Services and the long-term profitability in Taiwan's banks

This paper examines the relationship between service quantity and long-term profitability of Taiwan's banks. We employ the Fama-French IRR approach to measure long-term profitability and branch number, overhead expenses and average salaries as service proxies. The regression analysis using panel data reveals a strongly positive link between branch number and long-term profitability. This may explain why banks seek mergers with poorly operating financial institutions. The disadvantages of increased overhead expenses for enhancing services may be temporary. Furthermore, average salaries are detrimental to banks' profits, suggesting that personnel costs may be a serious burden; this may explain why a growing number of banks in Taiwan encourage early retirement of their senior employees who are then replaced by low-cost workers. (C) 2006 Elsevier Inc. All rights reserved.