Balanced Performance Index Metrics

7/29/2019 Balanced Performance Index Metrics

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Balanced Performance Index and Its Implications: Evidence from

Taiwans Commercial Banks

Dar-Yeh Hwang a,* ,Chi-Chun Liu b , Lishu Ouyang c

aDepartment of Finance, College of Business, National Taiwan University, Taipei, Taiwan.b

Department of Accounting, College of Management, National Taiwan University, Taipei, Taiwan.cDepartment of Economics, College of Management, Chinese Culture University, Taipei, Taiwan.

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Abstract

Taking into account only financial factors does not provide complete information onperformance, and could possibly lead to less profitable policies or strategies. This paper takesinto consideration of both financial and non-financial performances when evaluating 35sampled publicly traded commercial banks in Taiwan. The performance of banks is measuredusing an indexing method consisting of financial and non-financial measures. Banks areclassified into two categories according either to the year when founded, (i.e., old and new

banks), or to the type of major stockholders of a bank when founded, namely, privatizedgovernment-owned and private banks.

The results show that privatized government-owned/old banks are larger than private/newbanks, respectively. Moreover, privatized government-owned banks have significantly higherfinancial performance index than private banks but both types of banks are not significantlydifferent from each other in non-financial performance index. New and old banks are notsignificantly different from each other in both financial and non-financial performance indexes.

With relatively large scale, higher profitability and better management, banks will performrelatively better among competitors in the following year. Furthermore, non-financial factorsare important predictors of future financial and total performance indexes, though individualfactor may not be consistently significant.

More branch offices, better capital structure and solvency, and higher rates of growth indeposits and loans all result in more profits, and lead to higher customer satisfaction and more

efficient management. Providing better technology to customers is an efficient way inpromoting customer services, which in turn produces more profits and results in efficientmanagement. CEOs, on average, have plans for better management and more profits.

Among the factors that have direct and positive impacts on profitability, increasing theefficiency of management is the most efficient way; on the contrary, adding more branch officescontributes the least profits. Therefore, to increase bank profits, CEOs should aim to improve

bank management and capital structure and solvency rather than to add more branch offices.

JEL classification: G21, G28, C12

Keywords: Balanced Performance Measures; Performance Indexing Approach; Privatized

Government-Owned Bank, CEO Leadership

*Correspondence author: Tel:011-8862-2363-0987; fax:011-8862-2365-7095.

E-mail addresses: [email protected] (Dar-yeh Hwang), [email protected]

(Chi-Chun Liu), [email protected] (Lishu Ouyang).

We thank the Taiwan Academy of Banking and Finance (TABF) for their financial supports. We thank thefollowings for helpful discussions, comments, and insights: Edward Altman, Gang Shyy, Paul Chiu, Ming-Teh Yu,Conference participants at the 2000 Chung-hwa Banking Association Meetings, the 2001/2002 Enhancing BankingCompetitivity Conference at TABF and 2003 Taiwan Conference on Economics, Finance and Accounting,.
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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1. Introduction

The first step is to measure whatever can be easily measured. This is OK

as far as itgoes. The second step is to disregard that which cant be easily

measured or to give it an arbitrary quantitative value. This is artificial andmisleading. The third step is to presume that what cant be measured easily

really isnt important. This is blindness. The fourth step is to say that what

cant be easily measured really doesnt exit. This is suicide.

--The McNamara Fallacy1

Performance measurement systems play a critical role in evaluating the achievement of

firms goals, compensating managers, and developing strategies. With increasing global

competition and technology changes, designing a balanced performance measure is critical to

the survival and success of companies. We develop a balanced performance measurement as a

management tool for enhancing decision-making and accountability, not for evaluating stock or

bond performance. As a strategic process, the balanced performance index can be used to assess

accomplishment of organizational strategic goals and objectives. Existing financial measures

are insufficient at expressing corporate value. Managers depending wholly on financial

performance only get an incomplete view of the companies.

Thus, there is a pressing need for a set of widely accepted metrics by which managers and

investors can rely on to measure the value creation in firms (Kaplan and Norton 1992, 1996).

How financial and non-financial performance measures can be integrated into one measure is a

necessary ingredient. The performance index should include outcome measures, the

performance drivers of those outcomes, short-term and long-term objectives, hard objective

measures and more subjective measures. By articulating them clearly, managers can channel the

energies, the abilities, and knowledge towards achieving the firms long-term goals. In addition,a balanced performance index can serve as the focal point for the organizations efforts,

defining and communicating priorities to managers, employees, investors, even customers, and

can be used as a communication, information, and learning system.

1 The McNamara Fallacy was tagged to Robert S. McNamara, a strikingly successful executive who sought to

quantify virtually everything. McNamara was elected as a director of the Ford Motor Company in 1957, andpresident of the company in 1960. At the request of President John F. Kennedy, McNamara served as Secretary ofDefense of the United States, a position he held from 1961 until 1968. He became president of the World BankGroup of Institutions in April of 1968, retiring in 1981.


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Depository financial institutions in Taiwan include commercial banks, credit

cooperatives, credit departments of farmers and fishermen associations, the Postal

Remittances, Savings Bank and local branches of foreign banks. At the end of 2001, 53

commercial banks in Taiwan, relatively larger compared with other depository financial

institutions, accounted for 71.33% of total deposits accepted and 89.38% of total loans

extended. Out of 53 commercial banks, 35 banks are publicly traded in 2001, and some of them

are ranked among top 500 banks in the world. Facing the trend of worldwide financial

deregulation, commercial banks in Taiwan make all efforts to enhance their performance.

After the Commercial Bank Establishment Promotion Decree being approved in 1991, a

number of domestic private and foreign banks join the highly competitive banking industry, and

result in lower profitability for most banks. Furthermore, the wave of consolidations and

globalization has been transforming the financial services landscape. Thus, how to maximize

the shareholders value is always the most dominant variable in bank managers decisions. In

response to the question of what drives the shareholders value, there are numerous competing

measures being developed both in theory and in practice. Some use the economics-based

approach or financial information metrics. Since performance measures strongly affect the

behavior of managers, employees, and investors (Handy, 1994; Kaplan and Norton, 1992), a

more balanced approach, a combination of financial and non-financial measures, has been

introduced in economics, strategy, finance and accounting (Porter, 1992; Liebowitz, 1999; Lev,

2001; Kaplan and Norton, 2001a, 2001b; Stewart, 1991a, 1991b).

The performance indexing approach is proposed in this paper to measure the performance

of Taiwans commercial banks. This paper takes into consideration of both financial and

non-financial performances when evaluating 35 sampled publicly-traded commercial banks in

Taiwan. Performance measurement systems play a critical role in evaluating the achievement of

firms goals, compensating managers, and developing strategies. The performance index takesout the fuzziness and subjectivity. It offers a yardstick by which to compute the impact of

various factors. It allows managers and investors a more complete view of the wealth creating

potential of their companies, eliminating the partial and restricted view of a strictly financial

perspective. Banks are classified into two categories according either to the year a bank was

founded, i.e., old and new banks, or to the type of major sponsors of a bank when founded,

namely, privatized government-owned and private banks. The categories and weights of the

performance index in this paper are selected according to their relative impact based upon the

surveys of diverse experts from accounting, finance, strategy, and management. This study


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seeks to offer a performance metrics and implement this measure to evaluate the Taiwan

commercial banks.

