Banking Productivity

8/4/2019 Banking Productivity

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Managerial Fina

Vol. 36 No. 12, 2

pp. 1007-1

# Emerald Group Publishing Lim

0307-4

DOI 10.1108/03074351011088

Banking productivity: anoverview of the Greek

banking systemProdromos D. Chatzoglou, Anastasios D. Diamantidis and

Eftichia VraimakiDepartment of Production and Management Engineering,

Democritus University of Thrace, Xanthi, Greece

Elena PolychrouTEI of Kavala, Kavala, Greece, and

Kyriakos Chatzitheodorou National Bank of Greece, Xanthi, Greece

AbstractPurpose The aim of this paper is to examine the productivity of the Greek banking sector for thetime period 2004-2006.Design/methodology/approach Standard ratio measures of bank financial performance havebeen used as output measures in a data envelopment analysis model in combination with efficiencyratios analysis.Findings The Greek banking efficiency remains relatively constant throughout the period underobservation, while, on average, big banks perform better than medium and small ones.Research limitations/implications Profit and loss accounts as well as balance sheet accounts ofeach bank are used for examining bank efficiency.Practical implications A positive relationship between bank size and performance is observed.More specifically, it is suggested that large total assets gives a bank the ability to achieve higherefficiency levels; thus, a merger of two small banks will probably increase their efficiency and

competitiveness in the long term.Originality/value Greek banks are at a crossroad and faced with the dilemma of expanding theiroperations internationally or staying at home. The current financial crisis has made this dilemmastronger. The papers findings suggest that probably the best solution for the Greek banks toovercome their current problem is to merge.

Keywords Greece, Banks, Financial performance

Paper type Research paper

1. IntroductionIn the frame of the technological and financial progress, it is important for banks todevelop and implement a high productivity policy, which, eventually, leads to highprofitability. This is actually why the effort of achieving the highest level of

productivity must be focused on certain issues of management policy. To achieve thisaim, re-amendment of the financial ratios is needed, along with the use of new, or morespecific, ratios that will enhance our understanding of productivity improvementissues.

As far as Greece is concerned, the way the banking system is operating hasdrastically changed during the last two decades due to:

. mergers that occurred in the industry;

. technological progress; and

. severe deregulation (Rezitis, 2008).

The current issue and full text archive of this journal is available at

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This deregulation of the Greek banking system reflects the continuous need for financialchange in the countrys economic policy, as banking is one of the leading industries.Apart from that, banking is considered to be a subject of high governmental interest, as itis a source of capital, through taxation. Therefore, many funds are invested for the

improvement and enlargement of the Greek banking sector (Rezitis, 2008).This research attempts to present the basic characteristics of the Greek banking

system, to define productivity by using financial ratios, to investigate the impact ofcertain financial and political factors on the Greek banks productivity and, finally, toexamine the effectiveness of the Greek banking sector and the relative efficiency ofeach bank. This research follows a similar method to the Halkos and Salamouris(2004) approach, where the efficiency of the Greek commercial banks is examined in the1997-1999 period, relying on standard ratio measures of bank financial performance asoutput measures in the data envelopment analysis (DEA) model. Although the data setis different, results provide the ground for comparisons between the efficiency of theGreek banks during the 1997-1999 and 2004-2006 periods. This comparison ismeaningful since 1997-1999 was only the beginning of the restructuring era of theGreek banking market which has not yet been completed.

2. Literature review2.1 Basic characteristics of the Greek banking systemThe Greek banking system until recently (up to 1997) was operating under strict statecontrol, with numerous legislations and a very bureaucratic framework. However, in thelast 15 years, a gradual but substantial deregulation of the Greek banking system tookplace and the minimum obligatory interest rate margins were abolished along with theselective state allowance (Noulas, 1997). It is undeniable that these changes, incurred tothe Greek banking sector during recent years, are very important. The alteration fromthe obligations of a strict framework to an operation characterised by freedom in funds

transfer, loans supply and interest policy, led to the promotion of new banking productsand mainly changed banks operations and their marketing policy (Giokas, 2008a, b).

In Greece today[1] (July 2008) 65 commercial banks are operating, 35 of them havetheir head office in Greece (19 commercial and 16 co-operative), 24 somewhere in theEU, while five elsewhere (EU passport, second banking EU directive). Moreover, thereis a credit union (The Consignments and Loans Fund) that has been excluded fromthe application of the Law n.2076/92, where all the above-mentioned financialinstitutions are included. Finally, Bank of Greece is the central bank of the country,with a supervisory and auditing role. It should be stressed here that, despite the largenumber of banks operating in Greece, only a small number dominate the Greekbanking system. These are mainly the National Bank of Greece (NBG), Alpha Bank,

EFG Eurobank, Emporiki Bank, Piraeus Bank and Bank of Cyprus, which representabout 80 per cent of the total banking market (Piraeus Bank Group Presentation, 2004).In 2007, another bank, Marfin Egnatia Bank, started its operation in Greece (after

the consolidation of three banks: Egnatia, Laiki and Marfin), which recently expandedits operations nationwide with a network of 150 branches and about 170 ATMs.

The decade of changes. In the last decade (1997-2007) the Greek banking sector wasreorganised. More than 15 Greek banks became parts of larger-sized and emergingbanking groups. At the same time, Greek banks merged their networks and businesseswith many significant foreign banks. Thus, many Greek banks reinforced their positionand improved the competitive advantages in the domestic market (Kosmidou, 2008).


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Eurobank was the champion of mergers and acquisitions (M&As) and managed tobecome one of the biggest financial institutions in Greece, within just 15 years. PiraeusBank has followed Eurobank in the number of M&As it was involved in. The NBG alsostrengthened its network and financial performance by restructuring its internal

operations but also with the absorption of significant subsidiaries, such as the TurkishFinansbank. This merger offered significant advantages to the NBG group, since itgave the opportunity to the bank to further expand its operations, offering an evenbroader range of financial products/services.

In 1999, Alpha Pisteos Bank announced the biggest, until now, acquisition of a Greekbank and absorbed both the Ionian Bank and Laiki Bank. The new bank was namedAlpha Bank and became the most powerful private bank and the second largest inGreece, after NBG. Further, Credit Agricole increased its participation in Emporiki Bank,took over the banks management and offered Emporiki many know-how advantages.In 2007, the merger of three banks Egnatia, Laiki and Marfin took place, while in 2002Aspis Bank took over the network of ABN Amro in Greece and absorbed its operations.

Finally, during the decade 1997-2007 many small- or medium-sized banks appearedin the Greek banking sector; these were Probank, Proton Bank, FBBbank (took over thenetwork and operations of the Canadian Bank of Nova Scotia in Greece), MillenniumBank (ex-Novabank, member of the Portuguese banking group Millennium BCP) andPanellinia Bank (with 16 Greek co-operative banks as shareholders).

