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MPRA
Munich Personal RePEc Archive
Concentration, Competition, Efficiency
and Profitability of the Turkish Banking
Sector in the Post-Crises Period
Abbaso˘glu, Osman Furkan, Aysan, Ahmet Faruk and Gunes,
Ali
UNSPECIFIED
2007
Online at http://mpra.ub.uni-muenchen.de/5494/
MPRA Paper No. 5494, posted 07. November 2007 / 04:45
1
Concentration, Competition, Efficiency and Profitability of the Turkish
Banking Sector in the Post-Crises Period
Osman Furkan Abbasoğlu
University of Southern California, Department of Economics
Ahmet Faruk Aysan
Boğaziçi University, Department of Economics
Ali Güneş
University of Rochester, Department of Economics
Correspondence: Ahmet Faruk Aysan
Boğaziçi University, Department of Economics, 34342 Bebek, Istanbul, Turkey
Phone: 90-212-359 76 39, Fax: 90-212-287 24 53
ahmet.aysan@boun.edu.tr
2
Concentration, Competition, Efficiency and Profitability of the Turkish
Banking Sector in the Post-Crises Period
Abstract
After 2001 crisis, the macroeconomic environment led to important changes in Turkish
banking sector which has experienced a process of concentration by involving in merger
and acquisition activities and liquidation of some insolvent banks. Using the data from
the detailed balance sheets of the banks that operated in the years from 2001 to 2005, we
examine the degree of concentration and degree of competition in the market by applying
Panzar and Rosse’s approach. We also explore the existence of relationship between
efficiency and profitability of the banks taking into account the internationalization of
banking. Our results do not suggest the existence of relationship between concentration
and competition. There is also no robust relationship between efficiency and profitability.
3
Concentration, Competition, Efficiency and Profitability of the Turkish Banking
Sector in the Post-Crises Period
1. Introduction
Banks play a substantial role in capital accumulation, firms’ growth and economic
prosperity. Hence, research on concentration, competition, efficiency and profitability of
the banking sector has important policy implications. In investigating the relationship
between the concentration and competition in banking sector there are two competing
approaches: the Structure-Conduct-Performance (SCP) hypothesis and the Efficient-
Structure hypothesis. The former states that the higher the concentration in a market, the
lower the competition and the higher profits that the firms receive. The latter takes the
efficiency factor into account and states that the firms with superior efficiency improve
their market shares and become more profitable.
Berger and Hannan (1989) found consistent empirical results with the implications
of SCP hypothesis. While Bikker and Groeneveld (2000) conclude that the increase in the
degree of concentration in the European banking sector is negatively related to
competition, Jansen and Haan (2003) found no evidence that concentration indicators are
linked to profitability, and added that concentration and competition are not related.
Smirlock (1985) also states that there is no discernable positive relationship between
concentration and profitability. Yeyati and Micco (2007) further suggest that it is not at
all clear whether competition and concentration should go in opposite directions. For the
Turkey’s banking sector, dominance, disparity and dynamic indexes are employed in
addition to static measures in order to analyze market structure more comprehensively.
4
According to the findings of this study, concentration showed an increasing tendency in
2000-2005. However, net interest margins which can be seen as the relevant prices in the
sector (as an indicator for the measure of competition) declined.
While the literature generally focuses on scale and scope economies, more recent
literature has attempted to evaluate X-efficiencies1 in various European banking markets
(Altunbas 2000, Berg 1993). Berger and Humphrey (1994) states that X-efficiency is
more important than scale and scope economies taking into account the managerial
ability to control costs. Isik and Hassan (2002) employ Data Envelopment Analysis
(DEA) to investigate efficiency in the Turkish Banking sector and found that foreign
banks operating in Turkey seem to be significantly more efficient than their domestic
peers.