The major contribution of this paper is the consideration of both financial and

non-financial factors in constructing the performance indexes. This provides a complete picture

of banking performance both from quantitative (objective) and from qualitative (subjective)

perspectives. The results show that privatized government-owned/old banks are larger than

private/new banks, respectively. Moreover, privatized government-owned banks have

significantly higher financial performance index than private banks in 2001 but both types of

banks are not significantly different from each other in non-financial performance index. New

and old banks are not significantly different from each other in both financial and non-financial

performance indexes. With relatively large scale, higher profitability and better management,

banks will perform relatively better among competitors in the following year. Furthermore,

non-financial factors are important predictors of future financial and total performance indexes,

though individual factor may not be consistently significant. In addition, more branch offices,

better capital structure and solvency, and higher rates of growth in deposits and loans all result

in more profits, and lead to higher customer satisfaction and more efficient management.

Providing better technology to customers is an efficient way in promoting customer services,

which in turn produces more profits and results in efficient management. CEOs, on average,

have plans for better management and more profits. Finally, increases in the size of a bank in

terms of total assets cause inefficient management, and reduce profits or impair customer

services.

Among the factors that have direct and positive impacts on profitability, increasing the

efficiency of management is the most efficient way; on the contrary, adding more branch offices

contributes the least profits. Therefore, to increase bank profits, CEOs should aim to improve


The remainder of the paper is organized as follows. Section 2 briefly reviews some of

performance measures. The methodology used in this paper is discussed in Section 3. The

data and the empirical results are presented in Section 4 and Section 5, respectively. Finally,

the conclusion is shown in Section 6.

2. Prior Performance Measures

Previous studies have measured bank performance from different aspects. Numerous


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studies estimated X-efficiency. Others construct performance indexes based on financial

and/or non-financial data. There have been many measures being proposed over the last two

decades to complement the current financial information. The most cited measures include the

value creation index (VCI) (Cap Gemini Ernst & Yong), the invisible balance-sheet (Annell et

al., 1989), the intangible assets monitor (Sveiby, 1997), the balanced scorecard (Kaplan and

Norton, 1996), economic value added (Stewart, 1991a, 1991b), IC-index (Roos et al., 1997),

technology broker (Brooking, 1998), Skandia AFS business navigoator, and the financial

method of intangible assets measurement (Rodov and Leliaert, 2002).

Balanced Scorecard is introduced by Kaplan and Norton (1992) to motivate and measure

business performance. The Scorecard with financial and non-financial (i.e., customer, internal

business process, and learning and growth) provides a balanced picture of current operating

performance as well as the drivers of future performance. Cap Gemini Ernst & Youngs Center

for Business Innovation (CBI) develops a value creation index (VCI), a list of the nine most

critical categories of non-financial performance that determine corporate value creation:

innovation, quality, customer relations, management capabilities, alliances, technology, brand

value, employee relations, and environmental and community issues. Economic value added

(EVA) is introduced by Stern Stewart and Co., as a comprehensive performance measure to

explain corporate value added or lost. The IC-index combines strategy, non-financial

measurements, finance, and management value added, and consolidates those factors into a

single index.

Numerous prior studies adopt frontier approaches to measure bank X-efficiency. Two

popular techniques are the nonparametric linear programming approach, often referred to as

data envelopment analysis (DEA), and the parametric econometric approaches, specifically, the

stochastic frontier approach (SFA). On SFA approach, Kraft and Tirgiroglu (1998) build that

during 1994 and 1995 in Croatia, new banks were more X-inefficient and scale-inefficient than

old banks and profitability was negatively correlated to X-efficiency. Berger and DeYoung

(1997) analyze the relationship between loan quality and cost efficiency in commercial banks

and found that cost efficiency was a good indicator of future problem loans or problem banks.

By controlling for scale, Kwan and Eisenbeis (1996) find that small banking firms in U.S. were,

on average, less X-efficient, and the degrees of X-inefficiency varied a lot among small banks

than large banks. In addition, banks with more capital are more efficient than those with less


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capital; less efficient banks are higher risk-taking than more efficient banks.2

On DEA approach, Grabowski, Rangan, and Rezvanian (1993) find that branch banking is

more efficient than the bank holding company. Grabowski et al. (1994) observe that banks with

deposits in excess of $1 billion have the highest technical efficiency. Miller and Noulas (1996)

measure technical inefficiency of 201 large U.S. banks during the years of 1984 to 1990 and

concluded that banks with relatively lager size and more profits are more technical efficient.

Chen, and Yeh (2000), on the other hand, finds that in Taiwan privatized government-owned

banks are less technically efficient than private banks in 1996. Aly et al. (1990) suggest that,

based on a sample of 322 U.S. independent banks in 1986, bank efficiency is positively

correlated with bank size and is negatively related to product diversity. Using a sample of 580

branches of a commercial bank in the UK, Athanassopoulos (1998) find technical inefficiency

and diseconomies of scale existed at the branch level. The empirical evidence in Avkirans

study (1999) indicates that bank efficiency rises slowly and steadily in Australia from 1986 to

1995.3 Bauer, Berger, and Humphrey (1998) investigate the consistency and differences of

measured operation efficiency obtained using different approaches. The evidence indicates

that nonparametric DEA method yields much lower average efficiency than the SFA parametric

approaches do.

3. Methodology

Bank performance in this study is measured using indexing procedure. Performance

measure is decomposed into financial and non-financial perspectives. Banks are further

classified by (1) the year of the establishment (new or old banks), or (2) the government being

the major stockholder (privatized government-owned or private banks).

The performance indexes of individual bank are first constructed; those of four types ofbanks (i.e., new, old, privatized government-owned as well as private banks) are derived from

individual bank performance indexes accordingly. The performance indexes of different types

of banks are examined. The Spearmans correlations of performance indexes of financial and

non-financial perspectives as well as overall performance indexes of banks are analyzed.

2 Other studies focusing on different issues are available. See Huang and Wang (2001), DeYoung et al. (1998),Mitchell and Onvural (1996), Atkinson and Cornwell (1994), Berger, Hancock and Humphrey (1993) Huang (2000)and Kumbhakar (1996).3

More studies on banking issues using DEA are also available. See Sathye (2001), Chen(2001), Chiu et al. (2000),Chen and Yeh (2000), Camanho and Dyson (1999), Chen and Yeh (1998), Chang (1997), Resti (1997), Schaffnit,Rosen and Paradi (1997), Fukuyama (1993), Elyasiani and Mehdian (1992), Oral and Yolalan (1990), Sherman andGold (1985).


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Finally, the impacts on commercial banks profitability of several different factors concerning

financial and non-financial performance indexes are studied.

3.1. Constructing Performance Index

3.1.1. Selection of Performance Measures and Weights

Kaplan and Norton (1996) emphasize that balanced scorecards should reflect four

types of measures: (1) financial and nonfinancial; (2) external and internal; (3) input/drivers

and outcomes/results; (4) objective and subjective. However, different types of measures are

not mutually exclusive. For example, financial measures (such as return on assets) could be

external, outcomes/results, or objective. Our performance index includes outcome measures,

the performance drivers of those outcomes, short-term and long-term objectives, hard objective

measures and more subjective measures. This study initially reviews prior literature on

performance measures, workers compensation and CEO incentive plans, and selects four types

of possible measures for our performance index. The preliminary list of performance measures

(about 60 different measures) is provided to NTU EMBA students who rank each of the

measures by its importance to the success of commercial banks. Then, we reduce the list to

about 30 measures. The final list of performance measures, categories and weights is

determined according to their relative impact based upon the surveys of diverse experts from

accounting, finance, strategy, and management. The performance index is evaluated from two

aspects, namely, financial and non-financial aspects. Financial and non-financial performance

components are measured based on five and four characteristics, respectively. Each

characteristic is composed of several important factors, as listed in Table 1.

