greek banking productivity: an overview of the greek...
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THE UNIVERSITY OF GREENWICH
BUSINESS SCHOOL
GREEK BANKING PRODUCTIVITY:
AN OVERVIEW OF THE GREEK BANKING SYSTEM AND A DATA ENVELOPMENT ANALYSIS
IMPLEMENTATION
Dissertation submitted in accordance with the requirements of the University of Greenwich for the degree
of MSc in Finance and Financial Information Systems
By
Kyriakos Chatzitheodorou
(I.D.Number: 000378683)
Kavala, 2007
2
INDEX page
Abstract 3
Acknowledgements 4
1. Introduction 5
2. Literature review 7
2.1 Basic characteristics of the Greek Banking system 7
2.2 Productivity of the Banking system 25
2.3 Techniques for measuring Banking Productivity 30
2.4 The Banking ineffectiveness 35
3. Research Methodology 37
3.1 The DEA technique 37
3.2 Data and Financial Ratios 44
4. Results 47
4.1 Basic Results 47
4.2 A comparison between Ratio and Input-Output DEA models,
and Interpretation 56
5. Conclusions 63
5.1 Summary 63
5.2 Managerial implications 64
5.3 Limitations of the results 65
5.4 Future research suggestions 66
6. References 67
3
ABSTRACT
The aim of this study is to identify the productivity of the Greek banking
sector during the last three years and how factors such as the many mergers and
acquisitions that took place and the Internet banking penetration influenced banks’
efficiency. Moreover a factor which is widely analyzed is the expansion of Greek
banks to South-Eastern Europe. In order to achieve this efficiency analysis, the Data
Envelopment Analysis (DEA) is applied for the years 2004 – 2006 in combination
with efficiency ratios’ results. The output-oriented method of DEA which is used,
provides a spherical image about the efficiency of the Greek banking system, the
efficiency of whose is generally presented constant for all the under observation
period. A reasonable explanation for this behavior despite the fact that Greek banks
are the forefront of the development of the Greek economy is that is due to the
expansion to Balkan, which currently affects negatively to Greek banks’ performance,
but has many positive prospects, as well. Finally, the big banks are observed to
perform better than the small ones.
4
ACKNOWLEDGEMENTS
First of all I would like to thank my parents and sister, without the continual
support of whom I could not reach at this point of my studies. Moreover, I would like
to thank my supervisor Dr Prodromos Chatzoglou, who helped me to defeat the
disappointments of the whole process and to overcome the technical difficulties of the
dissertation.
5
1. INTRODUCTION
The liberalization and internalization of the banking sector has shaped
conditions of severe competition, which imposes banks to be in a continual alertness
in order to immediately answer to the current challenges.
Nowadays, in the frame of the technological and financial progress, it is a
thing of great importance banks to develop a high productivity policy, which provides
high profitability. In this way the effort of achieving the highest level of productivity
must be focused on certain sectors of the management policy
In such an effort, the revaluation of the role of the financial ratios is needed
as well as the further use of new or specific ratios that provide a better knowledge
about productivity. The role of the financial ratios in the effort of achieving high
productivity is one of the most important, as they are the connectors between
production and management and suggest solutions to many problems.
Concerning Greece, the way the Greek banking system is operating has
much changed during the last two decades due to mergers that occurred in the
industry, technological progress, and severe deregulation. This deregulation in Greek
banking system reflects the continual need for financial change in Greek economic
policy as banking is the leading industry in country. Moreover, the banking
deregulation is an international tendency. Apart from that, banking is considered to be
a subject of high governmental interest as it is a source of capital for the government
through taxation. Therefore many funds are dedicated for the development of the
Greek banking sector.
This research will attempt to present the basic characteristics of the Greek
banking system, to define productivity by using financial ratios, to investigate the
6
impact of certain financial and political facts in the Greek banks’ productivity and
finally to conclude how effective the Greek banking system is.
7
2. LITERATURE REVIEW
2.1 Basic characteristics of the Greek banking system
Introduction
The Greek Banking system until recently (up to 1997) was working under a
state mechanism and control, with thousands of legislations and a suffocating
bureaucratic framework. Although, the last decade took place a gradual but substantial
deregulation of the Greek banking system. The minimum obligatory interest rate
margins were abolished as well as the selective state allowance. Moreover this
deregulation abolished banks’ obligation to put a significant part of their funds to
treasury notes and to finance problematic state owned companies and organizations.
Finally, the prohibitions and limitations in the requirements as well as the treatment
terms were abolished for a sweeping range of banking products, and there was a
gradual withdrawal in many exchange limitations.
It is undeniable that the changes incurred to the banking sector the last years
are very important. The alteration from the obligations of a strict framework to an
operation characterized by freedom in funds transfer, loans supply and interest policy,
leaded to the promotion of new banking products and mainly changed banks operation
and their marketing policy.
The 104/94 decree-law liberated the short-term funds transfer, and was the last
one of a wide range of legislations that signaled the liberation of the operation of the
Greek banking system,
The above mentioned facts and banks behavior as well, found seedbed in
market. The economic units had access in more alternatives in deposits and loan
8
types, namely had access to better performances and to more attractive interest rates
that could adapt better to their needs.
In Greece today1 (July 2007) are operating 61 commercial banks, 35 of them
have their head office in Greece (19 commercial and 16 co-operative), 21 are
branches of credit unions having their head office somewhere in EU apart from
Greece, and 4 are branches of credit unions that do not come under the common EU
operation (EU passport, 2nd banking EU directive). Moreover, there is a credit union
(The “Consignments and Loans Fund”) that has been excluded from the application of
the Law n.2076/92, where all the above mentioned credit unions are included. Finally
there is the “Bank of Greece”, which is not a commercial bank, but the central bank of
the country, with supervisory and auditing role. The most important it should be
mentioned is that a small number of banks dominate to the Greek banking system
(National Bank of Greece, Alpha Bank, EFG Eurobank, Emporiki Bank and Piraeus
Bank), and represent about 80 percent of the whole banking market (Piraeus Bank
Group Presentation, 2004).
In the following paragraphs of this section the basic characteristics of the top-
five Greek banks are presented as well as the special characteristics of one more bank
(Ate Bank) in order to provide a more representative image of the Greek banking
system.
National Bank of Greece
First, National bank of Greece (NBG), as it is mentioned in bank’s web site2 is
“the oldest and largest among Greek banks, heads the strongest financial group in the
country. It boasts a dynamic profile internationally, particularly in Southeastern
1 Source: site of “Bank of Greece”, www.bankofgreece.gr 2 Source: site of “National bank of Greece”, www.nbg.gr
9
Europe and the Eastern Mediterranean”. Undeniably, NBG is the leader bank in Greek
banking sector, and is ambitious to be the leader bank in Balkans too, despite the
severe competition. The bank founded in 1841 and since 1999 has been listed on the
NY Stock Market. In 2006, after a decade of NBG’s mergers and acquisitions in
Greece and Balkans, NBG acquired the Serbian “Vojvodjanska Banka” and the
Turkish “Finansbank”. Concerning the corporate governance of the bank, the
Chairman of the Board is chosen by the State, because the State is the bigger
shareholder of the bank with a 14,6% percentage, via pension funds and other public
sector entities.
Nowadays, the Group has in Greece 559 banking units and 1374 ΑΤΜs and
after the latest mergers in Balkans NBG's network abroad includes 891 units.
Although the bank lost a market share in a period of high profitability margins,
remains today the leader bank. It is the first bank concerning customers, turnover and
network and has developed all the kinds of banking activities. Moreover, the bank
follows a programme of modernization, reorganizing its network with electronic
systems.
Alpha Bank
Alpha Bank was established in 1879 in order to fulfill all the kinds of banking
needs. The bank was listed in the Greek stock exchange in 1925. It is a private bank
and belongs to Costopoulos family since its foundation. In 2000, the merger of the
Ionian bank conduced considerably to bank’s grown. Until recently the bank was
considered to be the second after NBG largest bank in Greece. Nowadays, its position
is under consideration due to the severe competition with another private bank,
Eurobank.
10
Alpha bank has a network of about 200 branches and international presence to
Cyprus, Romania, London, Serbia, Albania, Jersey, Bulgaria, F. Y. R. O. M., and
New York. The Alpha Bank Group offers a wide range of services apart from banking
such as insurance, real estate, venture capital, holding, leasing, education, securities
and hotel businesses.
EFG Eurobank
EFG Eurobank founded in 1990 (as Euromerchant Bank) and is member of the
EFG Bank European Financial Group with its head office in Geneva. The bank is
private and belongs to Latsis family. Eurobank played the first role in mergers and
acquisitions that took place in the Greek banking sector after 1996 as absorbed many
banks such as: Bank of Crete, Bank of Athens, Ergasias Bank (the most important
merge), Unit Bank and Telesis Investing Bank.
Nowadays the bank occupies internationally over 19.000 people and offers its
banking services worldwide, through its distribution channel of 1.300 branches. More
specifically the bank has presence to the following countries: Bulgaria, Romania,
Serbia, Poland, Turkey and Ukraine. Furthermore, it is a leading provider of credit
cards and consumer loans, mutual fund management and small business lending.
Emporiki Bank
Emporiki bank founded in 1907 in order to satisfy all the kinds of banking
needs and until recently was the second under State control bank. The bank is listed in
the Greek stock exchange since 1907. Nowadays is the fifth largest commercial bank
in the country. During its long history, Emporiki bank acquired many big banks such
11
as Ionian bank, Piraeus bank and Attica Bank. During 1991 – 1999 these big banks
were finally sold, as a different strategic plan was decided for bank’s development.
Thus, in 2000, the French bank Crédit Agricole entered with a 6.7% percentage to
bank’s share capital, in 2002 this percentage increased to 8.74% and finally in 2006
Crédit Agricole S.A. increased the percentage of participation to bank’s share capital
to 71,97% and adopted bank’s management.
Emporiki bank has a network of 370 branches in Greece and international
presence via subsidiary banks to Cyprus, Romania, Bulgaria and Albania (54 branches
today) and via a bank branch in London.
Piraeus Bank
Piraeus Bank was established in 1916. For many decades was operating as a
private bank. In 1975 passed under state control and remained as a state owned bank
until 1991. After its privatization moved to mergers and acquisitions and reinforced its
position to Greek banking market. Therefore, many banks were absorbed by Piraeus
bank such as Chase Manhattan in Greece, Macedonia-Thrace Bank, Credit Lyonnais
Hellas, Xiosbank, National Westminster Bank Plc in Greece. In June 2000, Piraeus
Bank, Macedonia-Thrace Bank and Xiosbank unified generating one of the three
biggest private banks in Greece.
