Specialization and other determinants of non-commercial bank financial institutions’ profitability Empirical evidence from Malaysia

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  • 1. Specialization and other determinants of non-commercial bank financial institutions’ profitability Empirical evidence from Malaysia Authors : Fadzlan Sufian, Suarddy Parman. Prepared by: Boughezala Hamad Hocine 802042 & Akhmedov Davran 803837 Prepared for: Prof. Shahriza Bt Osman Journal: Studies in Economics and Finance Vol. 26 No.2, 2009 pp. 113-128
  • 2. Contents Data and methodology Introduction Overview of the Malaysia financial system 1 2 3 4 5 Results Empirical Finding 6 Conclusion 04/04/10 UUM 2010
  • 3. Introduction Purpose of the study : to provide empirical evidence on the factors that influence non-commercial bank financial institutions (NCBFIs) profitability in a developing economy, and attempt to investigate the performance of financial institutions in Malaysia are relatively scarce . Keywords: banks, financial institution, profit, Malaysia 04/04/10 UUM 2010
  • 4. Overview of the Malaysian financial system Banking system (the largest component, accounting for approximately 70% of total assets of financial system) Non-bank financial intermediaries Malaysian financial system 04/04/10 UUM 2010
  • 5. Banking system Commercial bank Finance companies Merchant banks They are the largest and most significant providers of funds in the banking system; The second largest group of deposit taking institutions in Malaysia; The third largest , it’s merged in Malaysia banking scene in 1970. Commercial banks Finance companies Merchant banks The banking system can be divided into three main groups 04/04/10 UUM 2010
  • 6. Commercial banks 04/04/10 UUM 2010
  • 7. Finance companies 04/04/10 UUM 2010
  • 8. Merchant banks 04/04/10 UUM 2010
  • 9. Assets of the Banking system: 1960-2004 04/04/10 UUM 2010
  • 10. M.B F.C C.B RM 42,691 million (0.17% of GDP) RM 68421.1 million (0.27% of GDP) RM 761,254.8 million (3.05% of GDP) F.C+ M.B = 22,8% of the banking system 04/04/10 UUM 2010 Assets of the Banking system: 2004.
  • 11. Data and methodology 04/04/10 UUM 2010
  • 12. Econometric specification
    • Relationship between NCBFI profitability and the NCBFIs specific and macroeconomic determinants. Linear regression model:
    where P jt is the profitability of NCBFI j at time t; b1, b2, and b3 represent the coefficients of the explanatory variables to be estimated (grouped into NCBFI-specific, macroeconomic determinants, and specialization, respectively), and 1jt is the disturbance term, with vj capturing the unobserved NBCFI-specific effect and u jt is the idiosyncratic error. 04/04/10 UUM 2010
  • 13. Summary of parametric and non-parametric tests on equality of means and equality of population 04/04/10 UUM 2010
  • 14. Variables
    • ROA= return of total assets
    • LOANS/TA= total loans divided by total assets
    • LNTA = log of total assets
    • NII/TA= non-interest income divided by total assets
    • NIE/TA = total overhead expenses divided by total assets
    • EQASS = and book value of stockholders’ equity as a fraction of total assets
    04/04/10 UUM 2010
  • 15. Results
    • The model performs reasonably well in at least two respects:
    • 1. Results for most variables remain stable across the various regressions tested;
    • 2. The R²s are reasonably high ranging from 86 to 89%. In most cases the explanatory variables have the expected signs.
    • LOANS/TA reveals negative relationship with Malaysian NCBFIs profitability although is not statistically significant at any conventional levels.
    • LNTA exhibits (+)ve coefficient and is statistically significant at the 5% level implying that the larger NCBFIs tend to be more profitable.
    • LLP/TL shows a (-)ve relationship with bank profitability and is statistically significant at the 1% level, indicating that NCBFIs with higher proportion of riskier loans tend to exhibit lower profitability levels.
    04/04/10 UUM 2010
  • 16. Empirical findings 04/04/10 UUM 2010
  • 17. Empirical findings 04/04/10 UUM 2010
  • 18. Conclusion
    • Malaysian financial sector depends on its efficiency, profitability, and competitiveness. Further, in view of the increasing competition resulting from the more liberalized banking sector
    The findings of this study could have provided useful insights to the policymakers, industry leaders, as well as bank managers with regard to attaining optimal utilization of capacities, improvement in managerial expertise, efficient allocation of scarce resources, and most productive scale of operation of the Malaysian NCBFIs industry. 04/04/10 UUM 2010
  • 19. Thank You! For your attention