3.1.2. Financial performance index

Financial performance of a bank is dependent on its capital structure and solvency,management efficiency, profitability, scale and growth, all of which are evaluated based on

different financial ratios derived from financial statements. Capital structure and solvency is

determined by three ratios, i.e., liability ratio, risk-based capital ratio, and the current ratio.

Management efficiency is measured by NPL ratio, asset turnover and operating revenue per

employee. The size of a bank (i.e., bank scale) is defined by total assets. The growth rates of

both deposits and loans are taken into account when evaluating the growth of a bank.

For the purpose of intertemporal and cross-sectional comparisons, the values of all

considered factors of individual bank are standardized. Let X ijt be the value of jth factor of ith


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bank at time t. The standardized value is calculated as

jt

jtijt

ijt

XZ

= , (1)

where jt andjt are, respectively, the sample mean and standard deviation of the jth factor at t4.

Bank i is doing relatively well at time t than the average in terms of j th factor if the standardized

value (Zijt) is greater than zero, and is doing relatively worse if the value is less than zero.

-Insert Table 1 about here-

The performance index of each financial characteristic is constructed by averaging standardized

values through relevant factors with predetermined weights. The performance index represents

the relative importance of each category: the more important a factor is in determining a banks

value, the greater its weighting in the index. The weights, as indicated in the second column of

Table 1, are selected according to their relative impact based upon the surveys of diverse

experts from accounting, finance, strategy, and management.5 For example, the performance

index ofcapital structure and solvency for Bank i was calculated as follows:

Capital Structure and Solvency Index = E i1t = 0.45*(-1)*Zi1t+0.5* Zi2t+0.05* Zi3t (2)

where

Zi1t: the standardized ratio of liability to total assets for the ith bank at time t;

Zi2t: the standardized risk-based capital ratio for the ith bank at time t;

Zi3t: the standardized current ratio for the ith bank at time t.

Since the higher is the liability ratio, the more likely does the bank have troubles of paying

its customers, and hence, the more risky is the bank in terms of capital structure and solvency.

The negative multiplier (-1) associates with the ratio of liability to total assets takes into

account the negative influence of liability ratio on bank performance, as was indicated in the

third column of Table 1.

Bank performance indexes for management (Ei2t), profitability (Ei3t), scale (Ei4t), and

growth (Ei5t) were calculated similarly. Finally, financial performance index of each bank was

the weighted average of performance indexes of capital structure and solvency, management,

4jt (jt)) are the sample mean and standard deviation excluding outliers. The standardized values of outliers arereplaced by 3 and 3, depending upon whether they are three standard deviations above or below the mean value.

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5 The actual impact of a factor may differ from the common perception of experts.


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profitability, scale, and growth (with weights listed in Table 1). That is,

Financial Performance Index of the ith bank at time t = (3)=

=5

1j

ijtjit EWFE

where W1=0.15, W2=0.35, W3=0.20, W4=0.25, W5=0.05, respectively.

To evaluate the performances of banks of different types, banks were grouped by the

selected criteria. Based on the year when a bank was founded, banks are divided into new banks

(founded after the announcement of Commercial Bank Establishment Promotion Decree in

1991) and old banks. Banks are also classified into private banks and privatized

government-owned banks depending upon whether the bank was first founded mainly with

private funds or with public funds. The performance indexes of banks of different types arecalculated by averaging performance indexes through banks of the same type. For new banks,

Performance index of jth factor at time t = ZNjt Nbanksnewi ijt /nZ = , (4)

Performance index of jth characteristic at time t = ENjt Nbanksnewi ijt /nE = (5)

Financial Performance index at time t = FENt Nbanksnewi it /nFE = (6)

where

nN is the number of new banks.

3.1.3. Non-financial performance index

Non-financial performance of each bank is evaluated based on peers and customers ratings.

Questionnaires using five-point Likert scale are specifically designed for this research. The

questions regarding non-financial performance are summarized in Table 2. Each bank is

evaluated by its customers from two main categories: (1) customer services, and (2) technology.

Questions concerning customer services include six factors, i.e., employees knowledge about

their work, employees attitudes toward customers, fees and rates, the diversities of financial

information and services provided to customers, security and reliability, and lobby and other

facilities. Questions regarding technology concern the services of ATM, Tele-banking as well

as e-banking.6 On the other hand, CEOs leadership of each bank is evaluated by peers.

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6 Tele-banking (telephone-banking) and e-banking (electronic-banking) refers to provision of banking products andservices through telephone or electronic platforms. These products and services include deposit-taking, lending,


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Several questions are designed to measure customers satisfactions in services and technology

provided by banks and CEOs leadership among peers.

The rating of customers satisfactions in any particular service provided by each bank, for

example, Reasonable Service Charges, is constructed as the mean value of sample ratings with

respect to that service. The rating of any specific factor, for example, Fees and Rates, is the

average of the ratings corresponding to the questions (services) listed under that factor.

- Insert Table 2 about here --

To construct non-financial performance index, the ratings of all factors are first converted

into standardized values, respectively, as is in equation (1). The standardized values are

averaging through relevant factors to calculate the performance indexes of CEO leadership,

customer services, as well as technology. Equal weights are used in all cases.

Finally, non-financial performance indexes of banks of different types are constructed by

averaging performance indexes through banks of the same type. For new banks, for example,

Performance index of jth non-financial factor at time t

= ZNjt Nbanksnewi

it /nNZ

= , (7)

Performance index of jth non-financial characteristic at time t

= NENjt Nbanksnewi

ijt /nNE

= (8)

Non-financial performance index at time t

= NFENt Nbanksnewi

it /nNFE

= (9)

3.1.4. The composite index of total performance index

The composite indexes of total performance index of each individual bank (TEit) and

banks of different types are constructed by averaging through financial and non-financial

performance indexes with weights 2/3 and 1/3, correspondingly. That is,

Total performance index of bank i at time t = 3/)2(ititit

NFEFETE +=

10

electronic bill payment, account management, and other financial services. In Taiwan, stand-alone virtual banksare not allowed. That is, e-banking services are offered only as an extension and complement to existing otherservices.


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Total performance index of new banks at time t = 3/)2(NtNtNt

NFEFETE +=

Likewise, performance indexes of banks of other types are calculated. Based upon the

surveys of diverse experts from accounting, finance, strategy, and management, we assign

relatively heavier weight to objective evaluation (financial performance index) than to

subjective evaluation (non-financial performance index).

3.2. Hypotheses Testing

Government-owned banks used to command the Taiwan banking industry until the early

1990s, when Taiwan started financial liberalization by granting new banking licenses and

encouraging foreign banks to join the domestic market. With increasing competition and the

governments privatization policy, 1991 marked the turning point for market dominance to shift

from government-owned banks to private banks. Thus, we examine (1) whether banks

established before or after 1991 (Old vs. New banks) perform differently because of timing of

their entry into the market and (2) whether privatized government-owned or private banks

perform differently because of government support and/or favor.

Performance index of banks of different types are compared. The following hypotheses are

tested in all categories, including capital structure and solvency, management, profitability,

scale, growth, customer services, technology, CEO leadership as well as financial and

non-financial performance indexes. This study examines how the performance varies between

banks of different types. Our sample includes 35 banks (i.e., 8 privatized government-owned

banks and 27 private banks, and 16 new banks and 19 old banks). In sum, our first hypothesis is

as follows (in alternative form):

Hypothesis 1: Old (privatized government-owned) banks perform better than new (private)

banks. That is, old (privatized government-owned) banks have higher

performance indexes than new (private) banks.