Main strategy of the bank is the expansion to the markets of Southeastern
Europe and Eastern Mediterranean. Thus the bank has presence to Bulgaria, Serbia,
Egypt and Ukraine. Moreover the bank is present in the USA market through
Marathon Bank. In June 2007, Piraeus Bank Group had a distributional channel of
574 branches (270 abroad and 304 in Greece)
12
Ate Bank
Ate bank (or Agricultural Bank of Greece) is a state-controlled bank and was
established in 1929 as a non-profit organisation, credit provider to the agricultural
sector. The period 1950-1990 was characterized by the expansion of the bank’s
activities in the agricultural sector. After 1990 the bank expanded to non-agricultural
sector developing its distributional channel in Greece and offering a variety of new
financial products and services. After 2000, a restructuring programme took place in
order to reinforce banks corporate image, productivity and competitiveness. In
addition, its shares are listed in the Athens Stock market since 2001.
Nowadays, Ate bank has a network of approximately 455 branches and about
570 ATM’s. It has a large customer basis of 2.5 million people, mainly farmers.
Moreover, in July 2006 the Bank expanded in Balkans by absorbing MINDΒank and
getting authorization for bancassurance businesses in Romania
Closing this section about the introductive information about Greek banking
sector it should be mentioned the creation of the Marfin Egnatia bank, in 2007 after
the consolidation of 3 banks: Egnatia, Laiki and Marfin . This recently created bank
has a network of 150 branches and about 170 ATM’s.
The decade of changes
In the last decade (1997-2007) the Greek banking sector was reorganized.
More than 15 Greek banks, among them “Ioniki Bank” the oldest in operation
country’s bank, lost their own managerial control, and because of mergers and
acquisitions, became parts of bigger in size and emerging banking groups.
13
Simultaneously, Greek banks merged the network and businesses of many foreign
banks with significant brand name. In this way, many Greek banks reinforced their
position in the domestic market.
Eurobank was the champion bank is this procedure of mergers and
acquisitions, during the last decade. In 1997 Eurobank acquired “Interbank Hellas”,
which was already absorbed by the parent company of Consolidated Eurofinance
Holding (CEH) and which had a network of 23 branches. In the same year, Eurobank
acquired the distribution channel for retail services of the Credit Lyonnais Grece S.A
in Greece. In 1999 the bank went on with the acquisition of Bank of Crete and
acquired an important number of shares of Bank of Athens, capable to command this
bank, too. In 2001, Eurobank acquired Telesis Bank and Telesis Securities. The
largest merger took place in 1999, when the bank consolidated with Ergasias bank.
Thus, Eurobank with all these takeover activities, managed to become one of the
biggest credit institution in Greece, in duration of just 15 years.
Piraeus bank follows Eurobank in number of mergers and acquisitions. In
1998 absorbed the branch of Chase Manhattan in Greece and a major part of the
Credit Lyonnais Grece network. In the same time, the bank acquired Macedonia-
Thrace Bank. The next year took over Xiosbank and absorbed the operations of
National Westminster Bank in Greece. In 2002, the bank announced the merger of the
Greek Bank of Industrial Development (ETVA), which was founded on 1964.
National Bank of Greece (NBG) strengthened its network and its financial
ratios with many internal movements and with absorptions of significant subsidiaries.
More specifically, in 1998 the merger and absorption of its subsidiary, the National
Mortgage Bank of Greece S.A, assisted NBG to reorganize its distribution channel
and to offer integrated lending services. It is indicative, that after merger the bank
14
improved its rate of equity efficiency from 8% to 11.7%. In addition, the State forced
NBG to put up for sale its subsidiary, the Macedonia-Thrace Bank, which, as we
mentioned before, was lastly absorbed after a competition by the bank of Piraeus. In
2002, the bank merged and absorbed its subsidiary ETEVA (National Bank of
Investments for Industrial Development). This merger offered significant advantages
to the NBG group, because expanded bank’s operations to advisory services and
industrial loans, especially in the areas of funds for infrastructure and innovation.
Thus, the bank succeeded to reduce its operating costs because of the economies of
scale.
Alpha Pisteos bank announced in 1999 the biggest until now acquisition of a
Greek bank and absorbed Ionian and Laiki Bank, which was founded in the year 1839
in Corfu and was the third under governmental control bank. The new bank was
named Alpha bank, and became the most powerful private bank and the second
largest one in Greece, after NBG. This considerable growth, gave to the bank the
opportunity to increase its sales in a great amount.
In 1999, Emporiki Bank sold its shares of the Ionian and Laiki Bank to Alpha
Bank and in this way improved its financial status. The next year transferred to the
French banking group Credit Agricole a 6.7 percentage of its shares. In the following
years the French group expanded its participation percentage, took the bank’s
management control and offered to Emporiki bank many “know-how” advantages.
In 2007, the consolidation of the 3 banks Egnatia, Laiki and Marfin took place.
The new bank was named Marfin Egnatia Bank. A year before, the Marfin Group
proceeded to a number of acquisitions of domestic and foreign groups in the financial
area. As far as Egnatia Bank separately, in the year 1998, absorbed the Central Bank
of Greece.
15
Aspis bank in 2002 took over the network of ABN Amro in Greece and
absorbed its operations.
In 2004, the management of Geniki bank offered to the French bank Societe
Generale, as the bank became a member of the French banking group.
In January, 2006 Proton Bank announced the beginning of negotiations for its
acquisition with Omega Bank.
The following Table 1 provides a general image of the main mergers that took
place in the Greek banking system between the years 1997 – 2007
Table 1: Mergers in Greek banking sector during 1997 - 2007
Year Absorbing bank Absorbed bank
1997
EFG Eurobank Interbank
National Mortgage Bank
Piraeus bank
EFG Eurobank Interbank
National Housing Bank
Greek network of Chase
Manhattan
1998
National Bank of Greece
EFG Eurobank
EFG Eurobank
Piraeus Bank
Piraeus Bank
Piraeus Bank
Egnatia Bank
National Mortgage Bank
Bank of Crete
Bank Of Athens
Bank of Macedonia and Thrace
Xios Bank
Credit Lyonnais
Bank of Central Greece
1999
Alpha Bank Pisteos
EFG Eurobank
Deutsche Bank
Piraeus bank
Telesis AXE
Ionian Bank
Ergasias Bank
10% of EFG Eurobank
National Westminster Bank
Dorian Bank
2000 Credit Agricole
BCB
6,7% of Emporiki Bank
50% of Nova Bank
2001 EFG Eurobank Telesis Investing Bank
2002
National Bank of Greece
EFG Eurobank
Piraeus bank
ETEVA
Unit Bank
ETVA
2004 Emporiki Bank Investing Bank
2005 Marfin Bank 10% of Egnatia Bank
2006 Omega Bank Omega Bank
2007 Marfin Egnatia Bank Marfin Bank, Egnatia Bank and
Laiki Bank
16
Finally, during the decade 1997-2007 many small or medium sized banks
appeared in the Greek banking sector. More specifically, the banks Probank (from
Ergasia Bank ex-managers), ProtonBank, FBBbank (took over the network and
operations of the Canadian Bank of Nova Scotia in Greece) Millennium Bank (ex-
Novabank, member of the Portuguese banking group Millennium BCP) and Panellinia
bank (with 16 Greek co-operative banks as shareholders)
Greek banks abroad
Another fact that especially characterized the last years of the decade 1997-
2007 was the expansion of the operation of the Greek banks abroad. This expansion
took basically place in Northern-Eastern Europe, where many of the Greek banks
moved to mergers and acquisitions of native banks in order to have access to the
market of these developing countries. Greek banks found investing opportunities in all
Balkan countries, which had recently passed from centrally planned to open
economies. This expansion offered many advantages to the Balkan economies,
because created the conditions for a banking operation under Western European
standards. Greek banks entered in all Balkan banking systems offering sophisticated
IT application, funds, investing know-how and more sophisticated risk-management
methods. Greek banks investments are approximately amounted at 2 billion euro, and
are estimated to double in the following three years. In addition, the returning
revenues are nearly 10% of their banks turnover (K. Kosmidou et. al. 2007).
The Greek banks with the biggest investments in Balkans are National bank of
Greece, Alpha Bank, EFG – Eurobank, Emporiki Bank and Piraeus Bank. As the
elements show the Balkan country with the more bank branches under Greek banking
control is Bulgaria, and is following Romania, Serbia, Turkey, F. Y. R. O. M and
17
Albania. Of course, highlight of the investing policy of the Greek banks in Southern
Eastern Europe is the acquisition of Finansbank in Turkey, by National bank of
Greece. This acquisition apart from its huge for the Greek banking standards
economic size (€2,291 million) had political expansions too, because contributed to
better economic and trade relations between Greece and Turkey. Eurobank acquired a
Turkish bank too (Tekfenbank), but the sizes in this acquisition were smaller in
comparison with Finansbank. As far as results, for Alpha bank, the operation abroad
offered in 2004, 55.1 million euro to profits and about 160 million euro to revenues,
while 16% of the revenues of NBG for the same year, derived from businesses
abroad. Concerning Eurobank the same year the profits were 33 million euro and the
revenues were 130 million, while the same numbers for Piraeus bank were 52 and 110
million respectively. Finally Emporiki Bank from its presence abroad had 201.000
euro profits in 2004.
In this point, it should be mentioned that Greek banks have presence in many
other countries apart from Southern Eastern Europe (Cyprus, Britain, Egypt, USA, S.
Africa). This presence is not usually part of their expanding business plan but severs
the needs of the Greek Diaspora.
The following Table 23 is informative about the current (year 2006) presence of the
Greek banks abroad
3 Source: a. Hellinic Bank Association, www.hba.gr b. Banks
18
Table 2: Presence of the Greek banks abroad, in 2007
Bank Country Brand name Branches Personnel
Nat
ional
Ban
k o
f G
reec
e
1. Bulgaria United Bulgarian Bank AD 168 2321
2. Bulgaria INTERLEASE AD 7 62
3. Serbia NBG Beograd 35 427
4. Serbia Vojvodjanska Banka S.A. 209 2407
5. Turkey Finansbank 216 6499
6. Romania Banka Romaneasca SA 81 1037
7. Romania ETEBA Romania 1 1
8. Romania EURIAL Leasing 1 58
9. Cyprus National Bank of Greece (Cyprus) 26 264
10. S. Africa The South African Bank of Athens
Ltd
10 182
11. F.Y.R.O.M. Stopanska Banka AD-Skopje 26 1046
EF
G -
Euro
ban
k 1. Luxembourg ΕFG Private Bank (Luxembourg) S.A 1 44
2. Romania Banc Post S.A. 189 3269
3. Bulgaria Bulgarian Post Bank AD 151 1583
4.Bulgaria DZI Bank 130 1237
5. Serbia Nacionalna Stedionica-Banca A.D.
Beograd
103 1372
6. Turkey Tekfenbank 31 557
Em
pori
ki
Ban
k 1. Albania Emporiki Bank (Albania) SA 8 103
2. Bulgaria Emporiki Bank (Bulgaria) AD 18 135
3. Cyprus Emporiki Bank (Cyprus) SA 12 144
4. Romania Emporiki Bank (Romania) SA 11 170
Pir
aeus
Ban
k 1. USA Μarathon Banking Corp. 12 164
2. Romania Piraeus Bank Romania 54 698
3. Albania Tirana Bank 36 384
4. Bulgaria Piraeus Bank Bulgaria 67 799
5. Serbia Piraeus Bank AD Beograd 26 342
6. Egypt Piraeus Bank Egypt SAE 39 1012
Egnat
ia
Ban
k
1. Romania
EGNATIA BANK (Romania)S.A 8 111
Alp
ha
Ban
k 1. F.Y.R.O.M. Alpha Bank AD SKOPJE 10 101
2. Cyprus Alpha Bank Cyprus Ltd 28 612
3. Britain Alpha Bank London Ltd 2 54
4. Romania Alpha Bank Romania 70 1310
5. Jersey Alpha Bank Jersey Ltd 1 6
6. Serbia Alpha BANK Srbija AD 103 1413
Sum 1890 29924
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Internet Banking
Internet banking is correlated with banking productivity and is one of the last
Internet applications, which provides multiple benefits both for the banks and for
clients. Although today has been rejected the opinion that the Internet banking
applications can replace the traditional bank branches, Internet banking role remains
significant for the banks. The basic advantages of Internet banking as D. Anesti
(2004) mentions are: around the clock convenience, ubiquity, transaction speed,
cheaper services and market transparency, efficiency and effectiveness. On the other
hand its main disadvantages are related with trust and security issues.