Greek banks abroad. Another important recent development is the expansion ofthe operation of many Greek banks abroad (basically in north-eastern Europe), wheremany of the Greek banks adopted and implemented an aggressive M&A policy, inorder to capture a share in the rapidly increasing financial market of these developingcountries. Greek banks explored investment opportunities in all Balkan countries,which had recently passed from centrally planned to open market economies. Actually,they entered into all Balkan banking systems by offering state-of-the-art IT

applications, funds, investing know-how and more sophisticated risk-managementmethods. Greek banks invested over six billions euros, while this figure is estimated todouble in the following three years. In addition, the returning revenues are nearly 10per cent of their turnover (Kosmidou et al., 2007).

It should also be mentioned that Greek banks are present in many other countries,such as Cyprus, the UK, Germany, Ukraine, Australia, Egypt, the USA and SouthAfrica. This presence is not usually part of their expanding business plan but servesthe needs of the Greek diaspora. Table I[2] is informative about the presence of theGreek banks abroad[3].

Current situation. The structure of the Greek banking system has not changedmuch during the three-year period 2004-2006[4]. Greek banks continued to play an

TablePresence of the Grebanks abroad, in 20

Bank Countries Branches Personnel

NBG 7 780 14,304EFG Eurobank 5 605 8,062Emporiki Bank 4 49 552Piraeus Bank 6 234 3,399Egnatia Bank 1 8 111Alpha Bank 6 214 3,496

Sum 1,890 29,924


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important role, as their market share on assets basis rose from 85.1 per cent in 2005 to86.5 per cent by the end of 2006.

The concentration of the Greek banking system was slightly increased, as is evidencedby the size of total assets of the five biggest banks (2005: 64.8 per cent, 2006: 66.4 per cent).

This trend is something that more or less occurred in most other EU countries as well,where small-sized countries have a comparably higher concentration index. Nevertheless,unlike the EU tendency, the distribution channel in Greece continued to grow but at alower rate. This phenomenon can be explained by the emphasis Greek banks put on retailbanking, as well as the consumers preferences and needs.

Moreover, banks increased the number of services offered by ATMs and improved theirelectronic banking services (Giokas, 2008b). The banking services, via chains of retail trade(e.g. supermarkets, electronics stores, car agencies), continued to develop, as well as thesynergies with professionals (e.g. contractors). In addition, banks put emphasis on directmarketing.

The satisfactory profitability and capital sufficiency of Greek banks, as well as theimprovement of risk-management systems, enhanced the operational effectiveness of

the Greek banking system (Rezitis, 2006). Many factors contributed to the developmentand sustainability of this rather positive situation, such as the high rates of economicdevelopment and credit expansion, the satisfactory performance of the Greek stockmarket, the differentiation of income sources for Greek banks via their networkexpansion abroad and the reduction of their operating costs. More specifically, the basiccharacteristics of the Greek banking system in the 2004-2006 period were: the reductionof the profitability margins (Giokas, 2008a, b), the shrinking of the operational costsand the expansion to the south-eastern Europe and North Africa region. The severecompetition has started to put pressure on the profitability margins of all types of loan,especially on mortgages and business loans to medium-size companies. Notsurprisingly, therefore, many gurus of the Greek banking system predict a secondperiod of M&As for the Greek banks, in the near future. In Table II, the profits after taxfor the years 2006 and 2007 are presented.

As far as the growth rate is concerned, Greek banks continued to grow for a fourthconsecutive year, although at a lower rate compared to 2005. Of great importance wasthe contribution of the net incomes of interests, which represent approximately

Table II.Profits after taxes for2006 and 2007

Banks 2006 2007 Difference (%)

Alpha Bank 150.666 256.140 70.0Aspis Bank 3.229 3.897 20.7ATE Bank 47.739 74.593 56.3Attica Bank 4.076 4.087 0.3Bank of Cyprus 64.620 107.000 65.6

EFG Eurobank 157.300 203.800 29.6Egnatia Bank 1.954 7.203 268.6Emporiki Bank 52.077 18.275 64.9Geniki Bank 20.185 10.651 47.2Greek Postal Savings Bank 74.092 39.132 47.2Marfin Bank 34.892 170.292 388.1NBG 250.196 380.510 52.1Piraeus Bank 186.007 248.171 33.4Proton Bank 13.678 11.313 17.1Sum 1,020.341 1,513.792 48.4


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three-quarters of the total incomes of Greek banking, because of the small reduction ofthe net interest margin (NIM) due to the intensified competition, over-hedged from thehigh rate of credit expansion.

The rate of credit expansion to household consumers, although decelerated, remained

at a high level while, at the same time, in 2006 the same rate for enterprises accelerated.In addition, the income from commissions increased due to the expansion of the retailbanking operations and the improved performance of the Greek stock market.

The capital structure is at higher level than the 8 per cent obligatory minimum andmarginally higher than the EU average, despite the great increase of the risk weightedassets, due to the great credit expansion of the Greek banks abroad. The importantincrease of the NBG capital stock, in order to continue M&As abroad, was anotherbasic characteristic of the period under observation.

It is also important to refer to the main risks and challenges that the Greek bankingsystem faces. The first concerns the adaptation to the new supervision framework(Basel II). Bank of Greece has already done a preliminary audit to investigate thealertness of the Greek banks to apply this framework and, at the same time, made an

attempt to formulate this framework. Second, there is growing competition betweenGreek banks to increase their market share, mainly in the retail banking arena. Thiscompetition leads to the reduction of the profit margins and to the improvements in theflexibility (at least for some banks) of their credit standards. Third, Greek banksoperating abroad are concerned about managing risk (credit, operating and country risk)effectively, especially in the countries of north-eastern Europe, whose markets presentsignificant and rapid fluctuations (Kosmidou et al., 2007). Fourth, they are also focusedon correctly evaluating the risks stemming from the introduction of innovative productsand investing in new markets (hedge funds). However, it should be mentioned that theseinvestments represent only a small proportion of the total capital products of banks.Finally, there is the gap between total amount loans and deposits that has increased,which leads Greek banks to look for alternative funds, such as euro-bonds, that have ahigher cost and make Greek bonds more vulnerable to market fluctuations.

2.2 Productivity of the banking systemThe main problem with measuring banking productivity is that it is difficult to define, asthere are many factors that should be estimated; it can be measured by outputs, costs,efficiency and performance. In international literature, there are many experientialstatistical and econometric studies on the subject, which can be classified into twocategories, based on the approach to productivity measurement adopted. The first(English et al., 1993; McAllister and McManus, 1993; Berger et al., 1993a, b) classifiesproductivity into the following subcategories: scale efficiency, scope efficiency andX-efficiency.