Beside Berger (1995), in exploring the relationship between profitability and
efficiency, Turati (2003) does not employ a proper regression analysis. He computes
simple correlation coefficients between efficiency scores and different measures of bank
profitability. According to this study, correlation coefficients between ROE and
efficiency scores, and between ROA and efficiency scores are substantially close to zero
for all the three models. These findings suggest that there is no linear relationship
between profitability and efficiency. Turati (2003) also observed that for some European
countries there is a negative correlation between efficiency and profitability. He
interpreted this as a surprising result since the more inefficient banks were also the more
profitable ones. Berger and Hannan (1998) stated that monopolists earned higher profits
1 X-efficiency is the effectiveness with which a given set of inputs are used to produce outputs. If a firm is
producing the maximum output it can, given the resources it employs, such as men and machinery, and the
best technology available, it is said to be x-efficient.
5
and given the absence of competitive pressures, were also characterized by a higher level
of inefficiency.
After the November 2000 and February 2001 crises in Turkey, the new
macroeconomic environment led to important changes in the banking sector2. The rise in
the interest rates, depreciation of the Turkish Lira and the contraction of economic
activities adversely affected the profitability of the banks. Regarding to financial and
operational resurrection attempts in the scope of the Banking Sector Reconstruction
Program, the number of banks, branches, and employees were reduced. The equity
structures of the private banks were strengthened and merger and acquisition activities
were promoted with tax incentives. In 2001, eight banks3 were acquired by Saving
Deposit Insurance Fund (TMSF), seven banks4 were merged, and the licenses of three
banks5 were revoked. In the private sector, several banks6 engaged in mergers and
acquisitions activities. After these mergers and acquisitions, concentration increased in
the banking sector. In 2002, Pamukbank was acquired by TMSF. In 2003, Imar Bankasi
entered into the liquidation process upon revocation of its license to perform banking
activities and accept deposits. Fiba Bank was transferred to Finans Bank, ING Bank and
Credit Suisse ceased their activities in the Turkish Banking sector. In 2004, Pamukbank
was merged with Turkiye Halk Bankasi. In 2005, the tendency for merger and acquisition
2 On recent development in Turkey also see Al and Aysan (2006) and Aysan and Yildiz (2007).
3 Ulusal Bank, Sitebank, Iktisat Bankasi, Kentbank, Tarisbank, Bayindirbank, EGS Bank, and Toprakbank
4 Egebank, Yurtbank, Yasarbank, Bank Kapital, Ulusal Bank under Sumerbank; Interbank and Esbank
under Etibank
5 Etibank, Iktisat Bankasi, and Kentbank
6 Korfez Bank was transferred to Osmanli Bankasi, then Osmanli Bankasi was transferred to Garanti
Bankasi, Bank Ekspres merged with Tekfen Yatirim ve Finansman and formed Tekfen Bank, HSBC
acquired Demirbank, Sumerbank was transferred to Oyakbank and Sinai Yatirim Bankasi was transferred
to Turkiye Sinai Kalkinma Bankasi
6
activities kept reducing the number of banks in the sector and increasing the
concentration. Fortis Bank acquired Turkiye Dis Ticaret Bankasi7.
In this paper, we analyze the changes in concentration and competition in the
Turkish banking sector in the light of the facts discussed above, and focus on efficiencies
of all commercial banks and the existence of the relationship between efficiency and
profitability. The plan of the paper is as follows. Section 2 describes the data and the
measures of concentration, competition, efficiency, and profitability. Section 3 presents
the related results and Section 4 concludes.
2. The Data
This study uses data from the detailed balance sheets of the banks that operated in
the years from 2001 to 2005 in Turkey (see Table A.1 and Table A.2 for details). We
obtained the data from the Banks Association of Turkey database. Throughout this period
the number of banks in Turkey has been decreasing due to the merger and acquisition
activities and/or liquidation of some insolvent banks. Table-1 shows the numbers of
banks according to their types for each year. There are totally six state-owned banks in
each year, three of which are commercial and the others are non-depository. As the
number of state-owned banks did not change throughout the period, the decline in the
number of banks in the sector is attributed to the decline in the number of privately-
owned banks, particularly the commercial ones. The number of foreign banks, however,
7 For detailed information on recent development in Turkey’s financial restructuring also see Aysan and
Ceyhan (2007a), Aysan and Ceyhan (2007b) and Aysan and Ceyhan (2006).
7
only decreased from 18 to 16. In each year commercial banks outnumber the non-
depository banks.