Concerning Europe, one in two bank customers uses alternative distribution
channels, but only one in ten customers has stopped visiting a bank branch for his
banking transactions and now uses entirely web banking. More specifically about
Europe, the developed economies seem to be more conservative and reluctant about e-
banking applications, while the acceptance of those applications for the economies in
transition seems to be different.
As far as the Greek banking system, the numbers are not very optimistic
compared to the rest EU and USA. Both the companies and the individual customers
are hesitant to adopt Internet banking applications and this can be explained by many
reasons.
First, the purchasing attitude and culture of the Greek consumer is different to
American and average European consumer. Thus the products and services in Greece
are usually bought from local markets. The Greek consumer prefers to develop a
personal relationship with the suppliers than to buy services and products
impersonally from the Internet. Moreover there is a reduced confidence towards
Internet banking. This is manly related to safety reasons and is a worldwide
20
phenomenon, which has affected Greek consumers as well, despite the fact that no
one serious financial crime appeared in Greece related with Internet banking. Another
factor that affects the penetration of the Internet banking in Greece is the whole
acceptance of Internet by the Greek society and the type of Internet connection the
Greek consumers choose as well. The elements show that the whole penetration of the
Internet in Greece today, is lower than the rest EU countries. Nevertheless, this
situation has started to change and more and more high speed DSL connections in
cheap price are available for the Greek consumers. Moreover, Greek banks invest
funds for the improvement of their e-banking services and the promotion of the e-
banking services is a basic element of their marketing policy.
Thus, it is clear that the wider spread of the Internet banking in Greece is a
matter of time, especially for the younger consumers that have built up a different
culture about new technologies. From the Diagramme 1 below it is obvious the
continuous increase of the Internet banking users in Greece.
Diagramme 1: Internet banking users in Greece, during 2000- 20044
0
100000
200000
300000
400000
500000
600000
2000 2001 2002 2003 2004
4 Source: Hellenic Bank Association
21
Current situation5
The structure of the Greek banking system has not much changed the during
last 3 years. Only small changes appeared such as the transformation of the Greek
Postal Savings bank from a special credit organization to a bank on April 2006 and
the incorporation of the Marfin Egnatia bank (after the consolidation of thee banks:
Egnatia, Marfin and Laiki) on March 2007.
Greek banks continued to play their important role, as their market share on
assets basis came from 85.1% in 2005 to 86.5% by the end of 2006. Unchanged
remained the market share of the foreign banks branches (10.1%) likewise the Greek
co-operative banks (0.8%). In addition a decrease observed to the market share of the
special credit organizations (2006: 2.6%, 2005: 4%), but this can be justified because
of the Greek Postal Savings bank transformation to a bank.
The concentration of the Greek banking system presented a small increase, as
it is clear from the amount of total assets of five biggest banks (2006: 66.4%, 2005:
64.8). This fact is presented in EU (European Union) as well, where generally
speaking, small sized countries have comparably higher concentration index.
Nevertheless, unlike the EU tendency, the distribution channel in Greece continued to
grow but in lower rate. This phenomenon can be explained by the emphasis the Greek
banks put to retail banking, as well as the consuming preferences, especially of the
elderly people, who prefer to visit a bank branch for the satisfaction of their banking
needs.
The network density per 100.000 citizens in Greece (33) remained lower than
the average density in euro-zone (2005: 54) and in EU (2005: 44) as well. The number
of employed per branch in Greece, although presents a reduction the last years, was
5 All the numerical information provided derives from the Annual Report of the Director of “Bank of
Greece” for the year 2006, Athens (2007)
22
17 persons by the end of 2006, and remains significantly higher than the EU average
(15 persons). During 2006, despite the expansion of the traditional distributional
channel, banks continued to develop alternative distributional channels. More
specifically, the number of ATM’s presented a 7% increase (2006: 6667, 2005: 5230).
Moreover banks increased the number of services offered by ATM’s and improved
the offered electronic banking services. The banking services via chains of retail trade
(e.g. supermarkets, electronics stores, car agencies) continued to develop, as well as
the synergies with professionals (e.g. contractors). In addition, banks put emphasis to
direct marketing.
The satisfactory profitability and capital sufficiency of Greek banks, as well as
the improvement of risk management systems conduced to the well operation of the
Greek credit system in 2006. Many factors contributed to this positive situation such
as: the high rates of economic development and credit expansion, the satisfactory run
of the Greek Stock market, the differentiation of incomes for Greek banks via their
network expansion abroad and the minimize of the operating cost.
More specifically, basic characteristics of the Greek banking system the last 3
years were: the limitation of the profitability margins, the shrink of the operational
cost, the expansion to the area of Southeastern Europe and North Africa, and the
decrease in the number of the protested loans The severe competition started to press
the profitability margins in every kind of loans, and this pressure was higher for the
mortgage loans and the loans for the business loans for the medium sized companies
On the other hand, the profitability margins are higher in Southeastern Europe
and can compensate the pressure in Greek market. The expansion in Southeastern
Europe continues with rapid rates, and the limitation of the operational cost in the
Greek market is arresting. Nevertheless, the contribution of the international
23
operations is estimated to be more apparent after 2009, apart form National Bank of
Greece, where the contribution of Finansbank is already significant. Eurobank has the
second largest network of branches in Balkans (after NBG), while Piraeus Bank and
Alpha Bank have powerful presence, too.
It should be mentioned that many gurus of the Greek banking system predict a
second period of mergers and acquisitions for the Greek banks, in the near following
years. In the following Table 3 the profits after taxis in are presented for the Greek
banks the last two years, in euro.
Concerning the growing rate, Greek banking kept on growing for forth
continuing year, although in a lower rate in relation to the rate of the year 2005.
Especially important was the contribution of the net incomes of interests, which
approximately represent the ¾ of total incomes of Greek banking, because the small
reduction of the net interest margin due to the intensified competition over-hedged
from the high rate of credit expansion.
Table 3: The profits after taxes of the Greek banks for 2006 and 2007
Banks 2006 2007 Difference
(%)
Alpha Bank 150.666 256.140 70.0%
Aspis Bank 3.229 3.897 20.7%
ATE Bank 47.739 74.593 56.3%
Attica Bank 4.076 4.087 0.3%
Bank of Cyprus 64.620 107.000 65.6%
EFG Eurobank 157.300 203.800 29.6%
Egnatia Bank 1.954 7.203 268.6%
Emporiki Bank 52.077 18.275 -64.9%
Geniki Bank -20.185 -10.651 47.2%
Greek Postal Savings Bank 74.092 39.132 -47.2%
Marfin Popoular Bank 34.892 170.292 388.1%
National Bank of Greece 250.196 380.510 52.1%
Piraeus Bank 186.007 248.171 33.4%
Proton Bank 13.678 11.313 -17.1%
Sum 1.020.341 1.513.792 48.4%
24
The rate of credit expansion to household consumers, although decelerated,
remained in a high level in 2006, on the same time the rate for enterprises accelerated.
In addition the incomes from commissions increased due to the expansion of the
operations to retail banking and the better performance of the Greek Stock-market.
The continual expansion of businesses and the reduction of the operating cost
improved the performance index.
The capital structure was at higher level than the 8% obligatory minimum and
marginally higher than the EU average, despite the great increase of the risk weighted
assets, which is due to the great credit expansion of the Greek banks abroad. The
important increase of the NBG capital stock in order to continue mergers and
acquisitions abroad was another basic characteristic of the under observation period.
On the other hand, is important for this study to refer the main risks and
challenges that the Greek banking system faces.
First is the effort for successfully adaptation of the new supervision framework
(Basel II). Bank of Greece has already done preliminary auditing to find out the
alertness of the Greek banks to apply this framework, and simultaneously tries for the
formulation of this framework. It is appreciated that the capital needs will grow
because of the calculation of the capital needs for the definition of the operating risk
Second is the growing competition between Greek banks for a greater market
share, mainly in retail banking. This competition leads to the reduction of the profit
margin and to flexibility (at least for some banks) of their credit standards, too. A
proof for this is the percentage increase of acceptances in relation to the number of
requests for new consumer credit and credit cards.
Third is the effective risk management (credit, operating and county’s) that
concerns the Greek banking businesses abroad, especially the businesses in the
25
countries of Northern-Eastern Europe, the markets of whom present significant
fluctuations.
Forth is the right evaluation about the risks in use of innovative banking
products and about the investment in new markets (hedge funds). Surely, it should be
mentioned that these investments represent an only small part of the total capital
outcomes of banks.
Fifth is the increase of the proportion between grants and deposits which leads
Greek banks to look for alternative funds such as euro-bonds. These funds although,
have higher cost and make Greek bans more vulnerable to market fluctuations.
In order Greek banking system to overcome all these difficulties it is important
Bank of Greece in corporation with the International Monetary Fund (IMF) to be in
continuous alertness. Moreover Greek banks should try to retain their profitability,
liquidity and capital structure among the internationally accepted limits.
2.2 Productivity of the banking system
Introduction
The main problem about measuring banking productivity is the fact that is
difficult to define what productivity is, as there are many factors that should be
estimated. Thus, banking productivity can be measured by outputs, costs, efficiency
and performance. In the international literature, there are many experiential statistical
and econometric studies about the subject of the productivity of the banking system.
Most of the studies can be classified in two main schools of thought, regarding the
appreciation and measurement of the productivity.
One of them (M. English, S. Grosskopf, K. Hayes & S. Yaisawarng, 1993 – P.
McAllister & D. McManus, 1993 – A. Berger, W. Hunter & S. Timme, 1993)
26
classifies three basic productivity categories: scale efficiency, scope efficiency and X-
efficiency.
