Relationship between Efficiency and Profitability in Banks of Brazil

Abstract

This study aimed to investigate the relationship between efficiency, measured by two different methods (Data Envelopment Analysis and Stochastic Frontier Analysis), and profitability of banks from Brazil. We analyzed a total of 47 banks that operated between the years of 2008 and 2015. The efficiency of institutions was measured using the Data Envelopment Analysis (DEA) and Stochastic Frontier Analysis (SFA) methodologies, based on economic and financial indicators. These indicators were calculated considering the approach of financial intermediation in order to measure the cost efficiency of banks. Subsequently, the scores found from the application of DEA and SFA were related to the ROA (return on assets) and ROE (return on equity) indicators, using the regression model with panel data. We identified the existence of a statistically significant relationship between the efficiency and the profitability of banks. Profitability measures are related in a direct and significant way with the efficiency measured by the DEA and SFA methods. The results show that the efficiency is associated with the profitability and evidence a greater impact on the ROE than on the ROA indicator. Thus, we concluded that efficiency significantly influences the return on total assets but has an even greater influence on return on invested capital.