Table-1: Number of Banks
2001 2002 2003 2004 2005
Sector Total 61 54 50 48 47
Commercial 46 40 36 35 34
State-owned 3 3 3 3 3
Privately-owned 22 20 18 18 17
Foreign 15 15 13 13 13
Under SDIF* 6 2 2 1 1
Non-depository 15 14 14 13 13
State-owned 3 3 3 3 3
Privately-owned 9 8 8 8 7
Foreign 3 3 3 2 3
*Saving Deposit Insurance Fund (TMSF)
2.1. Measures of Concentration
The degree of concentration is measured in various ways. The literature generally
uses the k-bank concentration ratio. We used C3 and C5 ratios which show the
concentration ratios of the biggest 3 and 5 banks respectively according to the share of
their assets in the total assets of the banking sector. These ratios are easy to calculate.
However, information about the remaining banks is not used in these ratios. Hence we
also calculated Herfindahl-Hirschman Index (HHI) which is calculated by adding up the
squares of the market shares of all banks.
8
2.2. Measure of Competition
To measure competition we used the well known Panzar and Rosse’s approach,
which have been used in many studies. The method of Panzar and Rosse constructs H-
statistic as a measure of competition. The H-statistic is defined as the sum of the factor
price elasticities of interest revenue with respect to capital, labor, and physical capital.
ln INTR= a + ( b *ln INTE + c *ln PPE + d *ln PCE) + f *ln BSF + e (1)
where INTR is the ratio of interest revenue to the total assets, INTE is the ratio of annual
interest expenses to the total funds, PPE is the ratio of annual personnel expenses to the
number of employees, PCE is the ratio of physical capital expenditure to the total fixed
assets, BSF are bank specific exogenous factors reflecting differences in risk and size
components: i) the ratio of equity to the total assets, ii) the ratio of net loans to the total
assets, iii) log of total real assets, and e is the random error component. INTE, PPE, PCE
are the unit prices of the inputs of the banks: loanable funds, labor and capital. The H-
statistic is calculated as b+c+d , for each year. These unit prices of the inputs are the ones
that were used in the methodology of Isik and Hassan (2002). We also used the proxies
for the unit prices of inputs that are used in Claessens and Laeven (2003) where INTE is
approximated as the ratio of interest expenses to total deposits, PPE as the ratio of
personnel expenses to total assets, and PCE as the ratio of other operations and
administrative expenses to total assets.
9
The PR model suggests that H ≤ 0 under monopoly, 0 < H < 1 under monopolistic
competition, and H = 1 under perfect competition. The magnitude of H can be interpreted
as an inverse measure of the degree of monopolistic power, hence a measure of the
degree of competition.
2.3. Measure of Efficiency
To measure the efficiencies of the banks we are interested in X-efficiency, which
shows whether banks use their inputs efficiently or not (Paul Schure and Rien
Wagenvoort, 1999). After constructing a cost frontier using the following regression
function, we obtained efficiency indices of the banks yearly.
TC = Σ (INPUTS) + Σ (OUTPUTS) + e (2)
where TC is the total cost calculated by adding up interest expenses, commission
expenses and total operating expenses, and e is the random error component. Three
independent variables exist in the regression as inputs: price of loanable funds, price of
labor, and price of building. Finally we have five outputs: customer deposits, total loans,
equity investment, off-balance sheet items, and commission revenue as other services.
Price of loanable funds is the ratio of the interest expenses to the total funds borrowed,
price of labor is the ratio of the personnel expenses to the number of employees, and the
price of building is the ratio of physical capital expenditure (depreciation) to the book
value of fixed assets. Efficiency indices are calculated as the difference between the cost
frontier constructed and the realized total cost.
10
2.4. Measure of Profitability
We use two indicators for profit: return on assets (ROA) and return on equity
(ROE). Table-2 shows the distribution of domestic and foreign banks among the most
profitable 5 and 15 banks respectively. The data includes the commercial banks that
operated throughout the whole period explored.8
Table-2: Return on Equity and Returns on Assets
Top 5 Banks Top 15 Banks
2001 2002 2003 2004 2005 2001 2002 2003 2004 2005
ROA
Domestic 2 5 2 3 2 8 11 9 10 10
Foreign 3 0 3 2 3 7 4 6 5 5
ROE
Domestic 3 5 3 4 4 9 10 11 11 10
Foreign 2 0 2 1 1 6 5 4 4 5
When return on assets is taken as the measure of profitability, it is seen that a
significant proportion of the top five banks is foreign banks except the year 2002. If
return on equities is employed the proportion decreases. Looking at the top 15 banks in
the sector according to profitability, the number of foreign banks constitute significant
portion although they are not many in the entire banking sector.
