2012 年 2 月第十五卷一期 • Vol. 15, No.

1, February 2012

An Empirical Study of Credit Risk Efficiency

of Banking Industry in Taiwan
Kuan-Chung Chen Chung-Yu Pan

http://cmr.ba.ouhk.edu.hk
Web Journal of Chinese Management Review • Vol.15• No 1 1

An Empirical Study of Credit Risk Efficiency of

Banking Industry in Taiwan

Kuan-Chung Chen Chung-Yu Pan

Abstract
The operating efficiency of Taiwanese commercial banks is a key factor on
Taiwan's economic development. However, the credit risk parameters of the
banks have serious impact on productivity. In this paper, we use financial ratios to
assess credit risk of 34 Taiwanese commercial banks over the period 2005-08, and
investigate the performance based on the credit risk parameters with data
envelopment analysis (DEA) approach. Then we employ the individual mean of
credit risk technical efficiency (CR-TE) at each bank over the period 2005-08 for
measurement of the competitiveness and apply the individual mean of earnings
per share (EPS) at each bank over the period 2005-08 to measure the profitability
of each bank. Our results indicate that only one bank is efficient in all types of
efficiencies over the evaluated periods. And most of the banks suffered from the
global financial crisis in 2008 held many bad debts, overdue loans or loss
profitability. Therefore, CR-TE, credit risk allocative efficiency (CR-AE) and
credit risk cost efficiency (CR-CE) are inefficient over our observational periods.
And the banks should have different strategies of credit risk management to
survive in this changing environment.

Keywords: Credit Risk, Financial Ratios, Earnings Per Share, Data Envelopment
Analysis.

______________
Kuan-Chung Chen, Department of Business Administration, TransWorld University
Chung-Yu Pan, Department of Industrial Engineering and Enterprise Information, Tunghai University
Web Journal of Chinese Management Review • Vol.15• No 1 2

Introduction

Most of the studies on bank performance in the literature employ objective

functions focusing on the economics of cost minimization, profit maximization or
managerial utility maximization, where the performance equation denotes a cost
function, a profit function or a managerial utility function (Sherman & Zhu, 2006;
Lin et al., 2009; Liu, 2010). In recent years, there has been a dramatic
proliferation of research concerned with risk assessment on bank performance.
The notion of risk which matters is central to all industries. It is not just a
question of what kinds of products will be produced, or how much it will cost.
Because of its practical importance, topic on bank risk assessment has become a
matter of great concern. More recently, the study of the risk preferences on the
efficiencies of banks have developed rapidly and its achievements have become a
center of attraction (Ozyildirim & Ozdincer, 2008).

The forces of globalization, financial deregulation and innovation have not

diminished the importance of credit risk even if market and off-balance risk did
capture a lot more attention during recent episodes of turmoil in international
financial markets (Paradi et al., 2004). Yet credit risk is still the most significant
risk for financial institutions as the devastating effects from the current credit
crisis will affirm. The New Basel Capital Accord places explicitly the onus on
banks to adopt sound internal credit risk management practices to assess their
capital adequacy requirements. Through effective management of credit risk
exposure banks not only support the viability and profitability of their own
business but also contribute to systemic stability and to an efficient allocation of
capital in the economy (Psillaki et al., 2010).

Credit risk is one of the oldest and most important forms of risk faced by banks as
financial intermediaries. It is defined as the degree of value fluctuations in debt
instruments and derivatives due to changes in the underlying credit quality of
borrowers and counterparties. And, it is also measured as the uncertainty of future
credit losses around their expected levels. In the literature, early research of credit
risk can be traced back to Black and Scholes (1973). They putted forward a basic
model for corporate default risks, which was called a structural model of credit
risk (Black & Scholes, 1973). While the study of Merton (1974) on the pricing of
risky debt was published, interest in pricing models for credit risk has been
Web Journal of Chinese Management Review • Vol.15• No 1 3

discussed extensively. About this setting, default of a firm occurs when the total
market value of its assets falls below the value of its debts or a certain given
threshold level. In order to manage this kind of risk, bank regulators select and
monitor borrowers and create a diversified loan portfolio.

The literature on credit risk assessment is extensive and growing. A variety of

analytical techniques have been used for credit risk assessment. They include
statistical methods, models based on contingent claims and asset value coverage
of debt obligations, neural networks, and operational research (OR) methods such
as linear or quadratic programming and data envelopment analysis (DEA). The
bulk of this literature has concentrated on the use of financial factors such as
liquidity, profitability and capital structure in risk evaluation (Psillaki et al.,
2010).