Scale efficiency is referring to economies of scale where the same amount of
increase of the utilized incomes drives to a relatively greater increase of production or
equivalently a product increase, ceteris paribus, concludes to a relatively smaller
increase of the production cost. The supporters of this school of thought consider that
the use of translog cost function does not provide efficient results, as confronts the big
and small banks in the same way, assuming that they are moving in the same average
cost curve.
Scope efficiency makes comparisons between the production cost of some
fiscal products and services from two or more banks and the same production cost
from a unified bank. In addition, scope efficiency concludes if it is better for a bank to
provide a completed range of banking products and services of it should specialize
offering only some of them.
Finally, X-efficiency mainly refers to the managers’ ability to minimize the
production cost or to maximize the incomes providing similar products.
Special interest presents the distinction between technical inefficiency and
allocative or price inefficiency. The first one can be classified in two sub-categories,
the pure technical inefficiency which refers to the elimination of banking profits
because of the non application of the production plan and operating off the isoquant,
and the scale inefficiency, when the bank functions without constant returns scales.
Allocative or price inefficiency refers to profit loss because of the non selection of
the best production plan.
The second school (E. Kaparakis, S. Miller & A. Noulas, 1994 – A. Noulas, S.
Ray & S. Miller, 1990 – G. Ferrier & C. Lovell, 1990 - N. Rangan, R. Grabowski, H.
27
Aly & C. Pasurka, 1988 – E. Elyasiani & S. Mehdian, 1990 – A. Berger & D.
Humphrey, 1991) follows the frontier approach by using production and/or cost
frontiers, where a benchmark is created for making comparisons about the real
banking efficiency. Deterministic and stochastic frontiers are distinguished, paying
attention mainly to the stochastic frontiers, where a composite error-term is defined,
and this provides the ability of classification between firm specific effects and random
shocks.
There are two basic approaches about the banking function and the products
the banks offer.
The first one is the production approach where the operating costs are
measured only. This method considers that banks provide demand deposits, time
deposits, saving deposits, commercial loans, mortgage loans, while they use capital,
labor and some other productional factors as incomes. This approach is appropriate
when the cost efficiency is interested.
The second one is the intermediation approach where the products are
evaluating in monetary unions and the functional costs are examined as well as the
interest expenses. Moreover, banks are considered to be capital collectors. This capital
is converted into loans and other kind of assets by the banks. This method is the most
suitable when we are interested about the banks’ financial liability.
Most of the studies of the second school researchers conclude that the big
banks are less effective, and that the main reason for this ineffectiveness is the purely
technical inefficiency.
Based on the property theory the public owned companies have less
effectiveness and profitability than the similar private companies. The opposite theory
states that the less profit observed is more the result of a social and employee-friendly
28
policy (higher salaries, better conditions of work, other privileges and advantages)
than an evidence of less effectiveness. Most of the studies done until nowadays on this
subject are based to North America companies’ data, and less to European ones.
These studies are referred to many economic sectors such as airlines, transportations,
railways, electricity, water supply, university education.
The basic disadvantage of many of these studies is that compare the
effectiveness between the public owned and private companies in a monopolist or
adjusted duopolist environment or in markets where the product cannot be evaluated
by the market forces. Almost none survey has not examined the property status quo in
a competitive environment. In addition, it has been ascertained that the existence of
non competitive circumstances is important of the company’s effectiveness.
In order to confront this problem A. Boardman and A. Vining (1996) used a
model with the following form to analyze the relation between marker structure and
effectiveness:
Effectiveness= f (mixed and public owned companies, assets, sales,
employees, market percentage, concentration, industry, country)
The model examined the effectiveness of the 500 biggest manufacturing
companies and mines and concluded that the mixed and public owned companies are
less profitable and less effective in relation to the similar private companies.
Another survey from J. Boyd & D. Runkle (1993) includes the two basic
theories that have been developed for the banking company operation, in the
international literature (deposit insurance theory and modern intermediation theory, in
order to check if the theoretical predictions can be verified.
29
The first theory is the deposit insurance theory. This theory states that the
deposit insurance system drives the insured banks to take more risks. On the other
hand, what is considered to be the worst for a country’s economy is the bankruptcy of
the biggest banks (more than the smaller ones), therefore the bigger banks receive the
greatest amount of the governmental insurance, and as a result there is unbalanced
treatment between the small and big banks. This theory predicts that the big banks are
“too big to fail” or they receive greater amount of the governmental aid and assurance
or both of them.
The second theory is the Modern intermediation theory. This theory
believes that the big banks (intermediaries) have less chances of failure than the small
banks. The basic point of this theory is that there is asymmetric information between
the borrowers and the lenders. Thus big banks because of having the advantage to
keep a large number of customers (borrowers and lenders), they reinforce
diversification, and finally the transaction cost is reduced, because of the asymmetric
informed customers. When a bank has many investments the pooled risk is reduced or
disappears, as well as the possibility of costly failures. This theory predicts that is less
possible for the big banks to fail, and that they are more costly effective in
comparison with the small bank.
Boyd & Runkle’s empirical study showed that there is statistically weak
negative relation between the banking size and the percentage of profits to the assets.
In addition the relation between the economy scale and the failure possibility
was examined, by using the market share price as en evidence of effectiveness. From
the empirical data made clear that the big banks failure possibility was greater
than the smaller ones. Namely, the data verified only the prediction of the second
theory in a limited extent.
30
The main techniques developed for the appreciation of the banking
productivity are the following: data envelopment analysis, econometric stochastic
frontier approach, thick frontier approach and “distribution-free” approach.
2.3 Techniques for measuring Banking Productivity
Frontier analysis
G. Ferrier & C. Lovell (1990) analyzed two of the techniques for measuring
the banking effectiveness in relation to the functional cost: a) the econometric
approach of a parametric cost frontier and b) the production frontier (nonstochstic).
Despite the important theoretical and methodological differences both techniques
present many similarities.
From the analysis of the production frontier it was shown the existence of a
relatively high technical inefficiency and moderate allocative inefficiency in relation
to the technology that presents increasing performance scales. The more effective
banks belong to the category of the smaller banks and this effectiveness advantage
makes the competition with the big banks possible, besides the disadvantages they
have.
The moderate economies of scale give a possible cost advantage to the big
banks. The distributional inefficiency is the result of the labor over-use and capital
under-use.
Another two known economists E. Elyasiani and L. Goldberg (1996) used the
production frontier approach to show that the cost function analysis is suitable for the
economies of scale measurement but inappropriate for the banking effectiveness.
Pure technical inefficiency is suitable for examining the product loss when the
banking operation is onto the production frontier. On the other hand, scale
31
inefficiency refers to product loss because of the banking operation to the minimum
point of the short-term curve of average cost, and not to the minimum point of the
long-term curve of average cost (with fixed scales of production).
Generally speaking, the literature referring to banking issues can be classified
in four types of models about the production frontier approach: the nonparametric
frontier models, the parametric programming frontier models, the deterministic
statistical models and the stochastic frontier models.
In addition, the intermediation approach is considered to be more suitable for
the production approach, because excludes the interest expenses –which are a
significant part of the banking expenses- from the analysis, and in the same way is
more proper to consider the banking deposits as banking inflows than banking
products.
To sum up, the banking size positively affects banking effectiveness and the
grater increase occurs to scale efficiency.
Another study is interesting, where the nonparametric frontier approach is
used (H.Aly, R. Grabowski, C. Pasurka & N. Rangan (1988) for the estimation of the
different forms of effectiveness in a sample of 322 banks in the United States, during
the year of 1986. In this survey, the intermediation approach is used and they
considered as inflows the labor, the natural environment and the lending capital (time
deposits and saving deposits).Moreover, as products are defined the mortgage,
commercial, industrial consumer and other loans and the demand deposits. The survey
concludes to the existence of a relatively low total effectiveness. It is proved that
banks are more allocativelly effective than technically effective and that the main part
of the technical ineffectiveness is a result of inflows wasting. Pure technical efficiency
is positively related to the banking size, as well as the total effectiveness is negatively
32
related to the product differentiation and positively related to the urbanization extent.
Finally there were no important differences for the effectiveness between branching
and unite state banks.
Data Envelopment Analysis (DEA)
A well-known methodology developed by H. Sherman & F. Gold (1985) is
Data Envelopment Analysis (DEA) which is a linear-programming based method
for evaluating the performance of organizational entities and is usually being used in
banking along with other industries. DEA creates a referring sample (which is the
linear combination of the effective banks) in order to find out the ineffective bank
branches, examining the mixture of the services offered and the inflows used.
The equation used and gives the profits of a bank is the following:
Bank branch’s Profits= Incomings from interests + Incomings from offered
services – Cost of capital (mainly interests) – Functional expenses
With DEA, bank branches are compared to each other, and the more effective
and ineffective branches are detected.
In addition, DEA provides information about the alternative methods which
can be used in order to transform an ineffective bank branch to relatively effective.
DEA concludes firstly the evolution of the empirical function of production
and secondly the managers’ evaluation from a selected or available elements about
inflows/outflows.
33
As product is considered the transaction number for each service/product
offered by the bank branch, as well as inflows are labor, functional expenses and the
offices’ square size.
The comparisons are always made with some other bank branches (those with
the best performance detected), therefore the conclusions are always relative. DEA
cannot find out the reason of ineffectiveness or to suggest the treatment needed to
overcome the ineffectiveness.
DEA counts the effectiveness of the branch o in relation with the n branches
of the sample with the following way:
S r n
max E0 = Σ Ur yro / Σ Vj Xjo j = 1,………..,n branches
r=1 j=1
s r n
s.t. 1 > Σ Ur yrj / Σ Vi Xij
r=1 j=1
0 < Ur r = 1,..........… ,s
where yrj: quantity of r product of j branch and Xij: quantity of i inflow of j branch.
The pair (Ur, Vi) is the solution we survey, in order the branch to get the maximum
effectiveness.( E0 < 1).
One of the few surveys about the competitiveness and effectiveness of the
European banking sector was made by S. Berg, F. Forsund, L. Hjalmarsson & M.
Suominen (1993), who compared the banking productivity among Finland, Norway
and Sweden using the DEA method.
34
The effectiveness measurement size is given from the following relation:
Eij = min {aij : F (yj aij xj) ≤ 0} i,j Є T aij
where a is the scale factor, y the products’ vector, x the inflows vector, i the
country with the technological frontier (with the best performances), j the country that
compares its performances with the relative country i and T the whole countries
sample.
The liner programming problem that should be solved from Berg, Forsund,
Hjalmarsson & Suominen was the following:
min Eij zij
s.t. (a)Yi zij≥ yj , (b) Xj zij≤xj Eij , (c) Σ zij=1, (d) zij≥0 j
where Y is the products’ matrix, k the inflows’ number, n the number of the
banks of the sample, X the inflows’ matrix and z the weighted vector that defines the
benchmark bank in comparison with the j bank.
In order to find out the differences in effectiveness between two banks, the
Malmquist productivity index can be used:
Ei2 min {a i2:Fi (y2ai2x2) ≤0}
Mi (1,2) = ------- = --------------------------------------
Ei1 min {a i1:Fi (y1ai1x1) ≤0}
i, 1, 2 Є T
In the survey 3 products were used, loans, deposits and the number of
branches, as well as 2 inflows: labor and capital. The differences in effectiveness are
analyzed by two factors: a) the comparison with the best bank in national level and b)
comparison between countries.