Our performance index includes outcome measures and the performance drivers of those

outcomes, hard objective measures and softer, more subjective measures. Our performance

measure also provides a balance of short-term and long-term objectives. As a result, the

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balanced performance index can serve as the focal point for the organizations efforts, defining

and communicating priorities to managers, employees, investors, even customers, and can be

used as a communication, information, and learning system. By articulating them clearly,

managers can channel the energies, the abilities, and knowledge towards achieving the firms

long-term goals. Non-financial performance measures in our study can be interpreted as

leading indicators that provide information on future performance that is not contained in

current financial measures. Thus, we expect that our financial and non-financial performance

indexes can be used to predict bank future performance. Our second hypothesis is stated in

alternative form as follows:

Hypothesis 2: The current performance indexes can be used to predict future performance.

That is, current performance indexes are positively associated with future

performance indexes.

The other purpose in this study is to examine whether a tailor-made financial and

non-financial performance measures, unique to banks, can provide significant insights into

bank value creation. Thus, we further examine the impacts of financial and non-financial

factors on Management, Profitability and Customer Services The interactions of profitability,

management and customer services performance indexes are investigated by using a system of

three equations in order to take their endogeneity into account. Our third hypothesis is stated as

follows (in alternative form):

Hypothesis 3: Other financial and non-financial factors affect profitability, management

and customer services performance indexes. Furthermore, profitability,

management and customer services performance indexes are interrelated.

4. The Data

The data used in this paper consists of panel data of 35 sampled publicly-traded


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commercial banks in Taiwan for the years of 2000 and 20017. Nineteen out of 35 sampled

banks are old banks founded before 1992 and the other sixteen of them are new banks founded

after 1992. Eight out of 35 sampled banks are privatized government-owned banks and 27 of

them are private banks. Table 3 lists the members of banks of all types.


Financial data of each bank are collected mainly from ROC Securities and Futures

Institute database and bank annual reports. Non-financial data are collected by surveys based

upon peers rating (CEO questionnaires) and customers rating (customer surveys).

CEO questionnaires are self-administered fax-delivered to CEOs of the 35 sampled

commercial banks, 23 and 21 of which responded for the years of 2000 and 2001, respectively.

On the other hand, both personal-interviewing and self-administered methods are employed on

customer surveys8. 2583 and 2792 response data are collected for the years of 2000 and 2001,

respectively.

5. The Empirical Results

5.1. The performance index of individual banks

To examine how performance of each bank is relative to that of the peers in certain

category, banks are ranked according to performance index of interest. Table 4 reports the

ranking results of individual banks based on the performances of financial and non-financial

perspectives as well as total performance index.

It is interesting to see that banks continuously being on the top-ten list of the best financial

performance are mostly old banks. These banks are Chang Hwa Commercial Bank, First

Commercial Bank, Hua Nan Commercial Bank, International Commercial Bank of China,

Central Trust of China, Chiao Tung Bank, United World Chinese Commercial Bank and Taipei

Bank. On the contrary, banks continuously being among the worst tens are all private banks.

7 Several banks were merged or were converted into holding companies in 2002 after the Taiwan congress passedthe bill of Financial Holding Company Act. Financial and non-financial data of these banks in 2002 were not

available and hence not compatible to those before 2002, and thus year 2002 and later are excluded from oursample.8 A personal interview and a self-administered questionnaire seeking the same data generally provided sufficientsimilarity of answers to enable them to be combined (Cooper and Schindler, 1998).


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These banks are Hsinchu International Bank, Tainan Business Bank, Kaohsiung Business Bank,

Taitung Business Bank, Taichung Commercial Bank, Chung Shing Bank, Pan Asia Bank and

Bank of Overseas Chinese. Similarly, banks continuously being the worst non-financial

performance are private banks.

Do privatized government-owned banks on average have better performance than private

banks? Do old banks perform better than new banks? Are they true in what aspect? In order to

find out the answers, we compare the performance indexes of banks of different types.


5.2. The performance indexes of banks of different types

The descriptive statistics and test results for the comparisons of financial performance

indexes between old and new banks and between private and privatized government-owned

banks are summarized in Tables 5. Likewise, the descriptive statistics and test results for the

comparisons of non-financial performance indexes between banks of different types are

reported in Tables 6.


5.2.1 Privatized Government-Owned Banks vs. Private Banks

Table 5 shows that private banks have, on average, higher performance scores than

privatized government-owned banks in terms of current ratio; their performance in liability

ratio is also better than privatized government-owned ones in 2001. Privatized

government-owned banks are larger than private banks in terms of scale; they have better

performance than private banks in profitability only in 2000. The two types of banks are

always not significantly different from each other in management and growth. Overall,

privatized government-owned banks are significantly better performers than private banks in

financial performance of both 2000 and 2001.

Table 6 shows that private banks have higher performance scores than privatizedgovernment-owned banks in fees and rates, but the two types of banks are no difference in


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terms of customer services. The CEOs of privatized government-owned banks are considered

by the peers to have better visions in 2001. Overall, privatized government-owned banks and

private banks are not significantly different from each other in the non-financial performance

category.

-- Insert Table 6 about here --

5.2.2 New Banks vs. Old Banks

On financial performance indexes, Table 5 shows that new banks have, on average, higher

performance indexes than old banks in NPL ratio in 2001. Old banks are always larger in scale.

In general, old banks and private banks are not significantly different from each other in the

category of financial performance index during 2000 and 2001.

On non-financial performance indexes, Table 6 shows that new and old banks are no

different except in 2001, in which new banks perform better in customer services due to better

attitudes toward customers (i.e., service quality) and relatively more comfortable lobby and

facilities. Overall, new and old banks are not significantly different from each other in the

non-financial performance category.

5.3. Prediction of Future Performances

5.3.1. Spearmans rank correlation coefficient

To examine the correlations among the rankings, Spearmans rank correlation coefficients

for financial and non-financial performance indexes as well as total performance indexes of

banks are computed and reported in Table 7.


Table 7 shows that the rankings of banks based on total performance indexes are highly and

positively correlated with those based on financial performance indexes. In addition, the

rankings of banks based on non-financial performance indexes are positively correlated with

those based on financial performance indexes. This result supports that our non-financial

performance captures the drivers of outcomes and provides a balance of short-term and

long-term objectives. As a result, the balanced performance index can serve as the focal point

for the organizations efforts.


16/40

The evidence also suggests that lagged performance in financial and non-financial

categories affects future total performance indexes. In other words, financial and non-financial

performance indexes of this period will have impacts on banks future performance with

different degree. This result supports our second hypothesis that our financial and non-financial

performance indexes can be used to predict bank future performance. Thus, by articulating

performance measures clearly, bank managers can channel the energies, the abilities, and

knowledge towards achieving the firms long-term goals.

Our results indicate that non-financial performance measure is highly related to both current

and future financial performance indexes. Our findings imply that non-financial performance

measures in our study are highly value-relevant for banks, and leading indicators that provide

information on future performance are not contained in current financial measures. Consistent

with the literature, predictive ability is one of the primary benefits of non-financial measures.

5.3.2. Prediction Results

High correlations among lagged and current performance ranks denote that lagged

performance indexes can be used to predict current performances. Two new variables

measuring the size of a bank are introduced in the prediction regression analyses. They are

BRANCH (the number of branch offices) and EPLEBR (the number of employees per branch

office, in hundred).

Eight different models are considered here. Models A1 through A4 examine the effects on

total performance indexes of lagged financial and non-financial performance factors.

