Profitability as a business goal: the multicriteria approach to the ranking of the five largest Croatian banks

Višnja Rosenzweig,Hrvoje Volarević,Mario Varović

doi:10.2478/v10305-012-0006-0

Višnja Rosenzweig, Hrvoje Volarević + Show 1 more

Open Access

https://doi.org/10.2478/v10305-012-0006-0

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Journal: BSRJ	Publication Date: Jun 1, 2012
Citations: 1	License type: cc-by

Affiliation: Zagreb School of Economics and Management

Abstract

Profitability as a business goal: the multicriteria approach to the ranking of the five largest Croatian banks Background: The ranking of commercial banks is usually based on using a single criterion, the size of assets or income. A multicriteria approach allows a more complex analysis of their business efficiency. Objectives: This paper proposes the ranking of banks based on six financial criteria using a multicriteria approach implementing a goal programming model. The criteria are classified into three basic groups: profitability, credit risk and solvency. Methods/Approach: Business performance is evaluated using a score for each bank, calculated as the weighted sum of relative values of individual indicators. Results: In the process of solving the corresponding goal programming problem, the weights are calculated. It is assumed that the goal of each bank is the highest profitability. Because of the market competition among banks, the weights of indicators depend on the performance of each bank. This method is applied to the five biggest Croatian banks (ZABA, PBZ, ERSTE, RBA and HYPO). Conclusion: For the observed period (2010), the highest priority is given to profitability and then to credit risk. The ranking is achieved by using a multicriteria model.

Highlights

The goal of every business subject in a market environment is increasing its profit, in order to increase the wealth of the owner (Dayananda et al, 2002)
The purpose of the research in this paper is to introduce a multicriteria approach by applying a goal programming model in order to rank commercial banks
The debt in the banking sector is significantly higher, it is still preferred to be in line with its own capital. Based on the former formulas, the calculated values of all six individual criteria (X1, X2, X3, X4, X5 and X6) for the five selected banks (ERSTE, HPB, HYPO, POBA and Raiffeisenbank Austria (RBA)), and all the obtained results are presented in the following decision-making table (Table 1): Table 1 The values of six individual indicators categorized into three basic groups for the five selected banks

Summary

Introduction

The goal of every business subject in a market environment is increasing its profit, in order to increase the wealth of the owner (Dayananda et al, 2002). Commercial banks are specific business subjects that operate in an extremely competitive financial sector. They have a key role in the process of being a financial intermediary in which they collect an excess of monetary assets and place them to those that need financing. Commercial banks in this paper are chosen based on their specific roles in Croatian economy They belong to the so-called bank-centric financial system. The purpose of the research in this paper is to introduce a multicriteria approach by applying a goal programming model in order to rank commercial banks. The research in this paper is directed toward analyzing financial reports for 2010 and the calculation of the six chosen indicators divided into three basic groups: profitability, credit risk and solvency (Croatian National Bank, 2011). The last chapter contains a discussion and the final observations where the assumptions from the introduction are confirmed

Selection of criteria

Solvency indicators

Credit risk

Goal programming model and implementation

Discussion and conclusion

Literature