This study addressed the impact of bank business models on banking stability and performance. We use a sample of 2,513 commercial banks from 26 countries between 1985 and 2015. Business models are identified using k-medoids cluster analysis. The results show two main banking business models, namely focused retail model and trader business model.
In addition, the newly privatised banks have undergone some changes in bank business models in the post-privatisation period, where they have tended to become more focused-retail and rely more on traditional intermediary activities.
The study employs Stochastic Frontier Analysis (SFA) to estimate the profit and cost efficiencies. The findings suggest immediate improvements in privatised bank efficiency after privatisation followed by subsequent continuous improvements and sustainable change in profit and cost efficiency in the privatised bank in the long-term.
The empirical evidence suggests that privatisation produced mixed effects depending on which variable is examined. The findings show that focused retail banks performed better in terms of efficiency, performance, and stability, since they exhibited higher profitability in terms of profit efficiency, ROA, ROE and NIM, and more stable, while focused retail banks were less cost efficient. Furthermore, commercial banks with trader model performed better in term of cost efficiency, ROA, ROE and NIM, but they are significantly less stable.
The relationship between bank business models and bank performance in the privatised bank is examined. The findings revealed that commercial banks with a focused-retail model performed better since they exhibited higher profitability in terms of profit efficiency, return on assets (ROA), return on equity (ROE), net interest margin (NIM), and more stability. However, they were less cost efficient. in contrast, privatised banks with a focused retail model exhibited lower profitability in terms of ROA and ROE. On the other hand, Commercial banks with trader business models performed significantly worse in terms of profit efficiency, ROA, ROE, NIM and less stable, but they were significantly more cost efficient. In contrast, privatised banks with trader model performed better in terms of ROA and ROE.
We extended the literature by examining the long-term effects of privatisation on bank performance. As a result of the competitive environment in which privatised banks operate and the changes in the banks' objectives towards maximising profit and minimising costs, we expected that privatisation could affect bank performance positively in the long-term. We employed a difference-in-differences (DID) approach to identify the effects of privatisation on bank efficiency and performance. The results revealed that privatised banks made significant profit efficiency improvements, cost efficiency, ROA, and NIM in the long-term. Nevertheless, the privatised banks showed an increase in risk-taking post-privatisation compared with other commercial banks.
Furthermore, the findings provide evidence that commercial banks with high non-deposit funding share (NOD) are more profit efficient than other banks. At the same time, banks with higher non-interest income share (NII) were less profit efficient and less stable but more cost efficient over the long-term.
On the other hand, the privatised banks with higher non-deposit funding share were less profit efficient, ROE and NIM, while the non-privatised banks were more profit efficient but less stable. Besides, privatised banks with high non-interest income share performed better in terms of ROA and ROE.