Scale efficiency refers to economies of scale, meaning that a product increase, ceterisparibus, leads to a relatively smaller increase of the production cost. The supporters ofthis school of thought consider that the use of the translog cost function does not provideefficient results, as it treats all banks the same way (regardless of their size), assumingthat they move on the same average cost curve. Scope efficiency compares the productioncost of some financial products and services from two or more banks, as well as the sameproduction cost from a unified bank. It can also estimate whether it would be better for abank to provide a completed range of banking products and services or whether it shouldoffer only specialised ones. Finally, X-efficiency mainly refers to the managers ability tominimise the production cost or maximise incomes providing similar products.


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Of special interest is the distinction between technical inefficiency and allocative orprice inefficiency. The first can be classified into two subcategories: the pure technicalinefficiency, which refers to the elimination of banking profits because of the non-application of the production plan and scale inefficiency, which occurs when the bank

functions without constant returns on scale (CRS). Allocative or price inefficiencyrefers to profit loss because of the selection of an inefficient production plan.

The second category (Kaparakis et al., 1994; Noulas et al., 1990; Ferrier and Lovell, 1990;Rangan et al., 1988; Elyasiani and Mehdian, 1990; Berger and Humphrey, 1991) follows thefrontier approach by using production and/or cost frontiers, where a benchmark is createdfor the purpose of comparing the real banking efficiency. There are two basic approachesto the banking function and the products the banks offer. The first is the productionapproach, where only the operating costs are measured. This method assumes that banksprovide demand deposits, time deposits, saving deposits, commercial loans and mortgageloans, while they use capital, labour and some other production factors such as incomes.

The second is the intermediation approach, where the products are evaluated inmonetary units and the functional costs and interest expenses are also considered.

Moreover, banks are considered to be capital collectors. This capital is converted into loansand other assets. This method is the most suitable when the banks financial liability isconsidered. According to most of the studies of the second school, researchers concludethat the big banks are less effective, caused mainly by a purely technical inefficiency.

Further, Boyd and Runkle (1993) report another two theories that have beendeveloped for the banking company operation (deposit insurance theory and modernintermediation theory), in order to check if the theoretical predictions can be verified.The first theory is the deposit insurance theory, according to which the depositinsurance system drives the insured banks to take more risks. This theory assumesthat either big banks are too big to fail or/and they receive a greater amount ofgovernmental aid and assurance.

On the other hand, the modern intermediation theory is based on the fact that thereis asymmetric information between borrowers and lenders and predicts that it is lesspossible for big banks to fail, as they are believed to be more cost effective, compared tosmaller ones. The intermediation approach is considered to be more suitable for theproduction approach, because it excludes interest expenses from the analysis (whichare a significant part of the banking expenses) and considers banking deposits asbanking inflows rather than banking products.

Summarising, bank size positively affects banking effectiveness, while the greaterincrease occurs to scale efficiency. Rangan et al. (1988) concluded that banks are moreallocatively than technically effective, with the main part of the technical ineffectivenessbeing a result of inflows wastage. Pure technical efficiency is positively related to banksize, in the same way that total effectiveness is negatively related to the product

differentiation and positively related to the degree of urbanisation. Finally, theseresearchers found no important differences between branching and unite state banks,regarding effectiveness.

In another interesting research, Berger and Humphrey (1997) noted that, in manycases, banking ineffectiveness is functional and not financial, that is, it derives fromincomes overuse and not from exceeding interest payments. In addition, it is obviousthat the cases of technical ineffectiveness (respective overuse of each inflow) are morethan those of allocative ineffectiveness (inappropriate mixture of inflows).

The study of Berger et al. (1993a, b) came to almost identical conclusions and alsonoted that outputs are greater than input inefficiencies, i.e. inefficiency is more a result


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of diminished incomes than exaggerated expenses. Moreover, they suggest that bigbanks are more effective and that also it is more profitable for a bank to specialise inbusiness than in consumer loans.

Many researchers have focused on the efficiency of the Greek banking sectors

adopting different standpoints as far as their methodological approach is concerned.Some of the more recent studies are those conducted by Tsionas et al. (2003), Halkosand Salamouris (2004), Rezitis (2006, 2008), Giokas (2008a, b), Kosmidou (2008), Noulaset al. (2008) and Pasiouras et al. (2008).

The banking ineffectiveness is basically technical (respective overuse of each inflow).There are two basic techniques used for assessing effectiveness: frontier analysis andDEA.

3. Research methodology3.1 Frontier analysisFerrier and Lovell (1990) analysed two of the techniques for measuring bankingeffectiveness in relation to functional cost:

(1) the econometric approach of a parametric cost frontier; and

(2) the production frontier (non-stochastic).

Elyasiani and Goldberg (1996) used the production frontier approach to show that thecost function analysis is suitable for the economies of scale measurement butinappropriate for the banking effectiveness.

In general, the relevant literature can be classified into four categories regarding theproduction frontier approach used:

(1) the non-parametric frontier models;

(2) the parametric programming frontier models;

(3) the deterministic statistical models; and(4) the stochastic frontier models.

The main techniques developed for the assessment of the banking productivity are thefollowing: DEA, econometric stochastic frontier approach, thick frontier approach anddistribution-free approach.

3.2 Data envelopment analysisIn this study, a well-known methodology, DEA (Charnes et al., 1978; Banker et al., 1984;Sherman and Gold, 1985) is used to estimate the efficiency of the banks. DEA is alinear-programming-based method for evaluating the performance of organisationalentities and is usually used in banking, along with other industries. This method

presents some main advantages over other methods:. it works well with small samples (Maudos et al., 2002);

. no assumption is required for the distribution of the inefficiency; and

. no functional form is needed in determining the most efficient unit.

Some of the relatively recent studies using DEA include those conducted by Maudoset al. (2002), Hauner (2005), Ataullah and Le (2006) and Drake et al. (2006).

DEA creates a referring sample (which is the linear combination of the effectivebanks), in order to find the ineffective bank branches, examining the mixture of the


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services offered and the inflows used. As Tsionas et al. (2003) mention, DEA providesquantitative information about three related fields, which are technical efficiency,allocative efficiency and total factor productivity.

With DEA, bank branches are compared to each other, and the more effective or

ineffective branches are detected. In addition, DEA provides information about thealternative methods that can be used in order to transform an ineffective bank branchto a relatively effective one. The comparisons are always made with other bankbranches (those with the best performance detected); therefore, the conclusions arealways in relation to the other similar branches and not the perfect branch.

As a non-parametric technique, DEA takes into consideration the levels of theoutputs and inputs for each business unit/branch and formulates a possible productionset. According to Thanassoulis et al. (1996), DEA measures efficiency by calculatingthe output level a business unit could produce for its given level of inputs, or byestimating the appropriate (reduced) level of inputs for its given level of outputs.Therefore, the output efficiency shows the degree to which the output results can be

improved by increasing productivity with no supplementary input. Moreover, the inputefficiency shows the degree to which the inputs can be reduced as a result of improvedefficiency, without any reduction in outputs.