Formal or mathematical modeling of finance theory began in the late 1950s. The
work of Markowitz (1959) proposed a framework for finance theory that has
withstood the test of time. Markowitz (1959) advocated that “risk” and “return”
are inextricably linked. For an individual (or an organization) to achieve a certain
level of reward (both financial and non-financial), they have to accept a certain
amount of risk. In the last several decades, numerous studies were carried out on
the effectiveness of mergers and acquisitions (M&As) (Ismail et al., 2009), using
investment portfolios to manage risk (Rossi et al., 2009), and optimization of a
firm’s financing mix (Franck & Krausz, 2007).

One of the fields in which formal or mathematical modeling of finance theory has
found widespread application is performance evaluation. A firm’s financial
information plays a vital role in decision making of investment activities by
different parties in the economy. Traditionally, the application of financial ratios
helps the evaluation of bank performance. Accounting ratios may be used in order
to interpret financial accounts or management accounting data. Two main reasons
for using ratios as a tool of analysis are to allow comparison among different
sized bank and to control for sector characteristics permitting the comparison of
individual bank’s ratios with some benchmark for the sector (Halkos &
Salamouris, 2004). Furthermore, the working method of financial ratios is also a
widely applied approach for measuring risk. In the past, risk is usually evaluated
by a function of expected profit and its standard deviation. The method is
Web Journal of Chinese Management Review • Vol.15• No 1 4

considered that the probability distribution depends on the parameter (Flannery,

1981; Gizycki, 2001; Ennis & Malek, 2005). Recently, extensive literatures
dedicated to the prediction of business failure as well as credit crisis have
emerged (Mingo, 2000; Brown & Wang, 2002; Carling et al., 2007). Financial
ratios are among the most popular and widely used tools of financial analysis.
They provide bank regulators with clues and symptoms of underlying conditions
and have been found useful in predicting business failure.

While considerable attention has been paid in the past to research issues related to
bank performance evaluation, a literature on issues of bank credit risk efficiency
has emerged only very slowly and in a more scattered way. Moreover, common
sense seems to indicate the importance of bank credit risk efficiency, but we lack
empirical support. This paper extends the efficient method of evaluating bank
credit risk efficiency. We combine financial ratios with DEA model to evaluate
the efficiency. Our main goal is to discuss the effect of credit risk preferences on
bank performance and the techniques as applied to the advances in performance
measurement. In so doing it seeks to contribute to our growing understanding of
how and to what extent effect on credit risk management measures bank
performance. Empirical results are of great interest both for application and
scientific research.

The remainder of the paper is organized as follows. Section II presents the data
and methodology used in the study. Section III discusses the research findings.
Section IV presents the conclusions from the results obtained.

Data and Methodology

The Data

Financial institutions bridge the needs of lenders (savers) and those of borrowers.
They provide the flow of resources from one party to the other. Among financial
institutions, commercial banks play a major role. They have the largest share of
intermediation and are at the very core of a financial system. This study used
financial ratio and DEA to assess the 2005–08 relative financial performance of
34 Taiwanese commercial banks. We obtain the data from Taiwan Economic
Journal (TEJ) database and annual report of our sample. This set should be as
Web Journal of Chinese Management Review • Vol.15• No 1 5

homogeneous as possible to be meaningful within the DEA relative efficiency

measurement characteristic. The ratio of weighted outputs to weighted inputs
constitutes the DEA performance index.

Furthermore, selection of proper variables to define and to measure financial

performance is always an extremely important decision. Most of the studies in the
literature apply DEA for measuring the comparative efficiency of banks. Several
literatures evaluate technical efficiency (TE), allocative efficiency (AE), and cost
efficiency (CE) on bank operating performances, and that provide bank regulators
with important information for decision-making. There are a few studies that
measure bank performance by observing the change in earnings-based financial
ratios including the value of return on equity (ROE), return on assets (ROA),
return on tier 1 capital, average profit per employee and earnings per share (EPS).
The five variables are used to determine if financial structure differences affect
the relationship between the cash conversion cycle (CCC) and operating
performance. Therefore, we specify five outputs that represent profitability of our
sample:

Return on equity Y1
Income after tax
= (1)
Average shareholders′ equity

Return on assets Y2
Income after tax
= (2)
Average assets

Return on tier 1 capital Y3

Income before tax
= (3)
Average tier 1 capital

Average profit per employee Y4

Income after tax
= (4)
Total employees

Earnings per share Y5

Income after tax − Dividends of preferred shares
= (5)
Weighted average outstanding shares

In addition, we select three financial ratios in evaluating credit risk; the input set
Web Journal of Chinese Management Review • Vol.15• No 1 6

consisted of three main items:

Ratio of total loans to total assets X1

Total loans
= (6)
Total assets

Ratio of deposit reserve to total deposits X 2

Deposit reserve
= (7)
Total deposits

Ratio of overdue loans X 3

Overdue loans
= (8)
Total loans

Methodology

DEA is a widely applied approach for measuring the relative efficiencies of a set
of decision making units (DMUs), which use multiple inputs to produce multiple
outputs. It has been proven to be an effective tool for performance evaluation and
benchmarking since it was first introduced by Charnes et al. (1978). Charnes et al.
(1978) based on the seminal paper by Farrell (1957), and is a non-parametric
method of efficiency analysis. It is used to evaluate the relative efficiency of a set
of comparable entities with making simultaneous use of multiple inputs and
outputs. And the method does not require assumptions regarding the shape of the
production frontier. After Charnes, Cooper, and Rhodes’ model (CCR), a number
of different DEA models have been proposed (Banker et al., 1984; Seiford, 1996;
Wu et al., 2006; Lin et al., 2009), and these models have wide applications in
various performance evaluation problems. The DEA formulation is given as
follows:

To estimate efficiency scores for each DMU we use DEA estimator. We assume
that there are n DMUs (DMUj ; j = 1, 2, … , n) within a sample having access to
the same technology for transforming a vector of m inputs (xij ; i = 1, 2, … , m)
into a vector of s outputs (yrj ; r = 1, 2, … , s). Then the relative efficiency of
m s
DMUj can be expressed as ej = i=1 vi xij r=1 ur yrj , where ur and vi
represent output and input multipliers, respectively. And the associated
output-oriented CCR-DEA model is
Web Journal of Chinese Management Review • Vol.15• No 1 7

max e′jk = φjk

s. t. δj xij ≤ xij k , i = 1,2, … , m

j=1

φjk yrj k ≤ δj yrj , r = 1,2, … , s

j=1

δj ≥ 0 (9)

where jk represents one of the DMUs. And φjk is a real variable and δj is a
non-negative vector. Model (9) is built on the assumption of constant returns to
scale (CRS) of activities and that it evaluates TE.

Following the approach developed in Model (9), one may at the following Model
(10) that accounts for cost vector, c = c1 , c2 , … , cm . It is built on the
assumption of CRS of activities and that it evaluates CE.

min
∗
ce,ij k = ci xij k
δ,x j
i=1

s. t. δj xij ≤ xij k , i = 1,2, … , m

j=1

φjk yrj k ≤ δj yrj , r = 1,2, … , s

j=1

δj ≥ 0 (10)

In fact, since the very beginning of DEA studies, various extensions of the CCR
model have been proposed. The BCC (Banker-Charnes-Cooper) model is a
common representative of those extensions. The BCC model has its production
frontiers spanned by the convex hull of the existing DMUs. The frontiers have
piecewise linear and concave characteristics which leads to variable returns to
scale (VRS) characterizations with (a) increasing returns-to-scale occurring in the
first solid line segment followed by (b) decreasing returns-to-scale in the second
Web Journal of Chinese Management Review • Vol.15• No 1 8

segment and (c) constant returns to scale occurring at the point where the
transition from the first to the second segment is made (Cooper et al., 2007).

BCC model is used to evaluate the pure technical efficiency (PTE) and the scale
efficiency (SE). The associated output-oriented BCC-DEA model is

max e′jk = φjk

s. t. δj xij ≤ xij k , i = 1,2, … , m

j=1

φjk yrj k ≤ δj yrj , r = 1,2, … , s

j=1

δj = 1, j = 1,2, … , n
j=1

δj ≥ 0 (11)

Similarly, taking into accounts for cost vector, c = c1 , c2 , … , cm , one may reach
at the following linear programming formula:

min ∗
ce,ij k = ci xij k
δ,x j
i=1

s. t. δj xij ≤ xij k , i = 1,2, … , m

j=1

φjk yrj k ≤ δj yrj , r = 1,2, … , s

j=1

δj = 1, j = 1,2, … , n
j=1

δj ≥ 0 (12)
Web Journal of Chinese Management Review • Vol.15• No 1 9

Model (12) is used to evaluate CE on the assumption of VRS.

