The Effect of Cost Efficiency on The Financial Performance of Banks: A Research on Public Banks in Turkey

This research seeks to elucidate the impact of cost efficiency within banking institutions on their overall financial performance. The empirical data utilized in this investigation was sourced from the Bloomberg Terminal database. The research sample comprises public deposit banks operating within the Republic of Turkey. Eight banks were selected for data sampling, with the temporal scope of analysis spanning from 2009 to 2022. Initially, the study employed stochastic frontier analysis to assess cost efficiency, subsequently utilizing the technical efficiency metrics derived from this analysis to evaluate its influence on the financial performance of deposit banks via panel regression methodologies. In the stochastic frontier analysis conducted according to the model of Battese and Coelli (1995), it was concluded that the variables selected as input (Personnel Costs and Interest Costs) affected the output (Loans and Financial Assets) at a 1% significance level. Return on Assets (ROA), Return on Equity (ROE) and Net Interest Margin (NIM), which are financial performance indicators of banks, were selected as dependent variables. Logarithm of Total Assets (LNASSETS), Total Equity/Total Assets (TETA), Total Loans/Total Deposits (TLTD) and Non-Performing Loans/Total Loans (NPL), which are important variables for banks with cost efficiency levels, were used as independent variables in this study. As a result of the panel regression, it was seen that Cost efficiency affected the dependent variables ROA, ROE and NIM at 5% significance level. This result indicates that banks need to review their credit risk management, non-interest expense control, and capital adequacy strategies with a focus on cost efficiency; for regulators, it highlights the need for close monitoring of high TLTD and rising NPL ratios and the implementation of countercyclical measures.