16

CSSTPAModel ++++=

:4

GROWTHPROFITMANGMT:3



2001,20002102001

2001,20008200072000620005

2000420003200022000102001

2001,20008200072000620005

2000420003200022000102001

2001,20008200072000620005

20004200032000220001A02001

AAAA

AAAAA

AAAAA

AAAAA

AAAAA

AAAAA

AAAA

NFPFPTPAModel

vTECHSRVCECEOEPLEBR

CSSTPAModel

uTECHSRVCECEOBRANCH

CSSTPAModel

TECHSRVCECEOSCALE

+++=

+++++

++++=

+++++

++++=

+++++

where

TP2001: total performance score in 2001

CSS2000 : the performance score of Capital Structure and Solvency in 2000;


17/40

MANGMT2000 : the performance score of Management in 2000;

PROFIT2000 : the performance score of Profitability in 2000;

GROWTH2000 : the performance score of Growth in 2000;

CEO2000 : the performance score of CEO Leadership in 2000;

SRVCE2000 : the performance score of Customer Services in 2000;

TECH2000 : the performance score of Technology in 2000.

BRANCH2000 : the number of branch offices in 2000;

EPLEBR2000 : the number of employees per branch office in 2000.

Models B1 through B4 inspect the effects on financial performance indexes of lagged financial

and non-financial performance factors.

2001,20002102001

2001,20008200072000620005

2000420003200022000102001

2001,20008200072000620005

2000420003200022000102001

2001,20008200072000620005

2000420003200022000102001

:4



GROWTHPROFITMANGMT:1B

BBBB

BBBBB

B

BBBBB

BBBBB

BBBBB

BBBB

NFPFPFPBModel

vTECHSRVCECEOEPLEBR

CSSFPBModel

uTECHSRVCECEOBRANCH

CSSFPBModel

TECHSRVCECEOSCALE

CSSFPModel

+++=

+++++

++++=

+++++

++++=

+++++++++=

where

FP2001: financial performance score in 2001.

Table 8 reports the prediction results of current total performance index on lagged financial

and non-financial performance indexes. The prediction results of current financial performance

on lagged financial and non-financial performances are reported in Table 9. Unless statedotherwise, we say that a coefficient is significant if it exceeds the 90% confidence level in

one-tailed test.



Table 8 and 9 indicate that customer services and technology are significantly positively

related to future total performance (financial performance) in Models A1 (B1) and A3 (B3)

17


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18

respectively. In addition, non-financial factors have a significant and positive impact on total

performance and financial performance in the following year. Among five financial factors,

profitability, management and scale in terms either of the number of branch offices or of assets

all significantly and positively affect total performance and financial performance in the

following year. As a whole, current financial performance also has a significant and positive

impact on total performance in the following year. Similarly, current financial performance also

leads to better financial performance in the following period.

The above results suggest that with relatively large scale, higher profitability and better

management, banks will perform relatively better among competitors in the following year.

Furthermore, non-financial factors are important predictors of future financial and total

performance indexes, though individual factor may not be consistently significant.

5.4. Simultaneous Equations

In addition to BRANCH (the number of branch offices) and EPLEBR (the number of

employees per branch office), EPLEE (the number of employees) is also created and tested for

its influence on performances of different factors.

The standardized values of all variables relating to financial and non-financial performanceindexes are relatively too small compared to the numbers of employees, branch offices and

employees per branch, and are adjusted by 100.

5.4.1. Correlation Analysis

The correlation coefficients of factors appeared in regression analysis are calculated and

reported in Table 10.


Bank scale (SCALE), the number of branch offices (BRANCH), and the number of

employees (EPLEE) are highly correlated. These variables would not be included in the same

regression. They are used interchangeably in three equations to measure size effects.

5.4.2. Regression Results

Based on the correlations among variables, the single regression model for each of


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profitability, management, and customer services is first developed. To control for endogenous

effects, the three equations are estimated simultaneously using three-stage least square method.

Several systems of equations with different scale variables are studied. Table 11 reports, among

several possible models, the best regression results for analyzing the impacts on profitability,

management, and customer services of variables of interest. The system of three equations is

as follows:

343210

2543210

1543210

CEO

CSG

GROWTHMANGMT

tttttt

ttttttt

ttttttt

EPLEBRTECHMANGMTSRVCE

SRVCEEOCALEROWTHPROFITMANGMT

BRANCHSRVCECSSPROFIT

+++++=

++++++=

++++++=

All variables are the same as those defined for Models A1 through A4. Subscript t denotes the

time. It is a panel data model with 33 observations (banks) in each of the two years (2000 and

2001).


Regression results suggest that capital structure and solvency, management, growth, and the

number of branch offices all have significant and positive impacts on profitability.

Profitability and the quality of customer services as well as CEO leadership all have significant

and positive impacts on a banks performance in management. The size of bank, on the other

hand, has a significant and negative impact on management suggesting that larger banks in

Taiwan, on average, probably do not take advantage of their competitive edge. Consequently,

the larger is the banks scale; the worse is a banks performance in management. Finally,

financial performance had a positive impact on customer services directly through management

and indirectly through profitability.

On non-financial performance, technology provides to customers, as expected, has a

significant and positive effect on customer satisfactions. On the contrary, CEOs have strategies

planned for long-term profitability, which may contradict short-term customers expectations.

As a result, CEO leadership has a significant and negative impact on customer satisfactions.

Figure 1 illustrates the relationship among variables. Solid lines indicate significantly

positive effect while dash lines indicate the opposite. The arrows show the cause to effect.

19


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20

-- Insert Figure 1 about here --

Figure 1 shows that

1. More branch offices, better capital structure and solvency and higher rates of growthin deposits and loans all result in more profits, which in turn lead to efficient

management and better customer services.

2. CEO leadership, on average, has plans for better management and more profits.3. The investment in technology is an efficient way in promoting customer services,

which in turn results in efficient management and more profits.

In the following, the coefficients in the profitability regression are converted to

coefficients to compare the effects on profitability9:

Profitability = -0.0915 + 0.0558*Asset Quality + 0.1792*Management +

0.002295*Branch office + 0.0455*Growth - 0.0473*Customer Services.

The coefficients of regressions for profitability suggest that, for an increase in one standard

deviation of the explanatory variables, efficient management brings in the greatest profits,

followed by better asset quality and the growth in deposits and loans; an increase in the number

of branch offices brings in the least profits. Therefore, to increase bank profits, CEOs should

aim to improve bank management and capital structure and solvency rather than to add more

branch offices.

6. Conclusions

Conventional performance measures are mainly based on current financial data, which are

comparable and well accepted. However, such traditional financial information paradigms donot fully reflect performance in the new economy. Non-financial factors have become

increasingly more significant. Internal and external needs would be served by appropriate

performance measures that capture value creation activities linked to long-term strategies. This

paper evaluates the performance index of 35 publicly-traded commercial banks in Taiwan for

the years of 2000 and 2001. The performance indexes of financial and non-financial aspects as

9

Each regression coefficient is adjusted by multiplying the original coefficient by the ratio of S Xi/SY, in which SXiis the standard error of Xi and SY is the standard error of Y. The new coefficient represents the change in the unitsof standard errors of profitability due to the increase in one unit of standard errors of the independent variable ofinterest.


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21

well as total performance index are constructed. Thirty-five banks are divided into new and old

banks based on the year a bank founded or into public and private banks according to the type

of major sponsors of a bank when founded.

