Factors Affecting the Operations of Thai Commercial Banks

Abstract

Commercial bank business as already known, is highly competitive. The operation of all banks would aim for maximizing profit. However, the introduction of new technology has gradually increased the operating expenses of the bands. The study of the trend of the banks’ income, the earning per share, capital structure and factors affecting the operations of Thai commercial banks will enable us to manage setting up the prevention plan for future problems and to improve the efficiency in the operations of Thai commercial banks. The data and information used in this research were secondary data obtained from the banks’ financial statements of their fiscal year end covering the period of 6 years from B.E. 2522 to B.E. 2527 of 11 Thai commercial banks which have their shares listed in the Stock Exchange of Thailand. The commercial bank’s ratio analysis as well as the Simple and Multiple Linear Regression methods were used. The assumption was based on the fact that the bank’s net interest income has close correlation with the earning per share. The independent variable factors in the test consisted of the net interest income and other non-interest income such as income from foreign exchange trading. The independent variable factors on the operating expenses were staff salaries and benefits, provision for bad debts and other operating expenses. The dependent variable factor is used in determining the operating result of the bank which is its earning per share. The Linear Trend Function Methods was used testing its ability to generate income and its earning per share. In analyzing the cost structure of the bank, the cost of bank’s deposits, inter-bank’s borrowing, and the average cost of the capital funds were considered. The results of this research showed that: The trend of the Thai commercial bank’s income had been increasing during the research period. The revenues consist of interest income and noninterest income while the expenses consist of interest expense and non-interest expenses. Therefore, the net interest spread depends upon the bank’s ability to charge high interest on their loans and to borrow the funds from the cheapest source. The management’s capability and the quality of its loans are also important factors contributing to higher profit and earning per share. The analysis of our research showed that the large-sized banks had higher earning per share than the medium and small-sized banks. If all 11 banks were consolidated under review, the projection showed that the average earning per share of these banks would drop by 1 per cent per annum during the next 5 years. The earning per share is the indicator of how dividend can be paid to the shareholders. If the capital is increased and more shares are issued without the proportionate increase in revenue, the earning per share would drop, eventhough the amount of annual profit is increased. In analyzing the cost of funds of these banks during the period B.E. 2522 to B.E. 2527, the average cost of their deposits was 8.77 per cent. The average cost of borrowing was 12.33 per cent thus giving the average cost of funds during the 6 years period of 9.39 per cent. The factors affecting the Thai commercial bank’s operations can be classified into internal and external factors. The internal factors are (1) Net-interest income ; (2) Non-interest income ; (3) Non-interest expense ; (4) Cost of funds ; (5) Cost of capital ; (6) Number of branches ; (7) Bank’s policy’ (8) Bank’s personnels ; (9) Management’s capability and (10) Advertising, public relation and marketing promotion. The external factors are (1) Economic and financial condition locally and abroad; (2) government’s policy on banking system ; (3) Bank’s regulations and banking law ; (4) Competition ; (5) Non-banking sources of fund ; (6) Public image and rumours ; (7) Political situation and (8) Other relation factors.