Regarding AC, it is given input prices and production technology, and a DMU has
the ability to engage in production using the optimal proportion of investment
portfolio. It is calculated by the following formula:

CE
AE = (13)
TE

Empirical Analysis

Descriptive Statistical Analysis

Table 1 gives the descriptive statistics of the variables used in the empirical
analysis. It includes mean and standard deviation. In inputs, the standard
deviation tells us that there are considerable differences in ratio of deposit reserve
to total deposits (X 2 ) intensity among the banks in 2005, 2006, 2007 and 2008
with year in 2006 being the most X 2 intensive. In 2008, there are the lower
means of the inputs X 2 and X 3 . And in outputs, it shows that there are
considerable differences in average profit per employee (Y4 ) intensity among the
banks in 2005, 2006, 2007, and 2008 with year in 2006 being the most Y4
intensive. There are the lower means of the outputs Y2 , Y3 , Y4 , and Y5 in 2008.
We consider that banks had a lower profitability in 2008. In this analysis, we
obtain a result that there are considerable differences in all inputs and outputs
intensity among the banks in 2006. However, they do not indicate the effects of
credit risk on the profitability over the study period.

Table 1 Descriptive statistics of inputs and outputs

2005 2006 2007 2008
Var Mean StDev Mean StDev Mean StDev Mean StDev
𝑋1 62.535 10.090 62.958 10.607 64.509 10.540 63.619 9.590
𝑋2 22.326 24.859 27.209 44.407 20.912 17.866 20.609 11.844
𝑋3 2.137 0.851 2.206 1.248 2.007 1.033 1.856 0.924
𝑌1 122.904 15.802 109.720 26.714 117.001 24.143 115.701 13.337
𝑌2 6.281 1.254 5.676 1.816 5.975 1.545 5.623 1.171
𝑌3 160.323 21.127 165.676 1.816 155.878 33.289 154.504 18.713
𝑌4 12069.510 4023.458 11433.760 4761.517 11671.384 3735.533 10421.327 2182.938
𝑌5 9.588 2.463 8.269 3.255 8.156 2.384 7.850 1.621
Web Journal of Chinese Management Review • Vol.15• No 1 10

Credit Risk Efficiency Analysis

Table 2 presents the results of DEA. We apply financial ratios to evaluate credit
risk and employ the output-oriented DEA model to estimate contemporaneous
credit risk technical efficiency (CR-TE), credit risk allocative efficiency (CR-AE),
and credit risk cost efficiency (CR-CE) for the banks in our sample. In table 2, we
can find that Bank 7 is efficient in all types of efficiencies over the study period,
because all efficiency scores are equal to “1”. The result shows that Bank 7 may
have good credit risk management and its performance is stable. It also represents
that the bank has better performance than others, and there are no adverse effects
in credit risk changes due to the global financial crisis in 2008 in Bank 7. Bank 9
and 12 are efficient in CR-TE over the study period, but they are inefficient in
CR-AE and CR-CE in 2008. Clearly, the findings indicate that the global
financial crisis in 2008 has negative effect on CR-AE and CR-CE of Bank 9 and
12. Nevertheless, there are thirteen banks never attaining the perfect efficiency
score 1.0 during the four years, namely, Bank 3, 14, 17, 19, 20, 21, 22, 23, 25, 26,
27, 31, and 33. The result indicates that these banks have poorer performance than
others over the study period. According to our investigation, the global financial
crisis, brewing for a while, really started to show its effects in the middle of 2007
and into 2008. And most of the banks suffered from the global financial crisis
held many bad debts, overdue loans or loss profitability. Therefore, CR-TE,
CR-AE and CR-CE of the thirteen banks are inefficient over our observational
periods. Furthermore, the average CR-TE, CR-AE, and CR-CE of 2008 are
smaller than that of 2005, 2006, and 2007. In the analysis of the results, it points
out that the global financial crisis really hurts the performance for some banks.