The results show that privatized government-owned/old banks are larger than private/new

banks, respectively. Moreover, privatized government-owned banks have significantly higher

financial performance index than private banks but both types of banks are not significantly

different from each other in non-financial performance index. New and old banks are not

significantly different from each other in both financial and non-financial performance indexes.

With relatively large scale, profitability and better management, banks will perform

relatively better among competitors in the following year. In addition, non-financial factors, as

a whole, can be used to predict future total and financial performance indexes.

More branch offices, better capital structure and solvency, and higher rates of growth in

deposits and loans all result in more profits, and lead to higher customer satisfaction and more

efficient management. Providing better technology to customers is an efficient way in

promoting customer services, which in turn produces more profits and results in efficient

management. CEOs, on average, have plans for better management and more profits. Finally,

increases in the size of a bank in terms of total assets cause inefficient management, and reduce

profits or impair customer services.

Among the factors that have direct and positive impacts on profitability, increasing the

efficiency of management is the most efficient way; on the contrary, adding more branch offices

contributes the least profits. Therefore, to increase bank profits, CEOs should aim to improve


Our results indicate that non-financial performance measure is highly related to current and

future financial performance indexes. Our findings imply that non-financial performance

measure in our study is highly value-relevant for banks, and our performance measure can

serve as the focal point for the banks efforts, and be interpreted as leading indicators of

future performance. Consistent with the literature, predictive ability is one of the primary

benefits of non-financial measures.


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22

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Table 1: Factors Considered in Financial and Non-Financial Performance Indexes

ItemMean

2001

Std dev.

2001Weight Impact Explanation

Financial Performance 2/3

1. Capital Structure and Solvency0.15

(1) Liability Ratio 0.92 0.03 0.45 - Liability/Total Assets

(2) Risk-Based Capital Ratio 0.09 0.02 0.5 + Capital/Risk-Based Assets

(3) Current Ratio 5.10 4.06 0.05 + Current Asset/Current Liability

2. Management 0.35

(1) NPL Ratio 0.07 0.05 0.5 - Non-Performing Loans/Total Loans

(2) Asset Turnover 0.06 0.02 0.3 + Operating Revenue / Average Assets

(3) Operating Revenue per

employee (in Billions, NT$)

0.01 0.008 0.2 +Operating Revenue /Employees

3. Profitability* 0.20

(1) Return on Assets 0.002 0.01 0.4 + Net Income/ Average Assets

(2) Return on Stockholders Equity0.01 0.10 0.4 + Net Income / Average Net

Stockholders Equity

(3) Net Profit Margin 0.05 0.19 0.2 + Net Income /Operating Revenue

4. Scale 0.25

(1) Assets (in Trillions, NT$) 0.40 0.35 1 + Total Assets

5. Growth 0.05

(1) Deposits Growth Rate0.05 0.18 0.5 + (Deposits t Deposits t-1) /

Deposits t-1

(2) Loans Growth Rate 0.01 0.09 0.5 + (Loans t Loans t-1) / Loans t-1

II. Non-financial Performance 1/3

1. Customer Services 1/3 Customer Surveys

(1) Quality of Employees 3.78 0.20 1/6 + 1 question

(2) Services 3.79 0.21 1/6 + 3 questions

(3) Fees and Rates 3.36 0.20 1/6 + 2 questions

(4) Information and Convenience 3.67 0.17 1/6 + 6 questions

(5) Security and Reliability 3.76 0.17 1/6 + 3 questions

(6) Lobby and Facilities 3.76 0.17 1/6 + 5 questions

2. CEO Leadership 1/3 CEO surveys

(1) CEO vision 2.92 0.61 1/2 + Peer rating

(2) CEO strategy 2.90 0.57 1/2 + Peer rating

3. Technology 1/3 Customer Surveys

(1) ATM 3.78 0.29 1/3 + 2 questions

(2) Tele-Bank 3.61 0.36 1/3 + 2 questions

(3) E-Bank 3.50 0.36 1/3 + 2 questions

*. The means and standard deviations of Return on Assets and Net Profit Margin exclude outliers such as TaitungBusiness Bank and Dah An Commercial Bank.


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26

Table 2

Questions concerning customer services and CEOs leadership

Non-Financial Performance Questions

1. Customer Services

(1) Quality of Employees Professional and Familiar with his/her works(2) Services

Attitude toward customers Patience with customersquestions and/or complaints Awareness of customers needs

(3) Fees and Rates Satisfactory deposit rates Reasonable service charges

(4) Information and Convenience

Multi-financial products available Convenient location Easy and simple applications Prompt response to any requests Relevant information updated accordingly Diversified services

(5) Security and Reliability Security Privacy in customers personal data Banks reputation and reliability

(6) Lobby and Facilities

Welcoming facilities Enough ATM machines Low down rate of ATM Easy-to-follow screen directions in ATM Friendly designed lobby

2. CEO Leadership(1) CEO vision

(1) CEO strategy

Peer Ratings in both vision and strategy

3. Technology(1) ATM

(2) Tele-Bank

(3) E-Bank

Waiting time Satisfaction


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27

Table 3The Classifications of Sampled Commercial Banks in Taiwan

Bank Privatized Government-owned New

Chang Hwa Commercial Bank

First Commercial Bank

Hua Nan Commercial Bank

International Commercial Bank of China

Hsinchu International Bank

International Bank of Taipei

Tainan Business Bank

Taitung Business Bank

Taichung Commercial Bank

Central Trust of China

The Farmers Bank of China

Chiao Tung Bank

United World Chinese Commercial Bank

Grand Commercial Bank

Dah An Commercial Bank

Taipei Bank

The Chinese Bank

Taiwan Business Bank

Cathay United Bank

Bank of Kaohsiung

Cosmos Bank

Union Bank of Taiwan

Bank Sino Pac

E.Sun Commercial Bank

Fubon Commercial Bank

Asia Pacific Bank

Tai Shin International Bank

Far Eastern International Bank Ta Chong Commercial Bank

Entie Commercial Bank

Pan Asia Bank

Baodao Commercial Bank

Bank of Overseas Chinese

Total 8 15


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28

Table 4

Rankings of Banks Based on Performance Indexes

Bank Type Financial Non-financial Total operationBanks

Private New 2000 2001 2000 2001 2000 2001Chan Hwa Commercial Bank 10 8 27 16 14 12

First Commercial Bank 3 6 7 10 4 8

Hua Nan Commercial Bank 5 3 10 7 6 3

International Commercial Bank of China 4 4 5 19 3 7Hsinchu International Bank 27 25 26 5 27 16

International Bank of Taipei 15 13 14 17 13 15

Tainan Business Bank 31 28 21 20 29 25

Taitung Business Bank 33 33 33 31 33 33

Taichung Commercial Bank 30 29 28 32 30 31Central Trust of China 1 2 1 4 1 2The Farmers Bank of China 21 24 30 33 24 30