35
The survey concludes that the efficiency spreads between the banks of the
three Scandinavian countries are greater between Finland and Norway, which have
the bigger and smaller number of banks respectively. Moreover, the average Swedish
bank was found to be more effective in the three countries sample, second was
Norway and third Finland.
2.4 The Banking ineffectiveness
In another interesting research A. Berger & D. Humphrey (1997) noted that in
many cases banking ineffectiveness is functional and not financial, namely it derives
from natural incomes overuse and not from exceeding interest payments. In addition,
it is obvious that technical ineffectiveness cases (respective overuse of each inflow)
are more than allocative ineffectiveness cases (inappropriate mixture of inflows).
The study of A. Berger, D. Hancock & D. Humphrey (1993) had almost
identical conclusions, where noted that output inefficiencies are greater than input
inefficiencies, namely inefficiency is more a result of diminished incomes than
exaggerated expenses. Moreover, the researchers noted that big banks are in a great
amount more effective than small ones, and that is more profitable for a bank to
specialize in business than consuming loans.
To sum up literature about banking effectiveness, it can be noted that three are
the basic categories of effectiveness: scale efficiency, scope efficiency and X-
efficiency. In addition, the approaches followed about the subject of banking
operation and products are two: the production approach and the intermediation
approach. The ineffectiveness in banking productivity it is distinguished in two types:
the technical inefficiency and allocative or price inefficiency. It is proved by many
studies that public owned banks are less profitable than the similar private ones, as
36
well as the relation between banking size and profitability is statistically insignificant.
The banking ineffectiveness is basically technical (respective overuse of each inflow).
Two are the basic techniques used for checking effectiveness: frontier analysis and
data envelopment analysis (DEA).
37
2. RESEARCH METHODOLOGY
2.1 The DEA technique
Data Envelopment Analysis (hereafter DEA) uses linear programming for
estimating a company’s efficiency. The most basic characteristic of this non-
parametric technique is that measures the comparative or relative performance. DEA
measures the efficiency of a company with reference to other companies. As E.G.
Tsionas et al (2003) mention, DEA provides quantitative information in three related
fields, which are technical efficiency, allocative efficiency and total factor
productivity. Thus using DEA there is not an absolute definition of productivity and
efficiency, but only comparisons among the units can be made. On the other hand,
there are always units used as benchmarks to measure efficiency.
As a non-parametric technique, DEA observes the outputs and inputs levels of
the units and constructs a production possibility set. As Thanassoulis (1996) mentions
DEA measures efficiency by calculating the amount to which a unit could produce
more outputs for its input degree or by estimating the amount to which for its outputs
could have utilized a smaller amount of inputs. Therefore the output efficiency shows
the degree to which the output results can be better by increased productivity and no
supplementary input. Moreover, the input efficiency shows the degree to which the
inputs can be less as a result of improved efficiency, without reduction in outputs.
The following Figure 1 describes two companies K and K1. K1 is the efficient
one, operating on to the line of the production possibility set, while K is the inefficient
one, utilizing more inputs for the same level of outputs.
38
Figure 1: The Production Possibility Set
The differences between input and output oriented productivity are analyzed
below. The Farrell (1957) measures input adjusted technical efficiency using the AC /
AK ratio, while the output adjusted is equal to BK / BD,. On the other hand Farrier
and Lovell (1990) consider that when there is a constant return to scale, the
combination of different outputs and inputs provides always equivalent degrees of
efficiency. Vice-versa the combination provides unequal results when decreasing or
increasing returns to scale have been developed. When there is constant return to
scale, Fare and Lovell consider that for any inefficient point stands that AC / AK =
BK / BD. As Thanassoulis mentions (2001, p.22): “In general terms the essential idea
is that we wish to assess how efficiently each DMU6 is handling the transformation
process when compared to other DMUs engaged in that process. To do this we must
6 Decision Making Unit
39
capture in the outputs that the DMU achieves, take into account the resources it uses
and allow within the input-output set any factors beyond the DMU’s control which
impact its performance”. Figure 2 is representative
Figure 2: The DMU transformation
Inputs
Transformation
by the DMU
Outputs
Giving an example, in Figure 3(a), an inefficient company is presented
operating at point K, having decreasing return to scale. Figure 3(b) demonstrates the
constant return to scale, where each inefficient point equals to AC / AK = BK / BD.
Figure 3: Constant and Decreasing Return to Scale
40
Figure 4 presents a production possibility curve where the production
involves a single input and two outputs. As Farrier mentions the line AA’ symbolizes
the highest production possibilities. The firm I is an inefficient firm, operating below
the production curve. The distance IC corresponds the technical efficiency, namely
how the outputs can be increased without additional inputs needed. Technical
efficiency (TE) can be estimated as the ratio: TE = 0I / 0C. Moreover, the line BB’
defines the Allocative efficiency (AE). The ratio AE = 0C / 0D can be used for this
calculation. Finally, Overall Economic efficiency (EE) is the product of Technical
efficiency and Allocative efficiency, or mathematically: EE = TE x AE = (0I / 0C) x
(0C / 0D). The margins for these ratios are between one and zero.
Figure 4: Production possibility curve with a single input and two outputs
As Thanassoulis (2001) mentions DEA has many advantages as a method
measuring technical efficiency of different companies that function at the similar
sector. Many of the weaknesses of the parametric techniques can be overcome while
examining the financial ratios. More specifically, a great number of inputs and outputs
can be easily calculated, because the linear relationship is assumed and the
41
determination about the functional form or statistical distribution can be avoided. The
most comparative advantage of DEA technique is that enables firm’s management
department to attend each unit’s productivity and to create a whole image, as well.
Therefore, considering a number of financial ratios as outcomes, many of the
ineffective and effective points of the company can be detected. As far as the banking
sector, the relative efficiency is used to define each bank’s efficiency comparing the
efficiency ratio of a bank to another.
Giving an example about output-oriented DEA, the following Figure 5
presents a linear production curve where two outputs are used. The points lying below
the curve represent inefficient firms the operation of whom is characterized by output
slacks. Points lying on the curve are considered efficient. More specifically, points A,
B and C are the efficient frontiers while the point K’ is on the frontier of the
production curve. Namely, the observation K is projected to the observation K’ and
the amount K’A shows how much the y1 production could be increased, without
additional inputs. Thus, the amount K’A is the amount of the output slack in the
output of y1.
Figure 5: The output-oriented DEA
42
Applying, the previous example, to the banking sector, the productivity of
eight commercial banks can be examined (CB1, CB2, CB3… CB8), considering two
efficiency ratios (NIM – Net Interest Margin and P/L – Profit (Loss) per Employee).
As it is obvious from the Figure 6, commercial banks CB5, CB6, CB7 and CB8 are
inefficient because lie below the efficient frontier, while CB1, CB2, CB3 and CB4
operate on the efficient frontier and are considering efficient. The observation CBκ is
the reference point for the bank CB5 as combines the P / L and NIM ratios with the
best combination. CBκ also represents the best mixture between banks CB2 and CB3.
Thus, the distance CB5 to CBκ represents the inefficiency for CB5 which can be
calculated by the ratio 0CB5/0CBκ. It is important to be mentioned that inputs are not
taken into consideration as it is considered to be the same for all banks.
Figure 6: Application of the output-oriented DEA to the banking sector
43
The banks examined usually belong and operate to similar markets and
provide similar products and services. Mathematically, using the output-oriented
DEA, banks produce outputs Pκ (κ = 1, 2,…,κ), which make available financial ratios
for each bank respectively r ((r = 1, 2,…, R). Moreover a weighed average μ (μ = μ1,
μ2, …, μκ)ⁿ is used and provides the unit’s efficient frontier (n) and the efficiency
measure Θⁿ as well. Thus each bank’s linear programme for max φn is:
R
Σ μr Pir ≥ φn Pin (i = 1, 2, …, p)
r=1
R
Σ μr = 1
r=1
φn ≥ 0
μr ≥ 0
The term Θ*ⁿ = 1 / φn ( 1≥Θ*ⁿ >0) decides for productivity being the
efficiency score. More specifically different Θ* and slacks provide different
efficiency. The following Table 4 is more representative
Table 4: Different Θ* and slacks affect DMU’s productivity
OBSERVATION INTERPRETATION
Θ* Slacks DMU
1 0 Efficient
<1 0 Inefficient
1 >0 Not Pareto-efficient
44
Each bank can set best possible weights (μ*1, μ*2, …, μ*κ), in order to
improve its financial ratio Pi. This can be expressed mathematically with the
following formula:
R
Ŷin = Σ μ*κ Piκ or Ŷin = Pin (1/ Θ*ⁿ) + sin
r = 1
Where 1/ Θ*ⁿ is the relative output enhance and sin expresses the non-relative
residual output and describes the slack on ratio Pi.
Banker and Morey (1986) and Smith (1990) have put the following constraint
in case that the rates of the under observation banks are negative. This occurs when
the negative efficiency ratio of a certain bank is greater than the negative ratio of the
group of the banks examined.
R
Ŷin = Σ μκ Piκ ≥ Pin
r = 1
3.2 Data and Financial Ratios
In order to apply the DEA technique to the Greek banking system is important
to definite the sample data. First the period 2003-2006 is examined and ten banks are
under observation. The data related to examining banks are taken from the profit and
loss accounts and the balance sheets of each bank. More specifically the under
consideration commercial banks are as follows in Table 5:
45
Table 5: The under consideration banks
As far as the data selection is concerned, it should be mentioned that the
examining banks are the ten biggest banks of the Greek banking system considering
their client basis and their financial elements as well. From the big banks of the
country, Bank of Greece, the central bank of the country and AteBank a state
controlled bank applying government’s agricultural policy and providing a limited
only commercial services to the public, are both excluded from this analysis. On the
contrary, Bank of Cyprus is included in this survey because it plays a significant role
in Greek banking system; despite the fact that its head office is out of Greece (foreign
bank)..
Concerning the five financial ratios which are used, these are ratios usually
utilized by analysts in order to measure productivity and, as a group, provide a
satisfactory picture of bank’s efficiency. Many other ratios, or alternative types of
them could be used depending on the way productivity is defined and the unit’s
special financial characteristics. More specifically, the financial ratios used are
presented in the following Table 6.
Banks Symbol
Alpha Bank CB1
Aspis Bank CB2
EFG Eurobank CB3
Bank of Attica CB4
Geniki Bank CB5
Egnatia Bank CB6
National Bank of Greece CB7
Emporiki Bank CB8
Bank of Cyprus CB9
Piraeus Bank CB10
46
Table 6: The under consideration financial ratios
Financial Ratio Mathematical formula Description
1
Profit (Loss) per
Employee (P/L)
(P/L) = PBTt / ((Lt + Lt-1) / 2
PBT: profit (loss) before taxes at time t
Lt: number of employees at time t
Lt-1: number of employees at time t-1 (last year)
An increase of this ratio means an increase of bank’s productivity as well and vice versa. Moreover this ratio examines labor productivity.
