Evaluation of the financial performance of private banks admitted to the Tehran Stock Exchange

Academic Thesis for Master's Degree

Field: Business Administration Major: Finance

Abstract

Banks play an important role in the economic development of any nation, because they control a large part of the money supply in circulation. Therefore, the evaluation of the financial performance and productivity of banks has received a lot of attention in recent decades. Many methods and techniques have been created to evaluate financial performance, each of which introduces a set of indicators to balance the traditional and one-dimensional views of financial performance. In this study, in order to evaluate the financial performance of private banks admitted to the Tehran Stock Exchange, economic value added indices, Tobin's Kiwi and return on assets have been used as representatives of the banks' financial performance. For this purpose, the factors affecting the aforementioned indicators such as credit risk, operational efficiency, asset management and bank size have been investigated. The results have shown that in the first model; Bank size has a positive and weak relationship with return on assets. Also, credit risk has a direct relationship with asset returns. Operational efficiency has an inverse relationship with the dependent variable, and finally, asset management has a positive and significant relationship with asset returns. In the second model; Bank size has an inverse relationship with Tobin's Kiwi. Also, credit risk has a direct relationship with Tobin's Kiwi. Operational efficiency has a direct relationship with the dependent variable, and finally asset management has no significant relationship with the dependent variable. In the third model; Bank size has a positive relationship with economic added value. Also, credit risk has an inverse relationship with the dependent variable. Operational efficiency has no significant relationship with the dependent variable, and finally, asset management has a positive and significant relationship with economic added value.

Key words: financial performance, stock exchange, economic added value, Tobin's QI, asset return, asset management, credit risk, operational efficiency, bank size.

Introduction

Traditional criteria for evaluating financial performance because The cost of capital and the use of accounting information are subject to many criticisms. On the other hand, new criteria such as economic added value, taking into account opportunity cost and socio-economics, is a better criterion for evaluating the value created in companies. To solve the inadequacies of financial performance evaluation models that arise due to the use of accounting information, researchers such as Sujanen [1] and Stewart [2] sought to provide a new criterion for evaluating financial performance. With the emergence of theories in the field of economic profit or residual profit, models were proposed to calculate economic profit. In these models, net operating profit after deducting tax and capital cost is defined as economic profit or residual profit. The main goal of companies is to preserve and increase the wealth of shareholders, and value creation for companies is considered the only way to achieve this goal. Therefore, the creation of profit or added economic value, which increases the value of shares in the market and improves the wealth of shareholders, can be considered as the factor of value creation of companies. In the present study, to evaluate the financial performance of private banks admitted to the Tehran Stock Exchange, economic value added indicators, Kiwi Tobin and return on assets were used. For this purpose, the factors affecting the aforementioned indicators, such as credit risk, operational efficiency, asset management and bank size, have been examined.

The purpose of the first chapter is to express the generalities of the research, therefore, after posing the problem, the necessity and importance of conducting the present study has been discussed. Below are the goals and hypotheses based on the model. And the presentation of the research model and the introduction of variables have been discussed. In order to explain the conceptual and operational definition of the model, the variables have been mentioned. Finally, the scope of the research has been stated in terms of subject, place and time.

1-2- Statement of the problem

The issue of evaluating financial performance in the organization has become so important that management experts believe: what cannot be measured cannot be managed. Today, bank managers need to measure and evaluate the financial performance of their branches in order to plan and manage their branches so that they can compare their branches with each other and know their strengths and weaknesses. Therefore, banks, especially state-owned banks, which are large in terms of structure, and sometimes are also responsible for the circulation of government funds.Therefore, banks, especially state-owned banks, which are structurally massive and are sometimes responsible for the circulation of government funds, improving even one percent in their improvement programs, will contribute significantly to providing services to the people and bank management (Salehi et al., 2019). The Asian Cooperative Development Bank, the African Development Bank, the Federal Reserve Bank, and the World Bank also use CAMEL indicators to measure the activity of banks and financial institutions (Singhal, 2003). Indicators determine the path of organizations to achieve goals. The first look in developing indicators focuses on the vision, mission, macro goals, long-term and short-term strategies, operational plans and main activities. The sources of statistics and adaptation for compiling financial performance evaluation indicators of government organizations are the laws and approvals of the parliament and the government board and economic, social, and cultural development programs, as well as the country's twenty-year vision and the country's industrial development strategy. In the non-governmental sector, the criteria are the statutes, operational plans, market share, and any goal that the organization intends to achieve (Rahimi, 2016). Considering the privatization and competitive environment for banks, improving financial performance and its evaluation is very important. In order for private banks to surpass their competitors in this space, it is necessary to evaluate financial performance continuously and also by using effective indicators. The main issue of the current research is which of the management evaluation indicators is a better criterion for evaluating the financial performance of private banks admitted to the Tehran Stock Exchange. Therefore, three measures of return on assets (ROA), Tobin's Q, and economic value added (EVA) have been used as representatives of banks' financial performance. Because these three indicators have something in common with each other. Because all three indicators measure management performance. According to the studies, bank size (Size), credit risk (CR), operational efficiency (OE) and asset management (AM) indicators have been used as management evaluation indicators. The main purpose of the current research is to explain the relationship between management evaluation indicators and the bank's financial performance. 1-3- Necessity and importance of conducting research Banks play an important role in the economic development of any nation. They control a large portion of the money in circulation. Private commercial banks are an important part of the banking system (Al Karim and Alam [4], 2013). The threats and pressures caused by globalization and the increasing growth of non-bank financial and credit institutions in recent years have prompted banks to improve their financial performance in the domestic and foreign markets by establishing research centers and conducting research activities in order to survive and compete in the market compared to other banks (Sorayai and Qaroi Ahangar, 2018). In this regard, the evaluation of financial performance and productivity has received much attention in recent decades. Many methods and techniques have been created to evaluate financial performance, each of which introduces a set of indicators to balance the traditional and one-dimensional views of financial performance. But despite all these advances in financial performance evaluation, many organizations still rely on traditional financial performance indicators (Tengen et al. [5], 2004). In our country, considering the ruling spirit of the state banking system and also the goals of the usury-free banking law, checking the efficiency of the banking system and how to use resources to achieve these goals is one of the issues discussed. Despite extensive studies in the field of banking industry inside and outside the country, checking the efficiency of branches has received less attention than the efficiency of the banking industry, and despite the importance of the subject, studies in this field have not received much attention. Perhaps the state of the banking system in the past three decades and the lack of transparency of bank statistics and information and the lack of transparency of bank goals within the framework of economic criteria (profit maximization) have caused this lack of attention (Kirimi, 2013). But now, considering the situation regarding the privatization of banks and the need to pay attention to increasing the efficiency of branches, it seems necessary and necessary to conduct research to determine the financial performance of branches.

1-4- Theoretical Framework

The theoretical framework is the foundation on which all research rests. It is a logical, developed, described and complete network between the variables identified through processes such as interview, observation and literature review of the research background. These variables are related to the research problem.