Exploring the Linkage between Profits and Asset–Liability Management

Abstract

The article uses panel data regression on a sample of 26 public sector and 20 private sector banks operating in India over the period 2004–2005 to 2012–2013 in order to empirically examine the relationship between profits and asset–liability (A–L) composition of Indian banks. The sample was initially split into public sector and private sector banks. Earning before tax (EBT) of public sector banks appear to be generated by all the assets under the asset portfolio while, in private sector banks, the EBT seems to be produced by loans and advances and deposits and placings to banks. From liabilities’ perspective, the ‘short-term funding’ appears to be the cheapest for both the bank groups. The sample was then split into high-profit and low-profit banks. The results show that, compared to the high-profit banks, low-profit banks experience higher rate of return on loans and advances, investments and fixed assets. The study does not find that high-profit banks always enjoy relatively cheaper cost of funding than low-profit banks.

Asset‐Liability Management and bank profitability: Statistical cost accounting analysis from an emerging market

“…This suggests that consistent with findings Vasiliou (1996), return on asset is higher for banks with high profit levels than for banks with low profit levels. While this is inconsistent with the findings of Kwast and Rose (1982) and Kosmidou et al (2004), the observations are consistent with evidence by Chatterjee and Dutta (2016) in the Indian banking sector. Loans to customer (A1) are the highest earning assets for Low‐profit banks whilst other assets (A6) earn the highest rate of returns for High‐profit banks.…”

“…On the contrary, Lower‐profit banks are observed to experience higher cost on fixed deposits (L3), other short‐term funds (L5) and long‐term liabilities (L6). While similar results were reported by Chatterjee and Dutta (2016), this finding contradicts Vasiliou (1996) and Kosmidou et al (2004) who reported lower cost of funding for high‐profit banks.…”

“…The application of the SCA model has been limited to banking markets in the United States, United Kingdom, Indian, Greek, Bangladesh and Italian banks (Chatterjee & Dutta, 2016; Hester & Pierce, 1975; Hester & Zoellner, 1966; Kwast & Rose, 1982; Vasiliou, 1996, Pouw & Kakes, 2013). In the context of banking markets in Africa, empirical evidence appears non‐existent.…”

“…While several studies (see Asiri, 2007; Chatterjee & Dutta, 2016; Hester & Zoellner, 1966; Kosmidou, Pasiouras, & Floropoulos, 2004; Kwast & Rose, 1982; Vasiliou, 1996) have examined the ALM from different context in developed economies, empirical evidence from emerging African economies appear parsimonious. This study, therefore, seeks to provide empirical evidence from the Ghanaian context.…”

Comparative Analysis of Employees’ Perspective on Asset-Liability Management in Banks

“…Most banks in international economies started strategic planning for asset and liabilities management in the 1970s (Goodman & Langer, 1983). At that time, Indian banks were free from interest rate risk as it was regulated and governed by the Reserve Bank of India (Chatterjee & Dutta, 2016). When other economies were planning for deregulation and Asset-Liability Management (ALM), Indian banks were getting nationalization (in 1969).…”