As Thanassoulis (2001) points out, DEA has many advantages, as a method formeasuring technical efficiency of firms operating in the same or similar sectors. Many ofthe weaknesses of the parametric techniques can be overcome by examining financialratios. More specifically, a great number of inputs and outputs can be easily calculated,because a linear relationship is assumed while no assumption has to be made aboutthe functional form or statistical distribution of the parameters. The most comparativeadvantage of the DEA technique is that it enables a firms management to estimate eachunits productivity and to form a complete picture, as well. Therefore, considering anumber of financial ratios as outcomes, many of the ineffective and effective points of the

company can be detected.

3.3 Data and financial ratiosBefore applying the DEA technique to the Greek banking system, it is important todescribe some of the sample characteristics. First of all, the period included in thisresearch is from 2003 to 2006. All necessary data are derived from the banks profit andloss accounts and balance sheets. More specifically, ten commercial banks have beenchosen for this study: Alpha Bank, Aspis Bank, EFG Eurobank, Bank of Attica, GenikiBank, Egnatia Bank, NBG, Emporiki Bank, Bank of Cyprus and Piraeus Bank.

As far as the data selection is concerned, banks under investigation are the tenbiggest banks, considering both their client basis and financial elements. Bank of Greece,the central bank of the country, and ATE Bank, a state-controlled bank applyinggovernments agricultural policy and providing only a limited number of commercialservices, are both excluded from this analysis. For the same reason the Greek PostalSaving Bank is not included. Further, Marfin Egnatia Bank is not included since it is anew bank (it was created in 2007, with the merger of Laiki, Egnatia and Marfin). Finally,Attica Bank and Proton Bank were excluded due to their very small size. On the otherhand, the Bank of Cyprus is included in this survey because it plays a significant role inthe Greek banking system, despite the fact that its head office is abroad (foreign bank).It must be stressed that the data set complies with homogeneity criterion as far as theservices offered by the banks included is concerned.


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An important characteristic of the model employed in this research is that it doesnot take inputs directly into consideration, assuming that inputs are similar and equalfor all banks as they operate in the same market. Actually, this is why the data set ofthis study includes only commercial banks, which offer similar products and services;

thus, any observed difference in efficiency would be attributed to differences intechnical efficiency and not in lack of comparability.

The five financial ratios used (see the Appendix) are the ones usually utilised byanalysts in order to measure productivity and, on the whole, provide a satisfactory pictureof a banks efficiency. In brief, these are: return on asset (ROA), return on equity (ROE),profit/loss per employee (P/L), 1/efficiency ration (1/EFF) and NIM. This approach is betterthan the simple ratio analysis in the sense that it forms a rounded judgment on firmsefficiency, taking into consideration a variety of ratios simultaneously and combining theminto a single measure of efficiency (Halkos and Salamouris, 2004, p. 205).

4. Results4.1 Descriptive results

ROA and ROE present approximately similar trends for each bank, with the exceptionof Geniki Bank, as it shows negative ROA and ROE for the examining period and anespecially unusual negative ROE for the year 2004. This can be largely attributed to therestructuring efforts undertaken after its acquisition by the Societe Generale Group.Similarly, Emporiki Bank has negative ROA and ROE, but only for the years 2004and 2006. Emporiki Bank is still under a reorganisation programme too, after itsacquisition from the Credit Agricole Group. All other banks have positiveperformances, as far as those two ratios are concerned. This probably indicates thatmost of the Greek banks have a management policy that is moving to the rightdirection, increasing profitability and enhancing efficiency.

Further, Alpha Bank has the highest profit per employee for the years 2004 and2006, while EFG Eurobank performs better in 2005. NBG and Bank of Cyprus havealso performed relatively well. Generally speaking, the level of product per labour (P/L)ratio is satisfactory for most of the banks, pointing towards a satisfactory labour andtotal productivity. Once again, Geniki Bank and Emporiki Bank have not performedwell, since the former has losses per employee throughout the three-year period, whilethe latter shows profits only in 2005.

Considering the efficiency ratio, Piraeus Bank shows the best performance for allthe three-year period and, especially, in 2006, when it is extremely high. Further,Egnatia Bank, NBG, Bank of Cyprus and Piraeus Bank covered their operational costsby gross operational income in the most efficient way. The only exceptions, once more,are Geniki Bank and Emporiki Bank.

Finally, EFG Eurobank, Alpha Bank, NBG and Piraeus Bank show the highest NIM.

The numbers are more or less similar among these four banks and only Alpha Bankseems to be the most efficient. On the other hand, Geniki, Emporiki, Aspis, Bank ofAttica and Bank of Cyprus presented a negative or very low positive level of NIM.

Overall, taking into consideration all the ratios examined, one could claim that thereis a positive trend in the Greek banking system. Most of the banks have positivegrowth or remain constant, while only two, Emporiki Bank and Geniki Bank, performnegatively. However, this negative performance can be justified by the restructuringefforts these two banks have made during the period examined by this research.

In Table III, a number of descriptive statistics concerning the whole sample ispresented. It can be noticed that some correlation coefficients are high. Since ROE and


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ROA are highly correlated, ROA can be excluded from the study. This will also benefitthe analysis since an important criterion (Nunamaker, 1985) will marginally besatisfied. Nunamaker is arguing that the sample size (in this case, 10) should be morethan three times larger than the sum of the number of inputs and outputs (4).

4.2 Initial results from the DEATable IV presents the DEA model, which provides the efficiency ratios (*) for the tenGreek banks under study. The table is divided into three columns, one per each year, andincludes the efficiency ratio * and the banks rank for all the three-year period, based onthis ratio. The* values observed are from 0.40 to 1. Commercial banks with* equal to 1are considered as the most efficient. Thus, Eurobank and Alpha Bank can be considered asefficient for the years 2004 and 2006, while Eurobank and Piraeus Bank are efficient for theyear 2005. Alpha Bank and NBG also have a generally satisfactory performance in 2005.

