DETERMINANTS OF THE PERFORMANCE OF BANKS IN HONG KONG

This paper develops a model to identify the major determinants of a bank’s profit, and the general level of profitability of a banking market. It found that in Hong Kong’s case, market structure, such as market concentration and market shares of banks, is not a major contributory factor. Cost efficiency of banks, which measures the ability of banks to optimise their input mix for producing outputs, is a major determinant of banks’ profitability. Since larger banks are found to be in general more cost efficient than smaller banks in our previous study on banks ’ efficiency, larger banks can offer services at lower prices to compete with smaller banks, yet attaining a similar or even higher level of profits. Smaller banks may, therefore, be more vulnerable to intense competitions in the loan market than larger banks, particularly in cut-throat price wars