from inefficiencies in managing non-interest income and interest expense. There is a significant positive impact of market share on the efficiency of generating interest income as well as non-interest income. Interbank and cost-to-income ratios have a negative impact on efficient generation of interest income but no significant effect on non-interest income. On the other hand, regulation of the loan-to-deposit ratio does not influence interest income. DEA and SFA efficiency estimates are significantly positively correlated with each other as well as with key financial performance ratios, thus opening the way for both methods to be used together with confidence and in a complementary manner.

Keywords: Chinese banking, technical efficiency, ranking, DEA, SFA, financial ratios

JEL Classification: C67, G21

Suggested Citation

Avkiran, Necmi K. and Zhu, Yushu, A Timely Comparison of Foreign Banks in China Against Domestic Banks (August 8, 2013). 26th Australasian Finance and Banking Conference 2013, Available at SSRN: https://ssrn.com/abstract=2307439 or http://dx.doi.org/10.2139/ssrn.2307439

Necmi K. Avkiran (Contact Author)

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Yushu Zhu

University of Queensland - Business School ( email )

Blair Drive
Brisbane
Australia

HOME PAGE: http://https://www.business.uq.edu.au/staff/yushu-elizabeth-zhu

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