Banks are also ranked based on their performance in each year (Table V); there

are highly, relatively and average efficient as well as inefficient banks. The mostinteresting conclusion that can be drawn from this table is that, although there is a 3per cent improvement in the efficiency of the Greek banking system in 2005 (comparedto 2004), in 2006 there is a significant (4 per cent) decrease in the average bankefficiency. This reduction in the efficiency rate can possibly be explained by thederegulation efforts that many banks made after 2005. In addition, most of the banks(Bank of Attica, Aspis Bank, Emporiki Bank and Geniki Bank) are characterised asinefficient, while Egnatia Bank and Bank of Cyprus can only marginally be classifiedas averagely efficient. On the other hand, the remaining four banks in this survey

Table III.Descriptive statistics andcorrelation coefficients

P/L ROE 1/EFF NIM

Descriptive statisticsMaximum 115,356 0.41568 3.96972 0.017039

Minimum 75,423 1.84304 0.31045 0.04913Average 30,971 0.05945 1.18322 0.00399Standard deviation 46,103 0.40301 1.02759 0.01365

Correlation coefficientsP/L 1ROE 0.759105 11/EFF 0.489644 0.404912 1NIM 0.722239 0.750708 0.53997 1

Table IV.Rank and averageefficiency scores

2004 * Rank 2005 * Rank 2006 * Rank

Eurobank 1 1 Eurobank 1 1 Eurobank 1 1Alpha Bank 1 1 Piraeus Bank 1 1 Alpha Bank 1 1Piraeus Bank 0.82 10 Alpha Bank 0.95 7 NBG 0.85 9Egnatia Bank 0.75 13 NBG 0.93 8 Piraeus Bank 0.80 11Bank of Cyprus 0.73 16 Egnatia Bank 0.76 12 Bank of Cyprus 0.75 13NBG 0.71 18 Bank of Cyprus 0.72 17 Bank of Attica 0.74 15Bank of Attica 0.68 21 Bank of Attica 0.70 19 Egnatia Bank 0.70 19Emporiki Bank 0.66 22 Aspis Bank 0.65 23 Aspis Bank 0.60 24Aspis Bank 0.54 26 Emporiki Bank 0.50 27 Emporiki Bank 0.58 25Geniki Bank 0.47 29 Geniki Bank 0.49 28 Geniki Bank 0.40 30


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present satisfactory efficiency and are classified as relatively efficient (Piraeus Bankand NBG) or highly efficient (Eurobank and Alpha Bank).

Nevertheless, taking into account that this sample consists of banks that represent asignificant share (%80 per cent) of the Greek Banking market, then the mean efficiencyscore (74) for 2004-2006 period can be considered as relatively low.

Further, Table VI can be used in order to define the feasible targets (in parentheses)for optimising the financial ratios. From this table it is clear that banks with highefficiency rate are close to their feasible targets, while banks with lower efficiency rateare away from them.

Finally, results presented in Table VII may possibly provide an answer to thequestion as to whether banks size affects efficiency. More specifically based on assets,

the banks are grouped into three subcategories:(1) Small: Aspis Bank, Bank of Attica, Geniki Bank and Egnatia Bank;

(2) Medium: Emporiki Bank, Bank of Cyprus and Piraeus Bank; and

(3) Large: NBG, Eurobank and Alpha Bank.

An increase of the average size of total assets during the three-year period can beobserved. This increase mirrors the basic management policy of the Greek banks,which assists their expansion into south-eastern Europe. More specifically, Greekbanks investments have a pioneering role in the Balkans. As Bastian (2004) mentions,during the past decade, Greek banks have invested over E650 million in the Balkansand assets expansion plays a vital role in this effort.

The average size of the total assets is examined in relation with *. According tothis, bank size seems to highly determine efficiency, as big banks tend to be moreefficient than the medium ones, while medium banks tend to be more efficient than thesmall ones, for the whole period of 2004-2006. In any way the gap between large banksis not only huge but also there is evidence that becomes even greater, despite the factthat medium-sized banks have, on average, increased their total assets in a relativelyhigher percentage 62.7 per cent than large banks (55.9 per cent).

Greek banks investment horizon is long term; this fact can probably explain banksefficiency, as can be observed in Tables VI and VII. Thus, big banks are proved to bemore efficient, possibly because they can more easily have access to various capital

Table Total rank and avera

efficiency scor

Bank 2004 2005 2006 Average Rank Interpretation

Eurobank 1 1 1 1 1 Highly efficientAlpha Bank 1 0.95 1 0.98 2

Piraeus Bank 0.82 1 0.80 0.87 3 Relatively efficientNBG 0.71 0.93 0.85 0.83 4Egnatia Bank 0.75 0.76 0.70 0.74 5 Average efficientBank of Cyprus 0.73 0.72 0.75 0.73 6Bank of Attica 0.68 0.70 0.74 0.71 7 InefficientAspis Bank 0.54 0.65 0.60 0.60 8Emporiki Bank 0.66 0.50 0.58 0.58 9Geniki Bank 0.47 0.49 0.40 0.45 10Mean efficiency 0.74 0.77 0.73 0.74Median efficiency 0.72 0.74 0.75 0.75Maximum efficiency 1 1 1 1Minimum efficiency 0.47 0.49 0.40 0.45


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sources, for their expansion to the Balkans. In contrast, small banks expansion to the

Balkans has a larger (negative) impact on their short-term profitability and efficiency.

Comparing these results to the ones found by Halkos and Salamouris (2004) the

growth of the Greek banking sector is evidenced. The total asset of 15 banks in 1999

was E100 billion, while for only ten banks in 2006 it was more than E273 billion.

Interestingly, though, the average efficacy was decreased from 0.83 (in 1999) to 0.73

(in 2006). However, this drop in the efficiency level can mainly be attributed to the

dramatic decrease in the efficiency of medium- and small-sized bank. Large banks have

actually managed to increase their average efficiency level form 0.89 (in 1999) to 0.95

(in 2006), always keeping in mind that the groups in 1999 consisted of different banks

compared to the ones included in the same groups in 2006.

4.3 A comparison between ratio and input-output DEA models and interpretationIn the following section, the input-output DEA models are compared, using net profit as

output and total assets, labour and operational expenses as inputs. More specifically,

Table VI.Financial ratios andfeasible targets

Banks P/L ROE EFF NIM

2004Eurobank 60,789 (60,155) 0.2284 (0.23) 0.41 (0.4) 0.01031 (0.019)

Alpha 59,151 (58,955) 0.1809 (0.172) 1.50 (1.49) 0.01709 (0.01)Piraeus 38,061 (30,146) 0.1650 (0.021) 3.25 (2.54) 0.01108 (0.015)NBG 29,516 (25,758) 0.1583 (0.213) 0.48 (0.50) 0.01081 (0.02)Egnatia 17,409 (25,237) 0.0767 (0.2) 2.05 (3.25) 0.01352 (0.02)Bank of Cyprus 10,107 (15,325) 0.0965 (0.17) 1.62 (3.00) 0.00244 (0.01)Bank of Attica 11,655 (17,563) 0.0645 (0.131) 0.49 (0.71) 0.01024 (0.07)Aspis 4,442 (8,655) 0.0298 (0.034) 0.37 (0.52) 0.00081 (0.002)Emporiki 6,288 (18,436) 0.0334 (0.15) 0.30 (0.65) 0.00728 (0.01)Geniki 75,423 (14,736) 1.8430 (0.42) 0.30 (0.55) 0.04913 (0.06)