Chiao Tung Bank 2 1 2 13 2 1

United World Chinese Commercial Bank 6 7 12 6 8 6

Grand Commercial Bank 18 27 15 22 16 27

Dah An Commercial Bank 20 32 16 3 20 28

Taipei Bank 8 5 13 15 10 9

The Chinese Bank 16 26 9 8 12 17Taiwan Business Bank 13 21 18 25 15 23

Cathay United Bank 28 15 22 29 26 22

Bank of Kaohsiung 19 14 25 12 21 13

Cosmos Bank 29 23 24 18 28 19

UNION BANK OF TAIWAN 17 20 17 24 18 21

Bank Sino Pac 11 12 6 2 9 5E.Sun Commercial Bank 12 11 8 1 11 4

Fubon Commercial Bank 9 10 4 9 7 10

Asia Pacific Bank 22 17 11 28 17 24Tai Shin International Bank 7 9 3 14 5 11

Far Eastern International Bank 14 16 23 11 19 14

Ta Chong Commercial Bank 24 19 19 21 22 18

Entie Commercial Bank 23 22 31 23 25 20

Pan Asia Bank 26 30 32 26 31 29Baodao Commercial Bank 25 18 20 30 23 26

Bank of Overseas Chinese 32 31 29 27 32 32


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29

Table 5Descriptive statistics and tests for financial performance indexes

Panel A: The means and standard deviations of financial performance indexes for privatized

government-owned and private BanksPrivatized Government-owned Private

Item2000 2001 2000 2001

1. Capital Structure and Solvency 0.12(0.80) -0.01(0.62) 0.02(1.00) 0.00(0.78)

(1) Liability Ratio -0.36(0.73) -0.43(0.56) 0.11(1.08) 0.14(1.08)

(2) Risk-Based Capital Ratio 0.62(0.98) 0.43(0.84) -0.08(1.03) -0.14(1.02)

(3) Current Ratio -0.64(0.46) -0.58(0.30) 0.23(1.01) 0.18(1.08)

2. Management 0.28(0.75) 0.18(1.02) -0.03(0.83) -0.06(0.67)

(1) NPL Ratio 0.37(0.51) -0.04(0.68) -0.05(1.11) 0.01(1.09)

(2) Asset Turnover -0.46(0.68) 0.18(1.54) 0.14(1.07) -0.06(0.79)

(3) Operating Revenue peremployee (in millions)

1.18(1.86) 0.71(1.83) -0.26(0.65) -0.23(0.36)

3. Profitability 0.39(0.31) 0.18(0.51) -0.11(1.07) -0.06(1.06)

(1) Return on Assets 0.41(0.37) 0.22(0.51) -0.12(1.11) -0.07(1.11)

(2) Return on Stockholders Equity 0.36(0.23) 0.21(0.58) -0.11(1.12) -0.07(1.10)

(3) Net Profit Margin 0.42(0.33) 0.06(0.38) -0.12(1.11) -0.02(1.14)

4. Scale 0.48(0.77) 1.16(1.14) -0.36(0.58) -0.37(0.61)

5. Growth -0.22(0.39) 0.03(1.28) -0.01(1.04) -0.01(0.61)(1) Deposits Growth Rate -0.28(0.49) -0.25(1.98) 0.02(1.11) 0.08(0.40)

(2) Loans Growth Rate -0.16(0.41) 0.31(1.11) -0.03(1.10) -0.10(0.97)

Financial Performance 0.30(0.38) 0.39(0.45) -0.12(0.68) -0.12(0.56)

Notes: the values in the parentheses are standard deviations.


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30

Table 5 (Contd)

Panel B: The means and standard deviations of financial performance indexes for new and oldBanks

New Old

Item 2000 2001 2000 2001

1. Capital Structure and Solvency 0.02(0.81) 0.10(0.78) -0.02(1.04) -0.09(0.71)

(1) Liability Ratio 0.20(0.87) 0.30(1.30) -0.16(1.10) -0.25(0.59)

(2) Risk-Based Capital Ratio -0.14(0.84) -0.03(0.61) 0.11(1.13) 0.03(1.26)

(3) Current Ratio 0.08(0.76) -0.26(0.49) -0.07(1.18) 0.22(1.26)

2. Management 0.13(0.63) 0.11(0.33) -0.11(0.90) -0.09(0.98)

(1) NPL Ratio 0.22(0.98) 0.41(0.41) -0.18(1.01) -0.34(1.22)

(2) Asset Turnover 0.26(0.75) -0.11(0.87) -0.22(1.14) 0.09(1.11)

(3) Operating Revenue peremployee(in millions)

-0.26(0.32) -0.30(0.28) 0.22(1.30) 0.25(1.29)

3. Profitability 0.00(1.09) -0.09(1.11) 0.00(0.89) 0.07(0.83)

(1) Return on Assets 0.00(1.08) -0.10(1.06) 0.00(0.96) 0.09(0.96)

(2) Return on Stockholders Equity -0.02(1.11) -0.15(1.25) 0.02(0.93) 0.12(0.74)

(3) Net Profit Margin 0.01(1.08) 0.07(1.22) -0.01(0.96) -0.06(0.81)

4. Scale -0.53(0.11) -0.55(0.22) 0.44(1.19) 0.46(1.16)

5. Growth 0.05(1.11) -0.02(0.68) -0.05(0.79) 0.02(0.90)

(1) Deposits Growth Rate 0.19(1.15) -0.05(0.37) -0.16(0.85) 0.04(1.33)

(2) Loans Growth Rate -0.08(1.18) 0.00(1.05) 0.07(0.85) 0.00(0.99)

Financial Performance -0.08(0.60) -0.10(0.37) 0.07(0.71) 0.08(0.70)



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Table 5 (Contd)

Panel C: Test results for financial performance indexes

Privatized vs. Private New vs. OldItem

2000 2001 2000 2001

1. Capital Structure and Solvency

(1) Liability Ratio Private (2) Risk-Based Capital Ratio

(3) Current Ratio Private Private 2. Management

(1) NPL Ratio New

(2) Asset Turnover Private (3) Operating Revenue per

Employee (in millions)Privatized Old

3. Profitability Privatized

(1) Return on Assets Privatized (2) Return on Stockholders Equity Privatized

(3) Net Profit Margin Privatized 4. Scale Privatized Privatized Old Old

5. Growth

(1) Deposits Growth Rate (2) Loans Growth Rate

Financial Performance Privatized Privatized (1) denotes no significant difference between the two types, otherwise, the

significantly better one was reported.(2) The significance level is 5%.


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Table 6Descriptive statistics and tests for financial performance indexes

Panel A: The means and standard deviations of non-financial performance indexes for

privatized government-owned and private BanksPrivatized

Government-ownedPrivate

Non-financial Aspect

2000 2001 2000 2001

1. Customer Services -0.22(0.89) -0.22(0.77) 0.09(0.76) 0.09(0.89)

(1) Employees Quality -0.39(1.13) -0.17(0.90) 0.03(0.91) 0.06(1.06)

(2) Service Quality -0.53(0.94) -0.36(0.96) 0.12(1.00) 0.13(1.02)

(3) Fees and rates -0.33(1.06) -0.40(0.71) 0.30(0.81) 0.19(0.99)

(4) Information and Convenience 0.05(1.03) -0.11(0.88) 0.07(0.89) 0.12(0.93)

(5) Security and Reliability -0.01(0.91) -0.08(0.91) -0.11(0.94) -0.06(1.07)

(6) Lobby and Facilities -0.14(1.12) -0.22(1.08) 0.09(0.97) 0.09(0.91)

2. CEO Leadership 0.07(0.40) 0.17(0.51) -0.22(1.05) -0.25(1.03)

(1) CEO vision 0.08(0.43) 0.22(0.50) -0.23(1.03) -0.27(1.03)

(2) CEO strategy 0.07(0.40) 0.12(0.53) -0.21(1.07) -0.22(1.04)

3. Technology -0.07(0.82) -0.13(1.04) -0.08(0.70) 0.09(0.70)

(1) ATM -0.03(0.94) -0.36(1.32) -0.01(1.01) 0.14(0.80)

(2) Tele-Bank -0.22(0.84) 0.02(1.22) -0.01(0.95) 0.04(0.82)(3) E-Bank 0.03(1.05) -0.04(1.04) -0.21(0.74) 0.09(0.92)

