Title: A classification method for banks' profitability using revised Thompson-Thrall profit ratios in DEA and cluster analysis with an application to South Asian banks

Authors: P. Sunil Dharmapala; Piyadasa Edirisuriya

Addresses: Department of Operations Management and Business Statistics, College of Commerce and Economics, Sultan Qaboos University, P.O. Box 20, Al-Khoud 123, Muscat, Oman. ' Department of Accounting and Finance, Monash University, Melbourne, Australia

Abstract: Many researchers in the past have addressed the issue of profitability of banks from different perspectives using financial ratios and decision models. Thompson et al. (1995) addressed this issue by introducing linked-cone (LC) profit ratios with assurance regions (AR) in data envelopment analysis. In this paper, we propose a method to revise LC-AR and show a contrast between Thompson-Thrall's and revised profit ratios. In an application of revised profit ratios to a set of South Asian banks, we classify them as profit-makers, loss-makers or neither. Then, analysing the banks' profitability using cluster analysis with financial ratios and revised profit ratios, we show how to strengthen the classification.

Keywords: DEA; data envelopment analysis; assurance regions; linked cones; bank profitability; LC-AR profit ratios; cluster analysis; classification; Thompson-Thrall profit ratios; South Asian banks; banking industry.

DOI: 10.1504/IJOR.2012.048865

International Journal of Operational Research, 2012 Vol.15 No.2, pp.147 - 169

Published online: 11 Jan 2015 *

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