2005Eurobank 95,258 (94,514) 0.3038 (0.30) 0.74 (0.74) 0.01311 (0.01)Alpha 89,765 (89,372) 0.2690 (0.27) 1.70 (1.73) 0.01565 (0.16)Piraeus 43,252 (40,319) 0.2117 (0.25) 3.18 (3.50) 0.01400 (0.02)

NBG 71,422 (70,568) 0.3266 (0.4) 1.82 (2.64) 0.01381 (0.02)Egnatia 16,219 (23,671) 0.0797 (0.13) 1.23 (2.37) 0.00478 (0.02)Bank of Cyprus 33,326 (41,842) 0.2229 (0.401) 1.58 (2.75) 0.00274 (0.01)Bank of Attica 8,600 (25,385) 0.0564 (0.21) 0.92 (1.64) 0.00326 (0.02)Aspis 16,387 (23,957) 0.1217 (0.32) 0.40 (0.50) 0.00116 (0.01)Emporiki 17,433 (46.392) 0.0974 (0.14) 0.26 (0.50) 0.00476 (0.01)Geniki 8,822 (5,128) 0.1135 (0.073) 0.09 (0.50) 0.00458 (0.01)

2006Eurobank 106,742 ( 100,137) 0.3212 ( 0.33) 0.78 ( 0.78) 0.01223 ( 0.02)Alpha 115,356 (114,243) 0.3562 (0.34) 1.76 (1.75) 0.01679 (0.17)Piraeus 61,541 (50,673) 0.3288 (0.55) 3.97 (3.40) 0.01676 (0.03)NBG 94,235 (100,465) 0.2609 (0.34) 1.91 (2.71) 0.01554 (0.02)Egnatia 8,511 (14,101) 0.0457 (0.1) 1.09 (2.65) 0.00219 (0.02)Bank of Cyprus 85,632 (111,734) 0.4157 (0.89) 2.06 (5.70) 0.00534 (0.01)

Bank of Attica 4,217 (13,065) 0.0310 (0.1) 1.04 (2.66) 0.00077 (0.02)Aspis 18,525 (31,718) 0.1234 (0.15) 0.50 (0.80) 0.00143 (0.01)Emporiki 37,079 (4,839) 0.2538 (0.1) 0.16 (0.50) 0.01164 (0.01)Geniki 43,603 (20,583) 0.4320 (0.02) 0.31 (0.47) 0.02159 (0.02)


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using both the assumptions of variable return on scale (VRS) and CRS, the input-output

DEA models are calculated. Literature suggests different approaches about how thesevariables should be treated. Avkiran (1999) believes that in order for the group ofvariables to keep its discrimination power high, highly correlated variables should beexcluded from the survey, while Charnes et al. (1994) and Rhodes and Southwick (1993)suggest that these highly correlated variables should remain, because they provideuseful elements about the units under observation. First, in Table VIII, the correlationsbetween net profit, total assets, labour and operational expenses are presented.These highly correlated variables are also used, following the suggestions of the latterauthors.

Table VTotal assets a

efficien

Beginning toend of

period resultsBanks 2004 * 2005 * 2006 * Assets (%) *

LargeNBG 48,302,078 0.71 60,426,560 0.93 76,569,652 0.85 58.5 14Alpha 31,991,788 1 44,464,000 0.95 53,820,000 1 68.2 Eurobank 31,939,000 1 43,663,000 1 45,090,000 1 41.2

MediumEmporiki 17,914,681 0.66 25,054,697 0.50 32,058,244 0.58 78.9 8Bank of Cyprus 17,212,095 0.73 23,545,500 72 30,931,200 0.75 79.7 2Piraeus 16,846,300 0.82 19,087,516 1 21,805,310 0.80 29.4 2

SmallGeniki 3,484,446 0.47 3,510,114 0.49 3,842,531 0.40 10.3 7Egnatia 2,840,169 0.75 3,284,147 0.76 3,696,311 0.70 30.1 5Bank of Attica 2,395,293 0.68 2,468,842 0.70 3,047,135 0.74 27.2 6

Aspis 1,900,492 0.54 2,200,240 0.65 2,512,280 0.60 32.2 6Total assets 174,826,344 227,704,616 273,372,663 56.4Median assets 17,029,198 21,316,508 26,368,225 54.8Average efficiency 0.74 0.77 0.73 1Average efficiencyof large banks 0.90 0.96 0.95 5Average efficiencyof medium banks 0.74 0.74 0.71 3Average efficiencyof small banks 0.61 0.65 0.61 0

Table VIDescriptive statistics a

correlation coefficienon input-outp

variab

Total assets Labou r Operating exp enses Net income

Descriptive statisticsMaximum 76,569,652,000 13,743 1,634,754,000 1,064,669,000Minimum 1,900,492,657 903 56,687,294 237,968,000Average 22,530,120,784 5,241 469,038,855 210,783,727Standard deviation 20,753,876,524 3,948 432,251,855 321,485,058

Correlation coefficientsTotal assets 1Labour 0.91105 1Operational expenses 0.71014 0.73471 1Net profit 0.80395 0.66951 0.69338 1


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Then, in Table IX, efficiency scores for various metrics concerning DEA models arepresented, i.e. ratio model efficiency, CRS efficiency, VRS output efficiency, CRS superefficiency, VRS output super efficiency, returns to scale and scale score. The averageefficiency of the banking system is provided as well as the efficiency of each of the

banks under study. Examining the CRS and VRS it becomes obvious that, althoughthere is an increase in the mean efficiency in 2005, it is significantly decreased in 2006to bring efficiency down to almost the same level (or slightly lower) as in 2004. Thesame picture is observed looking at the ratio mean efficiency in the same 2004-2006period. Comparing the efficiency of large, medium and small banks, a similar pattern isfollowed. These results support the findings of Halkos and Salamouris (2004) that allmodels (ratio and input/output) provide us with similar results (at least as far as thetrend is concerned), and therefore, all could be used for efficiency evaluations (p. 217).From this table it can be seen, once again, that big banks perform better than mediumbanks and that medium banks perform better than the small ones, for the whole 2004-2006 period.

The division of pure technical efficiency (VRS) by technical efficiency (CRS) is also

used in order for the scale efficiencies to be determined[5]. As Thanassoulis (2001)points out, when CRS VRS, the scale efficiency is equal to one and the scale sizecontrol is of no importance, while when CRS VRS, the scale score is less than oneand the bank is less efficient than before trying to control the scale size. Looking atTable IX we can see that in 19 out of 30 cases (for all years), scale score is lower thanone indicating a lower CRS efficiency compared to VRS efficiency. This actuallysuggests that banks are more productive under CRS and less productive when wecontrol for scale size. In other words, this suggests that scale operation does impact theproductivity of the banks. Table X provides a summary of these findings. These resultsindicate that there are no increasing returns on scale, only constant or even decreasing.