2
Return on
Equity (ROE)
ROE = PBTt / ((Et + Et-1) / 2)
PBTt: profit (loss) before taxes at time t
Et: bank’s equity at time t Et-1: bank’s equity at time t-1 Equity = Shareholders Capital +
Reserves + Fixed Assets (Revaluation) Reserves + Fixed Assets Investment Subsidy + Retained Earnings.
With ROE the bank can measure its profitability and the efficiency provided to use its equity.
3 Return on Total
Assets (ROA)
ROA = PBTt / ((TAt + TAt-1) / 2)
PBT: profit (loss) before taxes at time t
TAt: bank’s total assets at time t TAt-1: bank’s total assets at time t -1
Measures the total assets efficiency and therefore it can evaluate the management policy of the bank. ROE and ROA are highly correlated.
4
1 / Efficiency
Ratio (1/EFF)
1/EEF = GOPt / OEt
GOPt: the gross operating profit (loss) at time t
OEt: operational expenses (OP) at time t. OP: Commissions Payable +
Staff Costs and other Administrative Expenses + Fixed Assets Depreciation + Other Operating Charges + Extraordinary Charges
Describes the relation between the operational expenses and the gross operating profit (loss). The higher it is, the more efficient the bank under observation is.
5
Net Interest
Margin (NIM)
NIM = NIt / ((TAt + TAt-1) / 2)
NIt: bank’s net income at time t TAt: bank’s total assets at time t TAt-1: bank’s total assets at time t -1
Measures the assets efficiency of the bank, ceteris paribus. It calculates the efficiency for the group of under consideration banks
47
4. RESULTS
4.1 Basic Results
The following Figure 7 presents a general picture of the financial ratios which
are examined. As shown in the diagrams, apart from few a exceptions the Greek
banking system performs satisfactory. Thus, most of the commercial banks presented
minor or large-scale development and only a limited number of them had negative
performance.
As it is obvious, ROA and ROE present approximately similar trends for each
bank. Geniki bank is an exception as presents only negative performances for ROA
and ROE for the examining period of the three years and, more specifically, an
unusual negative ROE for the year 2004. This is mainly due to the restructuring
efforts of this bank after its acquisition from the Societe Generale Group. Emporiki
bank has negative performances in ROA and ROE as well, but only for the years 2004
and 2006. Emporiki bank is in a restructuring program too, after its acquisition from
the Credit Agricole Group. All other banks have positive performances. This means
that most of the Greek banks have a management policy that is moving to the right
direction, increasing profitability and enhancing efficiency.
Alpha bank has the highest Profit per Employee for the years 2004 and 2006,
while EFG Eurobank performs better for the year 2005. In addition, National bank of
Greece and Bank of Cyprus have also performed well considering their performance
every year. Generally speaking, the level of P/L ratio is satisfactory for most of the
banks and this means satisfactory labor productivity and whole productivity. Once
again, Geniki bank and Emporiki bank perform negatively as the first one has Loss
48
per Employee for each one of the three years and the second one has Profit per
Employee only in 2005.
Concerning the Efficiency ratio, Piraeus bank shows the best performance for
all the three year period and, especially, for the year 2006 it is extremely high. Egnatia
Bank, National Bank of Greece and Bank of Cyprus present satisfactory level, too.
Thus, four banks covered the operational costs by gross operational income in the
most efficient way. Exceptions to the general good performance of the Greek banking
system are Geniki bank and Emporiki bank once again
Finally, EFG Eurobank, Alpha bank, National bank of Greece and Piraeus
Bank shows the higher Net Interest Margin. The numbers are approximately similar
among these four banks and only Alpha bank seems to be the more efficient one.
Apart from Geniki bank and Emporiki bank, Aspis bank, Bank of Attica and Bank of
Cyprus presented negative or very low level of Net Interest Margin..
49
Figure 7: Financial ratios 7
Return on Total Assets (ROA)
-0,0500
-0,0400
-0,0300
-0,0200
-0,0100
0,0000
0,0100
0,0200
0,0300
1 2 3 4 5 6 7 8 9 10
Commercial Banks
2004
2005
2006
Return on Equity (ROE)
-2,0000
-1,5000
-1,0000
-0,5000
0,0000
0,5000
1,0000
1 2 3 4 5 6 7 8 9 10
Commercial Banks
2004
2005
2006
7
Banks Symbol Bank of Attica CB4 Emporiki Bank CB8
Alpha Bank CB1 Geniki Bank CB5 Bank of Cyprus CB9
Aspis Bank CB2 Egnatia Bank CB6 Piraeus Bank CB10
Eurobank CB3 NBG CB7
50
Profit/Loss per Employee (P/L)
-100.000
-50.000
0
50.000
100.000
150.000
1 2 3 4 5 6 7 8 9 10
Commercial Banks
Th
ou
san
d E
uro
s
2004
2005
2006
1 / Efficiency Ratio
-1,00
-0,50
0,00
0,50
1,00
1,50
2,00
2,50
3,00
3,50
4,00
4,50
1 2 3 4 5 6 7 8 9 10
Commercial Banks
2004
2005
2006
Net Interest Margin
-0,06000
-0,05000
-0,04000
-0,03000
-0,02000
-0,01000
0,00000
0,01000
0,02000
0,03000
1 2 3 4 5 6 7 8 9 10
Commercial Banks
2004
2005
2006
51
Generally, it can be observed that there is a positive trend for Greek banking
system. Most of the banks are developing or remain constant, and only two, Emporiki
bank and Geniki bank perform negatively. However this negative performance can be
justified by the restructuring efforts these two banks have gone through,.
In the following Table 7 a number of descriptive statistics is presented. The
correlation coefficients allow observing possible different trends. For example, some
correlation coefficients such as P/L – ROE, NIM – ROE and P/L – NIM, have high
values. The explanation to this is that these ratios are highly correlated. Especially
ROE and ROA take values very close to each other, thus ROA can be excluded from
the study.
Table 7: Descriptive Statistics & Correlation Coefficients
Table 8 presents the DEA model which provides the efficiency ratios for the
ten Greek banks. The Table is divided into three columns, one per each year and
includes the efficiency ratio Θ* and the bank’s rank for all the three year period based
on this ratio. Θ* values observed are from 0.40 to 1. As it was mentioned before,
commercial banks with Θ* equal to 1 are characterized as efficient. Thus banks 03
and 01 (Eurobank and Alpha bank) can be considered as efficient for the years 2004
P/L ROE 1/EFF NIM
Descriptive Statistics
Maximum 115,356 0.41568 3.96972 0.017039
Minimum -75,423 -1.84304 -0.31045 -0.04913
Average 30,971 0.05945 1.18322 0.00399
Standard Deviation 46,103 0.40301 1.02759 0.01365
Correlation Coefficients
P/L 1
ROE 0.759105 1
1/EFF 0.489644 0.404912 1
NIM 0.822239 0.920708 0.53997 1
52
and 2006, while banks 03 and 10 (Eurobank and Piraeus bank) are considered as
efficient for the year 2005. Also generally satisfactory performance present banks 01
and 07 (Alpha bank and National bank of Greece)
Table 8: Rank and Average Efficiency Scores
2004 Θ* Rank 2005 Θ* Rank 2006 Θ* Rank 03
Eurobank 1 1
03
Eurobank 1 1
03
Eurobank 1 1
01
Alpha B. 1 1
10
Piraeus B. 1 1
01
Alpha B. 1 1
10
Piraeus B. 0.82 10
01
Alpha B. 0.95 7
07
NBG 0.85 9
06
Egnatia B. 0.75 13
07
NBG 0.93 8
10
Piraeus B. 0.80 11
09
B.of Cyprus 0.73 16
06
Egnatia B. 0.76 12
09
B.of Cyprus 0.75 13
07
NBG 0.71 18
09
B.of Cyprus 0.72 17
04
B. of Attica 0.74 15
04
B. of Attica 0.68 21
04
B. of Attica 0.70 19
06
Egnatia B. 0.70 19
08
Emporiki B. 0.66 22
02
Aspis B. 0.65 23
02
Aspis B 0.60 24
02
Aspis B. 0.54 26
08
Emporiki B. 0.50 27
08
Emporiki B. 0.58 25
05
Geniki B 0.47 29
05
Geniki B. 0.49 28
05
Geniki B. 0.40 30
In the following Table 9 a more detailed image is provided. There are four
basic columns. The first one shows the banks, while the next one in divided into three
other sub columns, one per each year. The last two columns concern banks’ average
and total rating. Banks are also characterized based on their performance for each year
and their rank. Thus there are highly, relatively, average efficient and inefficient
banks. The most interesting that can be concluded from this Table is the 3% growth of
the Greek banking system observed from year 2004 to year 2005, which is followed
by a 4% decrease in average bank efficiency. This depreciation to the latter ratio can
be explained by the deregulation efforts that many banks made after 2005. In addition,
53
most of the banks (Bank of Attica, Aspis Bank, Emporiki Bank and Geniki bank) are
characterized inefficient, while Egnatia Bank and Bank of Cyprus only marginally can
be classified as average efficient. On the contrary, the rest four banks of this survey
present satisfactory efficiency and are classified as relatively efficient (Piraeus Bank
and NBG) or highly efficient (Eurobank and Alpha bank).
Table 9: Total Rank and Average Efficiency Scores
Table 10 can be used now in order to define the feasible targets for the
perfection of the financial ratios. More specifically the following formula is used,
which has been presented in previous section of this study.
R
Ŷin = Σ μκ Piκ ≥ Pin
r = 1
Bank 2004 2005 2006 Average Rank Interpretation
3 – Eurobank 1 1 1 1 1
Highly Efficient 1 – Alpha B. 1 0.95 1 0.98 2
10 – Piraeus B. 0.82 1 0.80 0.87 3
Relatively Efficient 7 – NBG 0.71 0.93 0.85 0.83 4
6 – Egnatia B. 0.75 0.76 0.70 0.74 5
Average Efficient 9 – B. of Cyprus 0.73 0.72 0.75 0.73 6
4 – B. of Attica 0.68 0.70 0.74 0.71 7
Inefficient 2 – Aspis B. 0.54 0.65 0.60 0.60 8
8 – Emporiki B. 0.66 0.50 0.58 0.58 9
5 – Geniki B. 0.47 0.49 0.40 0.45 10
Mean Efficiency 0.74 0.77 0.73 0.74
Median Efficiency 0.72 0.74 0.75 0.75
Maximum Efficiency 1 1 1 1
Minimum Efficiency 0.47 0.49 0.40 0.45
54
Thus, the following Table 10 presents units’ financial ratios with their feasible
targets. Using the derived μ, the feasible targets for every efficiency ratio (which are
appeared in parentheses) can be illustrated. From this Table, is clear that banks with
high efficiency rate are close to their feasible targets while banks with lower
efficiency rate are away from it.
