The Impact of Size on Bank Profit Performance

Abstract

Experts opine that size factors-Assets, Deposits, Loans and Advances, and Spread (Branch Network)--play significant roles on the profit performance of banks. That Big banks possess the capacity for exploitation of large scale economies of cost reduction through their access to a larger network of sources of inJ¥lts and larger outlets for their products and services and thereby can generate greater earnings and make larger profits. Alhadeff (1954), Adekanye (1986), Ojo (1994). A cursory observation of the financial results posted by some Big banks and Small banks leaves us uncertain as to what size bank is the more profitable. This study was carried out to ascertain what size bank, whether Big bank or Small bank, is the more profitable on relati ve profitability measures including Return on Assets, Return on Equity, Return on Capital, and Gross Profit Margin in order t ..) determine what impact size plays on profit performance. The performance records of Big banks were compared with those of sampled Small banks. By the Difference of Two Means, it was determined that Big banks were less profitable than Small banks on all four measures of profitability. Cost efficiency was seen to be the major factor influencing profitability. The major policy issue from this study is that profitabyity can be improved through strategies aimed at improving cost efficiency rather than by measures aimed at expanding size.