4.4 DiscussionThe previous analysis provides a clear description of the Greek banking efficiencywithin the three-year period examined. As can be observed, most of the banks presentconstant or decreasing efficiency and only NBG (in 2004) shows increasing efficiency.As mentioned before, this can be partially explained by the rapid expansion of manyGreek banks, mainly to the Balkans. This expansion is a strategic management policymost of the Greek banks have chosen, which temporally affects their current efficiencylevel (keeping it constant or even decreasing it).

Greek banks continue to play a vital role in the Greek economy and are in the forefrontof the expansion of Greek companies to the Balkans. More specifically, Greek banks arethe pioneers in direct investments in south-eastern Europe. Although the expansion tothe Balkans strategy offers many investment opportunities, since these countries have

adopted the free-market system only during the last 15 years, it has negative side effects,as well. For example, this effort consumes many of the banks assets and temporarilykeeps their profitability at low rates. Moreover, the Balkan economies are still unstableand developing, and this may involve hidden risks and disadvantages for the future ofGreek investments there (for example, recently at FYROM).

Furthermore, keeping in mind that all banks examined in this study, except theBank of Attica, have invested in the Balkans, it becomes obvious from the results,presented in many tables, that large banks perform better than medium- or small-sizedones for the whole three-year period. More specifically, large banks (such as AlphaBank and Eurobank) and medium banks (such as Bank of Piraeus and Bank of Cyprus)


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Table IXVarious metr

of DEA mod

Banks

Ratiomodel

efficiencyCRS

efficiency

VRSoutput

efficiency

CRSsuper

efficiency

VRSoutputsuper

efficiencyReturnsto scale

Scalescore

2004NBG (L) 0.71 0.87 0.93 87.2 107.84 Increasing 0.94Alpha (L) 1 1 1 110 110 Constant 1.00Eurobank (L) 1 1 1 110 110 Constant 1.00Emporiki (M) 0.66 0.83 0.83 82.39 83.04 Decreasing 1.00Bank of Cyprus (M) 0.73 0.88 0.90 88.23 90.32 Constant 0.98Piraeus (M) 0.82 0.93 0.94 93.67 98.50 Constant 0.99Geniki (S) 0.47 0.88 0.91 89.19 91.32 Decreasing 0.97Egnatia (S) 0.75 0.82 0.83 82.39 83.04 Constant 0.99Bank of Attica (S) 0.68 0.88 0.89 88.52 89.02 Constant 0.99Aspis (S) 0.54 0.77 0.80 80.39 81.40 Decreasing 0.97

2004 Mean efficiency 0.74 0.88 0.90 91.90 94.45 0.98

Mean efficiency (L) 0.90 0.96 0.98 102.4 109.28 0.98Mean efficiency (M) 0.74 0.88 0.89 88.10 90.62 0.99Mean efficiency (S) 0.61 0.84 0.86 85.12 86.20 0.98

2005NBG (L) 0.93 1 1 102.3 103.31 Constant 1.00Alpha (L) 0.95 1 1 110 110 Constant 1.00Eurobank (L) 1 1 1 101.65 101.84 Constant 1.00Emporiki (M) 0.50 0.82 0.85 82.15 81.73 Decreasing 0.97Bank of Cyprus (M) 0.72 1 1 110 110 Constant 1.00Piraeus (M) 0.75 0.91 0.95 90.98 94.89 Constant 0.96Geniki (S) 0.49 0.92 0.92 92.75 94.26 Decreasing 1.00Egnatia (S) 0.76 0.82 0.86 82.06 81.68 Decreasing 0.96Bank of Attica (S) 0.70 0.89 0.93 89.44 92.63 Constant 0.96Aspis (S) 0.65 0.90 0.90 89.52 89.65 Constant 1.00

2005 Mean efficiency 0.77 0.93 0.94 95.09 96.00 0.99Mean efficiency (L) 0.96 1.00 1.00 104.65 105.05 1.00Mean efficiency (M) 0.74 0.91 0.93 94.38 95.54 0.98Mean efficiency (S) 0.65 0.88 0.90 88.44 89.56 0.98

2006NBG (L) 0.85 0.90 0.92 92.60 95.16 Decreasing 0.98Alpha (L) 1 1 1 110 110 Constant 1.00Eurobank (L) 1 1 1 110 110 Constant 1.00Emporiki (M) 0.58 0.76 0.81 76.48 81.32 Decreasing 0.94Bank of Cyprus (M) 0.75 0.89 0.92 89.06 91.52 Constant 0.97Piraeus (M) 0.80 0.86 0.92 85.82 91.57 Constant 0.94Geniki (S) 0.40 0.74 0.80 76.48 81.32 Decreasing 0.93Egnatia (S) 0.70 0.81 0.89 81.07 89.41 Constant 0.91

Bank of Attica (S) 0.74 0.87 0.95 86.84 94.64 Constant 0.92Aspis (S) 0.6 0.91 0.93 90.53 93.4 Decreasing 0.98

2006 Mean efficiency 0.73 0.87 0.91 89.89 93.83 0.96Mean efficiency (L) 0.95 0.97 0.97 104.20 105.05 1.00Mean efficiency (M) 0.71 0.84 0.88 83.79 88.14 0.96Mean efficiency (S) 0.61 0.83 0.89 83.73 89.69 0.94

Notes: L, M and S refer to the size of the banks, based on their assets: L large bank,M medium bank and S small bank


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present a constant efficiency, while all the small banks (apart from Bank of Attica) havea decreasing efficiency for most of the years. Thus, the size of a bank is an importantfactor that affects efficiency, especially when the bank is expanding its network basis.Large banks, because of their size and their financing resources, can better cope undersuch conditions; however, this also depends on the extent (magnitude) of the expansionstrategy (compared to size). For example, NBG, although being the leading bank in thecountry and the bank with the biggest capital assets, presents an increased efficiencyonly for the year 2004, while for 2005 and 2006 it is constant and decreased,

respectively. This change can be explained by the exaggerated banks expansion to thesouth-eastern Europe (Table I), considering that most of the other basic characteristicsof the Greek banking system remained the same during the 2004-2006 period.

In summary, the efficiency of the Greek banking system for the last years (2004-2006) has been affected by the rapid expansion strategy (to the Balkans) banks adoptedand implemented. Therefore, the current situation can be considered as temporary,since they are within the transition period of restructuring their internationaloperations and their investments abroad have not yet started to pay off. Large banksnaturally appear to be more resistant to profitability pressures since they have morecapital to finance their expansion strategy.

Table X.