Non-financial Performance -0.08(0.59) -0.08(0.50) -0.07(0.61) -0.04(0.56)



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Table 6 (Contd)

Panel B: The means and standard deviations of non-financial performance indexes for newand old Banks

New OldNon-financial Aspect

2000 2001 2000 2001

1. Customer Services -0.10(0.75) 0.31(0.88) 0.06(0.83) -0.19(0.81)

(1) Employees Quality -0.27(0.95) 0.30(0.88) 0.03(1.00) -0.20(1.06)

(2) Service Quality -0.03(0.98) 0.36(1.01) -0.08(1.06) -0.24(0.96)

(3) Fees and rates 0.21(0.80) 0.32(0.93) 0.07(1.00) -0.16(0.93)

(4) Information and Convenience -0.15(0.88) 0.37(1.03) 0.20(0.94) -0.14(0.79)

(5) Security and Reliability -0.26(0.94) 0.15(1.06) 0.03(0.91) -0.21(0.99)

(6) Lobby and Facilities -0.11(0.89) 0.35(0.85) 0.10(1.08) -0.21(0.98)2. CEO Leadership -0.01(0.96) -0.10(0.94) -0.22(0.90) -0.15(0.94)

(1) CEO vision -0.02(0.98) -0.12(0.95) -0.22(0.87) -0.14(0.93)

(2) CEO strategy 0.01(0.95) -0.08(0.94) -0.22(0.93) -0.16(0.95)

3. Technology 0.04(0.58) 0.14(0.71) -0.15(0.81) -0.04(0.86)

(1) ATM 0.12(0.84) 0.38(0.78) -0.11(1.06) -0.23(1.04)

(2) Tele-Bank 0.18(0.87) 0.13(0.92) -0.23(0.92) -0.02(0.96)

(3) E-Bank -0.19(0.80) -0.08(0.84) -0.12(0.87) 0.14(1.01)

Non-financial Performance -0.02(0.51) 0.11(0.49) -0.11(0.66) -0.16(0.55)



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Table 6 (Contd)

Panel C: Test results for non-financial performance indexes

Privatized vs private New vs OldNon-financial Aspect

2000 2001 2000 2001

1. Customer Services New

(1) Employees Quality

(2) Service Quality Private New

(3) Fees and rates Private Private

(4) Information and Convenience

(5) Security and Reliability

(6) Lobby and Facilities New

2. CEO Leadership Privatized

(1) CEO vision Privatized

(2) CEO strategy

3. Technology

(1) ATM New

(2) Tele-Bank

(3) E-Bank

Non-financial Performance

(1) denotes no significant difference between the two types, otherwise,the significantly better one was reported.

(2) The significance level is 5%.


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Table 7

Spearmans Rank Correlation Coefficients

Total

performance

Financial

performance

Non-financial

performanceRank correlation

2000 2001 2000 2001 2000 2001

2000 1Total performance

2001 0.89 1

2000 0.96 0.89 1Financial performance

2001 0.89 0.88 0.91 1

2000 0.90 0.76 0.76 0.70 1Non-financial performance

2001 0.64 0.85 0.62 0.55 0.63 1


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Table 8

Prediction Results of Total Performance on lagged Financial and Non-financial Factors

Model Model Model Model

Independent Variables

Predicted

sign A1 A2 A3 A4

Intercept -0.139 -0.415 0.147 -0.072

Financial performance + 0.607***

Non-Financial performance + 0.236**

Capital Structure and Solvency + 0.057 0.07659 -0.024

Management + 0.405*** 0.536*** 0.306**

Profitability + 0.298** 0.272** 0.268**

Growth + 0.076 0.06970 0.052

Scale + 0.154**

CEO Leadership + -0.097 0.11275 0.048

Customer Services + 0.096* 0.07316 0.076

Technology + -0.025 -0.01546 0.144*

Branch per hundred + 0.454***

Hundred Employees per branch + -0.585

Adjusted R2 0.693 0.708 0.641 0.690

Degree of freedom 24 24 24 30

(1) Dependent variable is 2001 total performance index, and independent variables are componentsof 2000 performance indexes.

(2) *, ** and *** indicate significance at the 10%, 5% and 1% (one-tail) respectively.


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Table 9

Prediction Results of Financial Performance on lagged Financial and Non-financial Factors

Model Model Model ModelIndependent Variables

Predicted

sign B1 B2 B3 B4

Intercept -0.129* -0.601*** 0.213 -0.097*

Financial performance + 0.841***

Non-Financial performance + 0.209*

Capital Structure and Solvency + 0.046 0.079 -0.089

Management + 0.608*** 0.831*** 0.390**

Profitability + 0.260** 0.216* 0.228

Growth + -0.103 -0.114 -0.130

Scale + 0.264***

CEO Leadership + -0.053 -0.080 0.177

Customer Services + 0.117* 0.079 0.097

Technology + -0.075 -0.058 0.186*

Branch per hundred + 0.778***

Hundred Employees per branch + -0.645

Adjusted R2 0.7066 0.7360 0.5779 0.6678

Degree of freedom 24 24 24 30

(1) Dependent variable is 2001 financial performance index, and independent variables arecomponents of 2000 performance indexes.

(2) *, ** and *** indicate significance at the 10%, 5% and 1% (one-tail) respectively.


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Table 10The Correlation Coefficients of Variables Appeared in Regression Analysis

2000-2001 EPLEBRBRANCH EPLEE MANGMT CSS PROFITSCALEGROWTH CEO SRVCE TECH

EPLEBR 1

BRANCH -0.10 1

EPLEE 0.40 0.86 1

MANGMT 0.58 -0.18 0.09 1

CSS 0.22 -0.16 -0.05 0.46 1

PROFIT 0.30 0.17 0.26 0.60 0.53 1

SCALE 0.28 0.86 0.94 0.14 0.00 0.29 1

GROWTH 0.23 -0.07 0.02 0.54 0.28 0.53 0.05 1

CEO 0.59 0.09 0.36 0.67 0.43 0.52 0.40 0.40 1

SRVCE 0.00 -0.03 -0.06 0.24 -0.01 -0.05 -0.05 0.12 0.01 1

TECH 0.15 0.13 0.18 0.24 0.06 0.07 0.18 0.16 0.19 0.59 1

Variable Definitions:

EPLEBR: the number of employees per branch office;

BRANCH: the number of branch offices;

EPLEE: the number of employees;

MANGMT: the performance score of Management;

CSS: the performance score of Capital Structure and Solvency;PROFIT: the performance score of Profitability;

GROWTH: the performance score of Growth;

CEO: the performance score of CEO Leadership;

SRVCE: the performance score of Customer Services;

TECH: the performance score of Technology.


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Table 11

3SLS Regression Results of Profitability, Management and Customer Services

Variables Predicted sign Profitability Management Services

Intercept -40.089 3.622 11.999

Capital Structure and

Solvency + 0.319***

Management + 0.610*** 0.428**

Profitability + 0.324**

Growth + 0.245** 0.100

Scale + -13.621

CEO Leadership + 0.387*** -0.282

Customer Services + -0.190 0.243**

Information & Technology + 0.562**

Branch + 0.688***

Employees per branch + -0.375

System adjusted R2 0.5635

Degree of freedom 181

*, ** and *** indicate significance at the 10%, 5% and 1% (one-tail) respectively.


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Profitability

Managemnent

Growth

Branch Offices

Technology

Capital Structure &

Solvency

CEO Leadership

Customer Services

Figure1Impacts of Financial and Non-Financial Factors on Management, Profitability andCustomer Services

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Balanced Performance Index Metrics

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