8 It is important to note that, omitting the banks which were not in the sector for the whole period, there are
only eight foreign banks in the Turkish banking sector.
11
3. Results
3.1. Concentration and Competition
Table-3 and Figure-1 show the concentration indices according to C3, C5, and
Herfindahl-Hirschman Index (HHI). While C3 and C5 ratios increased continuously
except the year 2004, HHI kept increasing in the whole period. It is commonly accepted
that Herfindahl indices below 0.1000 indicate non-concentrated, between 0.1000 and
0.1800 moderately concentrated and indices above 0.1800 imply concentrated. Hence,
these measures suggest that in spite of recent merger and acquisition activities, Turkey’s
banking sector is still characterized as non-concentrated.
Table-3: Concentration Indices
2001 2002 2003 2004 2005
C3 0.370727 0.403774 0.429238 0.425586 0.456325
C5 0.475055 0.48892 0.493417 0.489567 0.534048
HHI 0.083636 0.088299 0.09417 0.094883 0.098053
Figure-1: Progress in Concentration Indices
0
0.1
0.2
0.3
0.4
0.5
0.6
2001 2002 2003 2004 2005
C3
C5
HHI
12
Table-4 shows the H-statistics calculated according to Panzar and Rosse’s
methodology. We used two separate models differing in the approximation to the unit
prices of inputs of the banks. In Model 1 the ratio of annual interest expenses to the total
funds, the ratio of annual personnel expenses to the number of employees, and the ratio
of physical capital expenditure to the total fixed assets are used as the unit prices of the
loanable funds, labor, and capital respectively, whereas in Model 2 the ratio of interest
expenses to total deposits, the ratio of personnel expenses to total assets, and the ratio of
other operations and administrative expenses to total assets are used. Both models reveal
that the H-statistic is between 0 and 1 which indicates that there is monopolistic
competition throughout the whole period investigated even if the values of the H-
statistics decreased from 2001 to 2005. Figure-2 shows the changes in the H-statistics.
Table-4: H-Statistics
2001 2002 2003 2004 2005
Model 1 0.5650542 0.2438027 0.1830553 0.181469 0.1923365
Model 2 0.5975753 0.4919328 0.5785956 0.1884205 0.3922842
Figure-2: Progress in H-Statistics
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
2001 2002 2003 2004 2005
Model 1
Model 2
3.2. Efficiency
13
For the sake of comparability we only included the banks which had data for all 5
years in the regression. There were 30 such commercial banks. However for Adabank it
was not possible to calculate the price of loanable funds because it did not have loans
borrowed in its balance sheet, and Banka di Roma and Habib Bank Limited were omitted
due to the irrelevancy they created. Turkiye Dis Ticaret Bankasi was sold to Fortis Bank.
Hence we combined these two banks’ data. Finally, we ended up having 135 observations
in our panel regression. Table-5 shows the efficiency indices of 27 banks in Turkey. After
calculating efficiency using the Cost Frontier Approach we set the most efficient bank to
be 1 and the least efficient to be 0.
The large banks generally turned out to be more efficient than the smaller ones. The
least efficient banks were the foreign banks with the exception of HSBC and Citibank.
Fortis Bank also seems more efficient than the other foreign banks. However, until 2005
it was Turkiye Dis Ticaret Bankasi which was a privately-owned domestic bank. Akbank
turned out to be the most efficient bank in 2002 and 2003 and Turkiye Is Bankasi in 2004
and 2005. In 2001 Tekfenbank was the most efficient bank.