Table 10: Financial Ratios and Feasible Targets
Banks P/L ROE EFF NIM
2004-01 59.151 (58,955) 0.1809 (0.1722) 1.50 (1.49) 0.01709 (0.01)
2004-02 4,442 (8,655) 0.0298 (0.034) 0.37 (0.52) 0.00081 (0.002)
2004-03 60,789 (60,155) 0.2284 (0.23) 0.41 (0.4) 0.01031 (0.0195)
2004-04 11,655 (17,563) 0.0645 (0.1312) 0.49 (0.71) 0.01024 (0.07)
2004-05 -75,423 (14,736) -1.8430 (0.42) 0.30 (0.55) -0.04913 (0.06)
2004-06 17,409 (25,237) 0.0767 (0.2) 2.05 (3.25) 0.01352 (0.02)
2004-07 29,516 (25,758) 0.1583 (0.213) 0.48 (0.50) 0.01081 (0.02)
2004-08 -6,288 (18,436) -0.0334 (0.15) 0.30 (0.65) -0.00728 (0.01)
2004-09 10,107 (15,325) 0.0965 (0.17) 1.62 (3.00) 0.00244 (0.01)
2004-10 38.061 (30,146) 0.1650 (0.021) 3.25 (2.54) 0.01108 (0.015)
2005-01 89,765 (89,372) 0.2690 (0.27) 1.70 (1.73) 0.01565 (0.16)
2005-02 16,387 (23,957) 0.1217 (0.32) 0.40 (0.50) 0.00116 (0.01)
2005-03 95,258 94,514) 0.3038 (0.30) 0.74 (0.74) 0.01311 (0.01)
2005-04 -8,600 (25,385) -0.0564 (0.21) 0.92 (1.64) -0.00326 (0.02)
2005-05 -8,822 (5,128) -0.1135 (0.0732) -0.09 (0.50) -0.00458 (0.01)
2005-06 16,219 (23,671) 0.0797 (0.13) 1.23 (2.37) 0.00478 (0.02)
2005-07 71,422 (70,568) 0.3266 (0.4) 1.82 (2.64) 0.01381 (0.02)
2005-08 17,433 (46.392) 0.0974 (0.14) 0.26 (0.50) 0.00476 (0.01)
2005-09 33,326 (41,842) 0.2229 (0.4012) 1.58 (2.75) 0.00274 (0.01)
2005-10 43,252 (40,319) 0.2117 (0.25) 3.18 (3.50) 0.01400 (0.02)
2006-01 115,356 (114,243) 0.3562 (0.34) 1.76 (1.75) 0.01679 (0.17)
2006-02 18,525 (31,718) 0.1234 (0.15) 0.50 (0.80) 0.00143 (0.01)
2006-03 106,742 (100,137) 0.3212 (0.33) 0.78 (0.78) 0.01223 (0.02)
2006-04 4,217 (13,065) 0.0310 (0.1) 1.04 (2.66) 0.00077 (0.02)
2006-05 -43,603 (20,583) -0.4320 (0.02) -0.31 (0.47) -0.02159 (0.02)
2006-06 8,511 (14,101) 0.0457 (0.1) 1.09 (2.65) 0.00219 (0.02)
2006-07 94,235 (100,465) 0.2609 (0.34) 1.91 (2.71) 0.01554 (0.02)
2006-08 -37,079 (4,839) -0.2538 (0.1) 0.16 (0.50) -0.01164 (0.01)
2006-09 85,632 (111,734) 0.4157 (0.89) 2.06 (5.70) 0.00534 (0.01)
2006-10 61,541 (50.673) 0.3288 (0.55) 3.97 (3.40) 0.01676 (0.03)
55
Finally, Table 11 provides an answer to the question whether bank’s size
affects efficiency. The average size of the total assets is examined is relation with Θ*.
According to this, bank’s size is determinant about efficiency as big banks tend to be
more efficient than the medium ones while medium banks tend to be more efficient
than the small ones, for the whole period of 2004-2006. More specifically based on
assets, the banks are grouped in three sub categories:
a) Small: Aspis Bank, Bank of Attica, Geniki Bank and Egnatia Bank
b) Medium: Emporiki Bank and Bank of Cyprus and Piraeus Bank
c) Large: NBG, Eurobank and Alpha Bank
Moreover, an increase of the average size of total assets, during the three year
period can be observed. This total assets increase is a basic management policy of the
Greek banks, which assists to their expansion to South-Eastern Europe. More
specifically Greek banks investments have a pioneering role in the Balkans. As J.
Bastian (2004) mentions, during the past decade Greek banks have invested over €650
million in the Balkans. Assets expansion plays a vital role to this effort.
Greek banks’ investment horizon is long term; this fact can probably explain
banks efficiency as this observed from Table 10 and 11. Thus, big banks are proved to
be more efficient maybe because they can easier find capital sources for their
expansion to the Balkans. In contrast, small banks expansion to the Balkan affects
more negatively their short-term profitability and efficiency.
56
Table 11: Total Assets and Efficiency
4.2 A comparison between Ratio and Input-Output DEA models and
Interpretation
In the following section, the input-output DEA models are compared, using
Net Profit as output and Total Assets, Labor and Operational Expenses as inputs.
More specifically using both the assumptions of variable and constant returns to scale,
the I/O DEA models are calculating. Literature suggests different approaches about
how these variables should be treated. Avkiran (1999) believes that in order the group
of variables to keep its discrimination power high, highly correlated variables should
be excluded from the survey, while Charnes et al (1994) and Rhodes and Southwick
Banks 2004 Θ* Banks 2005 Θ* Banks 2006 Θ*
LA
RG
E
07
NBG 48,302,078 0.71
07
NBG 60,426,560 0.93
07
NBG 76,569,652 0.85
01
Alpha B. 31,991,788 1
03
Eurobank 44,464,000 1
03
Eurobank 53,820,000 1
03
Eurobank 31,939,000 1
01
Alpha B. 43,663,000 0.95
01
Alpha B. 45,090,000 1
ME
DIU
M
08
Emporiki B 17,914,681 0.66
09
B.of Cyprus 25,054,697 0.72
09
B.of Cyprus 32,058,244 0.75
09
B.of Cyprus 17,212,095 0.73
10
Piraeus B 23,545,500 1
10
Piraeus B 30,931,200 0.80
10
Piraeus B 16,846,300 0.82
08
Emporiki B 19,087,516 0.50
08
Emporiki B 21,805,310 0.58
SM
AL
L
05
Geniki B 3,484,446 0.47
05
Geniki B 3,510,114 0.49
05
Geniki B 3,842,531 0.40
06
Egnatia B 2,840,169 0.75
06
Egnatia B 3,284,147 0.76
06
Egnatia B 3,696,311 0.70
04
B. of Attica 2,395,293 0.68
04
B. of Attica 2,468,842 0.70
04
B. of Attica 3,047,135 0.74
02
Aspis B. 1,900,492 0.54
02
Aspis B. 2,200,240 0.65
02
Aspis B. 2,512,280 0.60
Total Assets 174,826,344 227,704,616 273,372,663
Median Assets 17,029,198 21,316,508 26,368,225
Average Efficiency 0.74 0.77 0.73
Average Efficiency
of Large Banks 0.90 0.96 0.95
Average Efficiency
of Medium Banks 0.74 0.74 0.71
Average Efficiency
of Small Banks 0.61 0.65 0.61
57
(1993) suggest that these highly correlated variables should remain, because they
provide useful elements about the under observation units.
In Table 12 the correlation between Net Profit, Total Assets, Labor and
Operational Expenses is presented. The highly correlated variables are used,
according to the suggestions of the latter authors.
Table 12: Descriptive statistics & Correlation coefficients on Input-Output variables
Total Assets Labor Operating Exp. Net Income
Descriptive Statistics
Maximum 76,569,652,000 13,743 1,634,754,000 1,064,669,000
Minimum 1,900,492,657 903 56,687,294 -237,968,000
Average 22,530,120,784 5,241 469,038,855 210,783,727
Standard Deviation 20,753,876,524 3,948 432,251,855 321,485,058
Correlation
Coefficients
Total Assets 1
Labor 0.91105 1
Operational Expenses 0.91014 0.83471 1
Net Profit 0.90395 0.76951 0.79338 1
In the next Table 13 efficiency scores for various metrics concerning DEA
models are presented, such as Ratio model efficiency, CRS Efficiency, VRS Output
efficiency, CRS Super Efficiency, VRS Output Super Efficiency, returns to scale, and
scale score. The average efficiency of the banking system is provided as well as the
efficiency for small, medium and large banks. From this Table is clear that big banks
perform better than medium banks and medium banks perform better than the small
ones for the whole three year period.
58
Table 13: Various metrics of DEA model
Banks Ratio
Model
Efficienc
y
CRS
Efficiency
VRS
Output
Efficiency
CRS
Super
Efficiency
VRS
Output
Super
Efficiency
Returns to
Scale
Scale
Score
2004
01 – Alpha B. (L) 1 1 1 110 110 Constant 1.00
02 – Aspis B. (S) 0.54 0.77 0.80 80.39 81.40 Decreasing 0.97
03 – Eurobank (L) 1 1 1 110 110 Constant 1.00
04 – B. of Attica (S) 0.68 0.88 0.89 88.52 89.02 Constant 0.99
05 – Geniki B. (S) 0.47 0.88 0.91 89.19 91.32 Decreasing 0.98
06 – Egnatia B. (S) 0.75 0.82 0.83 82.39 83.04 Constant 0.99
07 – NBG (L) 0.71 0.87 0.93 87.2 107.84 Increasing 0.92
08 – Emporiki B. (M) 0.66 0.83 0.83 82.39 83.04 Decreasing 0.98
09 – B. of Cyprus (M) 0.73 0.88 0.90 88.23 90.32 Constant 0.98
10 – Piraeus B. (M) 0.82 0.93 0.94 93.67 98.50 Constant 0.97
2004Mean Efficiency 0.74 0.88 0.90 91.90 94.45 0.97
Mean Efficiency (L) 0.90 0.96 0.98 102.4 109.28 0.98
Mean Efficiency (M) 0.74 0.88 0.89 88.10 90.62 0.98
Mean Efficiency (S) 0.61 0.84 0.86 85.12 86.20 0.98
2005
01 – Alpha B. (L) 0.95 1 1 110 110 Constant 1.00
02 – Aspis B. (S) 0.65 0.90 0.90 89.52 89.65 Constant 0.96
03 – Eurobank (L) 1 1 1 101.65 101.84 Constant 1.00
04 – B. of Attica (S) 0.70 0.89 0.93 89.44 92.63 Constant 0.97
05 – Geniki B. (S) 0.49 0.92 0.92 92.75 94.26 Decreasing 0.99
06 – Egnatia B. (S) 0.76 0.82 0.86 82.06 81.68 Decreasing 0.97
07 – NBG (L) 0.93 1 1 102.3 103.31 Constant 1.00
08 – Emporiki B. (M) 50 0.82 0.85 82.15 81.73 Decreasing 0.98
09 – B. of Cyprus (M) 0.72 1 1 110 110 Constant 1.00
10 – Piraeus B. (M) 0.75 0.91 0.95 90.98 94.89 Constant 0.96
2005 Mean Efficiency 0.77 0.93 0.94 95.09 96.00 0.98
Mean Efficiency (L) 0.96 1.00 1.00 104.65 105.05 1.00
Mean Efficiency (M) 0.74 0.91 0.93 94.38 95.54 0.98
Mean Efficiency (S) 0.65 0.88 0.90 88.44 89.56 0.97
2006
01 – Alpha B. (L) 1 1 1 110 110 Constant 1.00
02 – Aspis B. (S) 0.6 0.91 0.93 90.53 93.4 Decreasing 0.97
03 – Eurobank (L) 1 1 1 110 110 Constant 1.00
04 – B. of Attica (S) 0.74 0.87 0.95 86.84 94.64 Constant 0.98
05 – Geniki B. (S) 0.40 0.74 0.80 76.48 81.32 Decreasing 0.94
06 – Egnatia B. (S) 0.70 0.81 0.89 81.07 89.41 Constant 0.91
07 – NBG (L) 0.85 0.90 0.92 92.60 95.16 Decreasing 0.97
08 – Emporiki B. (M) 0.58 0.76 0.81 76.48 81.32 Decreasing 0.94
09 – B. of Cyprus (M) 0.75 0.89 0.92 89.06 91.52 Constant 0.98
10 – Piraeus B. (M) 0.80 0.86 0.92 85.82 91.57 Constant 0.98
2006 Mean Efficiency 0.73 0.87 0.91 89.89 93.83 0.97
Mean Efficiency (L) 0.95 0.97 0.97 104.20 105.05 0.99
Mean Efficiency (M) 0.71 0.84 0.88 83.79 88.14 0.97
Mean Efficiency (S) 0.61 0.83 0.89 83.73 89.69 0.95
59
The returns to scale have been determined using the following formula:
φ*CRS ≤ φ*NIRS ≤ φ*VRS.
