Title: Measuring profit efficiency of Colombian banks: a composite non-standard profit function approach

Authors: Diego Restrepo-Tobón; Jim Sánchez-González

Addresses: Center for Economics and Finance Research, School of Economics and Finance, Universidad EAFIT, Medellín, Colombia ' Center for Economics and Finance Research, School of Economics and Finance, Universidad EAFIT, Medellín, Colombia

Abstract: We analyse the evolution of profit efficiency of Colombian banks from 2001 to 2013, the most important period of consolidation for this industry. Unlike previous studies, we estimate revenue, cost, and profit efficiency within a unified framework. We find that profit efficiency significantly increased from 80% in 2002 to 91% in 2013. Median profit, revenue, and cost efficiency estimates are around 90.3, 85.2, and 99.5%, respectively. Median return on equity (ROE) was 8%. Without inefficiency, it could have been as high as 14.6%. Cost inefficiencies explain 92% of median unearned ROE while revenue inefficiency explains only 8%. Revenue and cost efficiencies are negatively correlated. However, both correlate positively with profit efficiency. Foreign banks and banks taking on more credit risk are more profit efficient while bigger banks and banks taking on more liquidity and market risk are less profit efficient.

Keywords: profit efficiency; revenue efficiency; cost efficiency; non-standard profit function; NSPF; stochastic frontier.

DOI: 10.1504/IJPQM.2021.115693

International Journal of Productivity and Quality Management, 2021 Vol.33 No.2, pp.234 - 252

Received: 20 Jun 2019
Accepted: 23 Nov 2019
Published online: 17 Jun 2021 *

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