14
Table-5: Efficiency Scores of Turkey’s Banks
2001 2002 2003 2004 2005
ABN AMRO Bank N.V. 0.7301 0.8762 0.8370 0.7341 0.6236
Akbank T.A.Ş. 0.9679 1.0000 1.0000 0.9940 0.9828
Alternatif Bank A.Ş. 0.8972 0.9464 0.8927 0.8282 0.5720
Anadolubank A.Ş. 0.9226 0.9656 0.9379 0.9095 0.8380
Arap Türk Bankası A.Ş. 0.7320 0.7052 0.6234 0.6191 0.3495
Bank Mellat 0.0000 0.2474 0.0000 0.0000 0.1094
Citibank N.A. 0.8810 0.9333 0.9048 0.8999 0.8481
Denizbank A.Ş. 0.9526 0.9888 0.9789 0.9732 0.9504
Finans Bank A.Ş. 0.9307 0.9894 0.9704 0.9591 0.9349
Fortis Bank A.Ş. 0.9253 0.9770 0.9743 0.9628 0.9267
HSBC Bank A.Ş. 0.9520 0.9635 0.9544 0.9414 0.9058
Koçbank A.Ş. 0.9296 0.9744 0.9718 0.9701 0.9780
MNG Bank A.Ş. 0.6713 0.6764 0.5996 0.6446 0.4852
Oyak Bank A.Ş. 0.9427 0.9667 0.9536 0.9473 0.9014
Sociéte Générale (SA) 0.1132 0.0000 0.1581 0.5903 0.2172
Şekerbank T.A.Ş. 0.9338 0.9761 0.9730 0.9613 0.9505
Tekfenbank A.Ş. 1.0000 0.9697 0.9742 0.9515 0.9303
Tekstil Bankası A.Ş. 0.9235 0.9644 0.9481 0.9165 0.8337
Turkish Bank A.Ş. 0.6204 0.7722 0.7350 0.8969 0.6996
Türk Ekonomi Bankası A.Ş. 0.9150 0.9650 0.9485 0.9343 0.8449
Türkiye Cumhuriyeti Ziraat Bankası 0.9327 0.9832 0.9725 0.9892 0.9894
Türkiye Garanti Bankası A.Ş. 0.9430 0.9876 0.9863 0.9770 0.9633
Türkiye Halk Bankası A.Ş. 0.9219 0.9778 0.9831 0.9867 0.9871
Türkiye İş Bankası A.Ş. 0.9624 0.9947 0.9968 1.0000 1.0000
Türkiye Vakıflar Bankası T.A.O. 0.9402 0.9868 0.9864 0.9842 0.9984
Westdeutsche Landesbank Girozentrale 0.7153 0.7927 0.5073 0.2588 0.0000
Yapı ve Kredi Bankası A.Ş. 0.9601 0.9881 0.9863 0.9798 0.9538
15
3.3. Efficiency and Profitability
We used return on assets (ROA) and return on equity (ROE) as measures of
profitability. We ran random effect regression with panel data of 135 observations to
analyze the relationship between efficiency and profitability. We added a dummy
variable to see the differences between domestic banks and foreign banks.
Profitability = a + b*Efficiency + c*ForeignDummy + e (3)
The results of the panel regression are shown in Table-6.
Table-6: Efficiency and Profitability
ROA ROE
Constant -1.766
(1.697)
-34.601
(57.414)
Efficiency 1.979
(1.827)
24.529
(61.822)
Foreign Dummy 2.297*
(1.042)
28.409
(35.261)
Standard errors are in parentheses.*Significant at 5% level.
There is no significant evidence from the data that efficiency affects profitability.
Taking the return on assets into account, foreign banks are found to be significantly more
profitable than domestic banks. Going back to Table-2, one notes that although there are
16
only eight foreign banks in the period explored, most of them are more profitable than
their domestic peers in both return on assets and return on equity. While the least efficient
banks turned out to be foreign with the exception of a few, being foreign increases banks’
profitability. This result shows us that foreign banks are less efficient but more profitable
compared to the domestic banks. Hence, there is no clear evidence that there is a positive
relationship between efficiency and profitability.
