Does efficiency contribute to market valuation of banks Evidence from Turkish banking system

Abstract

Purpose- Operational efficiency is one of the strategic concerns for bank management. The aim of our study is to investigate the effect of operational efficiency on banks’ market valuation. Methodology- We empirically examine the way in which the financial market evaluates different efficiency measures of banks, using a panel data of listed banks at Borsa Istanbul for the years 2010 – 2017. We employ three different efficiency measures as proxies. Those are i) operating expenses compared to total net income, ii) total net income per branch, and iii) total net income per employee. Findings- We find that cost efficiency, interest income as return on equity (ROE) and loan loss provisions (LLPs) are found to be statistically significant drivers of market valuation of banks. We use risk-weighted assets to total assets as a measure for risk-taking behavior of banks. The results suggest tentative findings for risk-taking behavior of banks. The findings also suggest that bank size and non-interest income as ROE do not significantly influence bank market valuation. Conclusion- We conclude that operating expenses compared to total net income as an efficiency measure is a determinant of market valuation of banks while income per branch and income per employee as efficiency measures are not related to market valuation of banks. Thus, we recommend bank managers boost net interest income while avoiding credit losses, and drop off operating costs compared to revenue in order to maximize bank’s market valuation.

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