On the determinants of banking business profitability in Korea and Eastern Europe

다국어 초록 (Multilingual Abstract)

Commercial banks in Korea have exerted efforts to increase their assets size (asset gigantism) and to diversify their income sources, especially for the last decade since the 1997 financial crisis. The rationale for such pursuits is that both the increase in asset size and the revenue source diversification will be crucial drivers for the stability and sustainability of fundamental operations which, in turn, will lead to their sustainable growth. We will see if such efforts of Korean banks will have improved their structural income and if such efforts can also be found in other countries, for example European countries.
This paper examines the effects of the bank's cost drivers such as the asset growth, and the diversification, on the structural profit in the Korean and Eastern European banking industry. Our empirical tests do not provide the evidence that the asset-growth significantly improved the banks' structural profit. This result was due to the phenomenon that the asset growth reduced not only the bank's structural cost but structural revenue as well. However, we found the diversification in revenue sources did improve Korean banks' structural revenue and thus structural profit significantly whereas such is not true for Eastern European commercial banks. These results suggest that the Korean banking industry needs to concentrate on the enhancement of competitiveness by creating new financial services and commodities, rather than on excessive competition derived by asset gigantism.

다국어 초록 (Multilingual Abstract)

Commercial banks in Korea have exerted efforts to increase their assets size (asset gigantism) and to diversify their income sources, especially for the last decade since the 1997 financial crisis. The rationale for such pursuits is that both the increase in asset size and the revenue source diversification will be crucial drivers for the stability and sustainability of fundamental operations which, in turn, will lead to their sustainable growth. We will see if such efforts of Korean banks will have improved their structural income and if such efforts can also be found in other countries, for example European countries.
This paper examines the effects of the bank's cost drivers such as the asset growth, and the diversification, on the structural profit in the Korean and Eastern European banking industry. Our empirical tests do not provide the evidence that the asset-growth significantly improved the banks' structural profit. This result was due to the phenomenon that the asset growth reduced not only the bank's structural cost but structural revenue as well. However, we found the diversification in revenue sources did improve Korean banks' structural revenue and thus structural profit significantly whereas such is not true for Eastern European commercial banks. These results suggest that the Korean banking industry needs to concentrate on the enhancement of competitiveness by creating new financial services and commodities, rather than on excessive competition derived by asset gigantism.

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