4. Conclusion
In this paper, we used a detailed balance sheet database for banks that operated
between the years 2001 and 2005 to explore the concentration and competition in the
post-crises Turkish banking sector and the relationship between efficiency and
profitability. The results show that C3 and C5 ratios increased except for the year 2004
and Herfindahl-Hirschman Index kept increasing in the whole period, which can be
interpreted as an increase in the concentration overall. On the other hand in the two
models that we used to estimate the competition in the banking sector, our findings do not
show a clear relationship between concentration and competition. In the first model we
used, the competition index which is shown by the H-Statistic calculated by Panzar-
Rosse method, kept decreasing until 2004 but increased in 2005. In the second model the
H-Statistic did not show a stable path and fluctuated throughout the years. However, the
H-Statistics were always between zero and one, which can be interpreted as an evidence
for the existence of monopolistic competition in the Turkish banking sector.
17
To explore the efficiency of commercial banks we used the panel data for 27 banks
which operated throughout the whole period. The cost frontier approach was employed to
calculate the efficiency of the banks. Regression results show that larger banks generally
turned out to be more efficient than the smaller ones and the least efficient banks were the
foreign banks with the exception of a few. Akbank turned out to be the most efficient
bank in 2002 and 2003 and Turkiye Is Bankasi in 2004 and 2005. In 2001 Tekfenbank
was the most efficient bank which seems somewhat surprising due to its low share in the
banking sector.
We used both return on assets and return on equities as a measure of profitability.
The relationship between the efficiency and profitability was not confirmed by the panel
regression estimated. Only one coefficient which is the dummy for foreign banks turned
out to be significant in explaining return on assets as the measure of profitability. This
result shows that foreign banks reach higher profitability levels in the Turkish banking
sector without having high efficiency scores. Hence, this study pinpoints the lack of
strong evidence between efficiency and profitability in Turkish banking context.
18
5. Appendix
Table A.1: Descriptive Statistics
Variable Observation Mean Std. Deviation Min Max
Total Cost 256 3789251 9396104 0 8.60E+07
Price of Labor 255 268.5017 737.753 0 11574.05
Price of Capital 249 0.5221564 0.1975208 0.0940103 0.9856704
Price of Loanable Funds 226 34.11107 294.6047 0 4152.944
Total Deposits 255 1.44E+07 3.03E+07 0 1.70E+08
Total Loans 255 6806057 1.24E+07 0 7.25E+07
Equity Investment 255 2795855 5748220 -1.56E+07 3.18E+07
Interest Expenses 255 2767509 7938763 0 7.60E+07
Off Balance Sheet Items 255 7.46E+07 6.69E+08 0 1.06E+10
Other Services & Commission
Revenue 255 351714.8 733725.6 0 3954115
Total Operation Expenses 255 928795.4 1719933 0 1.13E+07
Commission Expenses 256 106755.3 289823.9 0 2792072
Source: Authors’ calculation
19
Table A.2: The Correlation Matrix
Total
Cost
Price
of
Labor
Price
of
Capital
Price of
Loanable
Funds
Total
Deposits
Total
Loans
Equity
Investment
Interest
Expenses
Off
Balance
Sheet
Items
Other Services
& Commission
Revenue
Total
Operation
Expenses
Commission
Expenses
Total Cost 1.00
Price of Labor -0.07 1.00
Price of
Capital -0.10 -0.01 1.00
Price of
Loanable
Funds 0.05 0.07 0.05 1.00
Total Deposits 0.81 -0.09 -0.08 0.09 1.00
Total Loans 0.59 -0.08 -0.06 0.01 0.85 1.00
Equity
Investment 0.63 -0.04 -0.05 0.05 0.84 0.85 1.00
Interest
Expenses 0.99 -0.07 -0.09 0.06 0.75 0.49 0.56 1.00
Off Balance
Sheet Items 0.40 -0.07 -0.06 -0.02 0.64 0.79 0.64 0.32 1.00
Other Services
& Commission
Revenue 0.60 -0.09 -0.11 0.00 0.82 0.92 0.77 0.49 0.78 1.00
Total
Operation
Expenses 0.83 -0.08 -0.07 0.03 0.88 0.82 0.76 0.74 0.61 0.85 1.00
Commission
Expenses 0.41 -0.07 -0.12 -0.03 0.61 0.78 0.60 0.31 0.55 0.80 0.63 1.00
Source: Authors’ calculation
20
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