A classification method for banks' profitability using revised Thompson-Thrall profit ratios in DEA and cluster analysis with an application to South Asian banks

P. Sunil Dharmapala and Piyadasa Edirisuriya

International Journal of Operational Research, 2012, vol. 15, issue 2, 147-169

Abstract: Many researchers in the past have addressed the issue of profitability of banks from different perspectives using financial ratios and decision models. Thompson et al. (1995) addressed this issue by introducing linked-cone (LC) profit ratios with assurance regions (AR) in data envelopment analysis. In this paper, we propose a method to revise LC-AR and show a contrast between Thompson-Thrall's and revised profit ratios. In an application of revised profit ratios to a set of South Asian banks, we classify them as profit-makers, loss-makers or neither. Then, analysing the banks' profitability using cluster analysis with financial ratios and revised profit ratios, we show how to strengthen the classification.

Keywords: DEA; data envelopment analysis; assurance regions; linked cones; bank profitability; LC-AR profit ratios; cluster analysis; classification; Thompson-Thrall profit ratios; South Asian banks; banking industry. (search for similar items in EconPapers)
Date: 2012
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