Where, φ*CRS is the optimal score for CRS model, φ*VRS is the optimal score for
VRS model and φ*NIRS is the best possible score when the constraint Σ μ ≤ 1 is
excluded to the CRS model. The returns to scale can be concluded as follows:
a) When φ*CRS = φ*VRS, there are constant returns to scale
b) When φ*CRS ≠ φ*VRS, the returns to scale should be compared to the one of
NIRS, namely:
b1) When φ*CRS = φ*NIRS, the returns to scale increase
b2) When φ*VRS = φ*NIRS, the returns to scale decrease
The division of pure technical efficiency VRS by technical efficiency CRS is
used in order for the scale efficiencies to be determined. As Thanassoulis (2001)
mentions, when CRS = VRS, the scale efficiency is equal to one and the scale size
control is without any importance while when CRS ≤ VRS, the scale score is less
than one and the bank is less efficient than before trying to control the scale size.
Table l4 provides the conclusions about this study.
60
Table 14: Returns to Scale
Banks 2004 2005 2006 01 – Alpha B. (L) Constant Constant Constant 02 – Aspis B. (S) Decreasing Constant Decreasing 03 – Eurobank (L) Constant Constant Constant 04 – B. of Attica (S) Constant Constant Constant 05 – Geniki B. (S) Decreasing Decreasing Decreasing 06 – Egnatia B. (S) Constant Decreasing Constant 07 – NBG (L) Increasing Constant Decreasing 08 – Emporiki B. (M) Decreasing Decreasing Decreasing 09 – B. of Cyprus (M) Constant Constant Constant 10 – Piraeus B. (M) Constant Constant Constant
Whole Sample (10)
Increasing 1 0 0
Constant 6 7 6
Decreasing 3 3 4
Large sized (3)
Increasing 1 0 0
Constant 2 3 2
Decreasing 0 0 1
Medium sized (3)
Increasing 0 0 0
Constant 2 2 2
Decreasing 1 1 1
Small sized (4)
Increasing 0 0 0
Constant 2 2 2
Decreasing 2 2 2
The previous analysis provides a clear image about the whole Greek banking
efficiency for the three year period examined. As it can be observed most of the banks
present constant or decreasing efficiency and only NBG for the 2004 has increasing
efficiency. As mentioned before, this fact can be explained by the expansion of the
Greek banks in the Balkans. This expansion is a strategic management policy most of
the Greek banks have chosen, and affects negatively their efficiency for the current
years.
61
Greek banks continue to play a vital role in Greek economy and are the
forefront of the expansion of the Greek companies in the Balkans. More specifically
Greek banks are the pioneers of the direct investments in South-Eastern Europe and
have the advantage of investing in neighbouring countries, with approximately same
cultural characteristics.
Although this management policy of the expansion in the Balkans offers many
investment opportunities as these countries have adopted the free-market system
only the last 15 years, has negative side-effects, too. Thus, this effort “consumes”
many assets of the Greek banks and their profitability is presented low, today.
Moreover, the Balkan economies are still unstable and developing and this maybe
means risks and disadvantages for the future of Greek banking investments there.
Moreover, as all the under observation banks have invested in the Balkans
apart from one, Bank of Attica, it is obvious that big banks present better performance
for all the three year period. More specifically, the large banks, Alpha Bank and
Eurobank and the medium banks, Bank of Piraeus and Bank of Cyprus present a
constant efficiency, while all the rest small banks (apart from Bank of Attica) present
for most of the years decreasing performance. Thus, the size of a bank is an important
factor that affects efficiency, especially when the banks are in a stadium of expansion
of their network basis. Big banks, because of their size and their financing resources
can better confront this situation, but always this depends on the extent of the
expansion.
For example, NBG which is the leader bank of the country and the bank with
the biggest capital of assets presents increasing efficiency for the year 2004, constant
for the year 2005 and decreasing for the year 2006. As this bank exaggerated its
expansion policy in the Balkans from the year 2004 to the year 2006, while most of
62
the rest basic characteristics of the Greek banking system remained the same, this
performance observed can be explained as a result of the exaggerated bank’s
expansion to the South-Eastern Europe.
To sum up, the efficiency of the Greek banking system the last years can be
explained as a result of their expansion efforts to the Balkans. As this expansion
belongs to the long-term planning of the banks, the present situation can be
characterized transitive. Big banks are presented more resistant to the profitability
pressures. The following years will answer to the question if this strategic choice of
the Greek banks will be profitable. Many factors conclude to the positive evolution,
while many risks and dangers are apparent, as well. The DEA methods let the
managers to better observe the whole situation about efficiency, and to take decisions
in order to face up the risks and dangers.
63
5. CONCLUSIONS
5.1 Summary
Greek banks are in a crucial stage of their development. The role of
productivity is more and more significant as a source of competitive advantage.
Productivity in connection with profitability is a factor of great importance for a
successful managerial policy.
In this dissertation the characteristics of the Greek banking sector were
presented, as well as a critical analysis of its efficiency by applying one basic method
for measuring banking efficiency. More specifically, the basic characteristics of six
banks that function in the Greek banking system were presented, as well as the main
facts that took place in the Greek banking system the last decade (1997 – 2007) and
entirely changed its whole image. These facts are mainly connected with the mergers
and acquisitions that appeared the last decade. In the following paragraphs, the
presence of the Greek banks abroad is analyzed, and the huge expansion of the Greek
banks to the Balkans is made clear. Moreover, the adoption of the Internet banking by
the Greek banks and the Greek consumers is presented. Greek banks have developed
satisfactory Internet banking applications while Greek consumers are still reluctant.
Despite this, the prospects are positive about the development of this application. The
current situation about Greek banking system is analyzed after, providing many
statistical and structural information.
In the following part the banking productivity is analyzed. After presenting
many of the techniques that have been applied internationally to measure banking
productivity, this survey focused on Data Envelopment Analysis (DEA) technique,
which uses linear programming for estimating banks’ efficiency. The output oriented
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method of DEA was used during the period 2003 - 2006, and a number of five
financial ratios were set as outputs. By this application the ratios results were
compared with the ones of DEA. Moreover, using DEA the efficiency findings and
the optimal scores were measured for the inefficient banks.
DEA results leaded to almost the same conclusions with the financial ratios’
results. The efficiency of the Greek banking system is basically presented constant,
while big banks perform better in comparison with the small ones. This has to do
mainly with the expansion policy of the Greek banks to the Balkans which negatively
affects their current profitability. Both DEA and efficiency ratios’ approach assist to
measure the banks’ profitability.
5.2 Managerial implications
The DEA results provided many detailed information about Greek commercial
banks’ efficiency and are more useful for a manager in comparison with the efficiency
ratio method. This is because a large number of factors are combined and a more
spherical image about efficiency is provided. The basic disadvantages of the DEA
method applied are related with the high values of the correlation coefficients which
was presented. Moreover, DEA and efficiency ratios indicate accounting values
instead of market ones.
Despite these, the results presented are very important for a manager who
wants to understand the current situation of the Greek banking system and to predict
the short-term situation. Therefore, from this dissertation is made clear that most of
the banks, with the exception of one bank (NBG: 2004), present constant or
decreasing efficiency. This is mainly due to the expansion efforts that the Greek banks
have taken to the Balkans. Moreover, big banks are presented more stable about their
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efficiency, and this can be explained because of their size which lets them to perform
better.
Giving an example, the performance of NBG although is decreasing from year
to year because of the expansion efforts, remains in satisfactory levels for all the
under observation period. The investment of the Greek banks in the Balkans is surely
risky, but is moving in a positive basis, as political, economical and cultural factors
asstist.
5.3 Limitations of the research
The most important limitation of this dissertation and simultaneously its
advantage was that the profit and loss accounts and the balance sheet accounts of each
bank were used as the basic data, for examining efficiency. Thus, the banks managers
had not the opportunity to participate in this survey, via personal interviews, in order
to shed light to more detailed productivity sources and to alternative ways of
profitability, as well. In addition, there was not the opportunity this dissertation to
further investigate how the bank managers understand ineffectiveness and what
efforts they undertake in order to avoid it.
The data used in this dissertation could be characterized objective as it utilized
bank’s basic financial statements as a source. Therefore, the elements presented were
out of any kind of distortion, which could be happened as a result of personal and
subjective points of view. To sum up, the conclusions of this survey are shot of
beautifications and dogmatisms.
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5.4 Future research suggestions
The future research suggestions should be examined in the frame mentioned to
the previous paragraph. Thus, the specific policies for improving effectiveness to
particular banking products and services should be examined, in order to better survey
bank’s management efforts for continuous improvement on productivity and
profitability.
In such a research the data taken from the basic financial accounts is not
enough, thus it is important the future researchers to investigate more detailed points
of banking function via personal interviews or any other kind of empirical
observation.
In addition, the following years are very important about the performance of
Greek banks in connection with their expansion to the South-Eastern Europe. An
alternative future research suggestion could be the resumption of this research under
the same frame for the following years. Thus, the comparisons will be very useful and
will conclude if the expansion in the Balkans was finally a right management choice.
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