Returns to scale

Banks 2004 2005 2006

NBG (L) Increasing Constant DecreasingAlpha (L) Constant Constant Constant

Eurobank (L) Constant Constant ConstantEmporiki (M) Decreasing Decreasing DecreasingBank of Cyprus (M) Constant Constant ConstantPiraeus (M) Constant Constant ConstantGeniki (S) Decreasing Decreasing DecreasingEgnatia (S) Constant Decreasing ConstantBank of Attica (S) Constant Constant ConstantAspis (S) Decreasing Constant Decreasing

Whole sample (10)Increasing 1 0 0Constant 6 7 6Decreasing 3 3 4

Large sized (3)

Increasing 1 0 0Constant 2 3 2Decreasing 0 0 1

Medium sized (3)Increasing 0 0 0Constant 2 2 2Decreasing 1 1 1

Small sized (4)Increasing 0 0 0Constant 2 2 2Decreasing 2 2 2

Notes: L, M and S refer to the size of the banks, based on their assets: L large bank,

M medium bank and S small bank


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5. Conclusions5.1 SummaryIn this study, the characteristics of the Greek banking sector, along with a criticalanalysis of its efficiency, have been examined, by applying one basic method for

measuring banking efficiency. More specifically, two basic characteristics of the Greekbanking sector for the decade 1997-2007 have been highlighted:

(1) the number of M&As that took place internationally; and

(2) the rapid expansion strategy that has been followed internationally (mainly inthe Balkans).

These characteristics have considerably affected the efficiency and profitability of theGreek bank during the examined period.

To measure banking productivity, this survey focused on the DEA approach, whichuses linear programming for estimating efficiency. The output-oriented method ofDEA was used for the period 2004-2006, and a number of five financial ratios werechosen as outputs.

DEA results led to almost the same conclusions as the financial ratios results. Theefficiency of the Greek banking system is basically presented as being constant, whilelarge-sized banks perform better in comparison to small ones. Moreover, big banks arepresented as more stable regarding their efficiency, and this can be partially explainedby their size, which enables them to perform better.

The DEA results provided much detailed information about Greek commercial banksefficiency and are more useful for a manager in comparison with the efficiency ratiomethod. This is because a large number of factors are combined and a more completeimage about efficiency is provided. The basic disadvantages of the DEA method arerelated to the high scores of the correlation coefficients that have been presented. Moreover,DEA and efficiency ratios indicate accounting values instead of market ones. Despite thesedisadvantages, the results presented are very important for bank managers, who want tounderstand the current situation of the Greek banking system and to predict the short-term developments.

5.2 Managerial implicationsIn this study, a positive relationship between bank size and performance is observed.More specifically, it is suggested that large total assets gives a bank the ability toachieve higher efficiency levels; thus, a merger of two small banks will probablyincrease their efficiency and competitiveness in the long term. According to Boyd andRunkle (1993) there is evidence that large-size assets may lead to economies of scale,because of the reduction of the gathering data cost and information processing. Also,a strategic expansion (e.g. Balkans) to other countries should be supported by heavy

capital assets, in order to be efficient and competitive. The reduction of operatingexpenses may also increase banks assets, empowering their strategic expansion.

5.3 Limitations of the researchThe most important limitation of this study and, concurrently, its advantage are that theprofit and loss accounts and the balance sheet accounts of each bank have been usedas the database for examining efficiency. Unfortunately, due to time limitations, banksmanagers were not given the opportunity to participate in this survey, via personalinterviews, and shed light on more detailed productivity sources and alternative waysof profitability. In addition, there was no opportunity to further investigate how bank


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managers understand ineffectiveness and what efforts they undertake in order to avoid it.Finally, the data used could be characterised as objective as banks basic financialstatements were used as a main information source.

5.4 Future research suggestionsFirst, specific policies for improving effectiveness of particular banking productsand services should be examined, in order to better examine banks managementefforts for continuous improvement of productivity and profitability. Second, additionalprimary data should be collected (using personal interviews, structured questionnairesor empirical observations) to identify the sources and understand the reasons for anyinefficiencies occurring. Finally, this research should be expanded to include databefore, during and after the completion of the Greek banking system expansion era, inorder to examine whether this strategy was successful or not (as far as efficiency andproductivity are concerned).

Notes

1. Source: site of Bank of Greece, www.bankofgreece.gr2. Source: (a) Hellenic Bank Association, www.hba.gr, (b) banks

3. An indication of the aggressive expansion policy followed by Greek banks is the factthat in July 2008 these figures, as far as the number of countries and branches areconcerned, have changed to: for NBG: 7 and 1,061, respectively; for Eurobank, 8 and 978,

respectively; for Alpha Bank, 6 and 391, respectively; for Pireus Bank, 7 and 421,respectively; and for Bank of Cyprus, 4 and 392, respectively.

4. All the numerical information provided derives from the Annual Report of the Directorof Bank of Greece for the year 2006, Athens (2007).

5. Returns to scale are calculated based on the approach suggested by Fare et al. (1985,1994) and scale scores as suggested by Coelli et al. (2001).

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Further reading

Berg, S., Forsund, F., Hjalmarsson, L. and Suominen, M. (1993), Banking efficiency in the Nordic

countries,Journal of Banking & Finance, Vol. 17, pp. 371-88.

Appendix

Corresponding authorProdromos D. Chatzoglou can be contacted at: [email protected]

Table AFinancial rat

Financial ratio Mathematical formula Description

1 Profit (loss) peremployee (P/L)

(P/L) PBTt/((Lt Lt1)/2)PBT: profit (loss) before taxes at time tLt: number of employees at time tLt1: number of employees at time t 1(last year)

An increase of this ratiomeans an increase of banksproductivity as well andvice versa. Moreover this ratioexamines labour productivity

2 Return on equity(ROE)

ROE PBTt/((Et Et1)/2)PBTt: profit (loss) before taxes at time tEt: banks equity at time tEt1: banks equity at time t 1Equity shareholders capitalreserves fixed assets (revaluation)reserves fixed assets investmentsubsidy retained earnings

With ROE the bank canmeasure its profitability andthe efficiency provided to useits equity

3 Return on totalassets (ROA)

ROA PBTt/((TAt TAt1)/2)PBT: profit (loss) before taxes at time tTAt: banks total assets at time t

TAt1: banks total assets at time t 1

Measures the total assetsefficiency and therefore it canevaluate the management

policy of the bank. ROE andROA are highly correlated4 1/Efficiency ratio

(1/EFF)1/EEF GOPt/OEtGOPt: the gross operating profit (loss) attime tOEt: operational expenses (OP) t time tOP: commissions payable staff costsand otheradministrative expenses fixed assetsdepreciation other operating charges extraordinarycharges

Describes the relation betweenthe operational expenses andthe gross operating profit(loss). The higher it is, themore efficient the bank underobservation is

5 Net interestmargin (NIM)

NIM NIt/((TAt TAt1)/2)NIt: banks net income at time t

TAt: banks total assets at time tTAt1: banks total assets at time t 1

Measures the assets efficiencyof the bank, ceteris paribus.

It calculates the efficiency forthe group of underconsideration banks

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Banking Productivity