The Effect of the Shift in the Composition of Bank Income on Bank Efficiency

Abstract

Data Envelopment Analysis (DEA) is used to estimate and compare the performance of the four largest banks in South Africa over a period of ten years. Technical, allocative, cost and scale efficiency are estimated for each of the banks and for each year over the ten year period. Two models were used to estimate relative efficiency – one estimated relative efficiency with regard to interest income (Model 1) and another estimated relative efficiency with regard to noninterest income (Model 2).

There are differences in relative efficiency with regard to interest income and noninterest income. On average all the banks experienced an improvement in technical efficiency moving from Model 1 to Model 2, but the majority of the banks experienced a deterioration in allocative efficiency. There are mixed results in the case of cost and scale efficiency. It is evident that noninterest income plays an important role in overall bank efficiency.