Table 2 Credit Risk Technical Efficiency, Credit Risk Allocative Efficiency,

and Credit Risk Cost Efficiency
Bank CR-TE CR-AE CR-CE
(DMU) 2005 2006 2007 2008 2005 2006 2007 2008 2005 2006 2007 2008
1 0.948 0.911 1.000 0.953 0.866 0.911 0.791 0.744 0.821 0.830 0.791 0.709
2 0.840 0.939 1.000 1.000 0.919 0.879 0.788 0.829 0.772 0.825 0.788 0.829
3 0.783 0.776 0.731 0.701 0.877 0.984 0.950 0.956 0.687 0.763 0.694 0.670
4 1.000 1.000 1.000 0.830 1.000 0.978 0.905 0.986 1.000 0.978 0.905 0.818
5 1.000 1.000 0.952 1.000 1.000 0.948 0.915 1.000 1.000 0.948 0.871 1.000
6 0.889 1.000 0.876 0.810 0.963 1.000 0.924 0.976 0.856 1.000 0.810 0.790
7 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000
8 0.937 0.868 0.875 1.000 0.894 0.878 0.875 0.723 0.838 0.762 0.766 0.723
Web Journal of Chinese Management Review • Vol.15• No 1 11

9 1.000 1.000 1.000 1.000 1.000 1.000 1.000 0.967 1.000 1.000 1.000 0.967
10 0.962 1.000 1.000 0.738 0.941 0.940 0.847 0.984 0.905 0.940 0.847 0.726
11 1.000 1.000 0.982 0.846 0.997 0.812 0.798 0.827 0.997 0.812 0.784 0.700
12 1.000 1.000 1.000 1.000 1.000 1.000 1.000 0.613 1.000 1.000 1.000 0.613
13 1.000 1.000 1.000 1.000 0.774 0.633 0.942 0.989 0.774 0.633 0.942 0.989
14 0.828 0.859 0.771 0.768 0.997 0.970 0.997 0.961 0.826 0.833 0.768 0.738
15 1.000 0.866 0.905 1.000 0.904 0.964 0.982 0.879 0.904 0.835 0.888 0.879
16 0.777 0.753 1.000 0.720 0.938 0.923 1.000 0.947 0.729 0.695 1.000 0.682
17 0.746 0.714 0.701 0.734 0.945 0.978 0.995 0.948 0.725 0.699 0.697 0.695
18 1.000 0.910 0.863 0.888 1.000 0.977 0.906 0.900 1.000 0.889 0.782 0.799
19 0.754 0.761 0.713 0.693 0.956 0.913 0.963 0.956 0.721 0.695 0.687 0.663
20 0.884 0.833 0.787 0.757 0.934 0.956 0.997 0.991 0.826 0.796 0.785 0.751
21 0.884 0.931 0.945 0.739 0.955 0.904 0.884 0.957 0.845 0.842 0.835 0.707
22 0.720 0.707 0.727 0.711 0.984 0.964 0.984 0.957 0.708 0.682 0.715 0.681
23 0.731 0.740 0.858 0.698 0.985 0.987 0.884 0.960 0.720 0.730 0.758 0.670
24 1.000 0.968 0.970 1.000 0.977 0.986 0.986 0.916 0.977 0.954 0.956 0.916
25 0.911 0.785 0.788 0.812 0.943 0.942 0.934 0.862 0.859 0.739 0.736 0.701
26 0.763 0.857 0.764 0.799 0.993 0.864 0.900 0.989 0.757 0.741 0.715 0.791
27 0.878 0.918 0.824 0.818 0.966 0.991 0.973 0.999 0.848 0.910 0.802 0.817
28 1.000 1.000 1.000 0.967 0.977 0.933 0.895 0.829 0.977 0.933 0.895 0.802
29 1.000 0.948 0.843 0.862 0.980 0.879 0.844 0.877 0.980 0.834 0.712 0.756
30 1.000 0.827 0.807 0.837 0.973 0.993 0.967 0.927 0.973 0.821 0.780 0.776
31 0.823 0.799 0.744 0.730 0.968 0.961 0.992 0.910 0.797 0.768 0.738 0.665
32 1.000 0.771 0.747 0.774 1.000 0.962 0.969 0.843 1.000 0.742 0.724 0.652
33 0.824 0.773 0.788 0.755 0.971 0.971 0.954 0.890 0.800 0.751 0.752 0.672
34 1.000 1.000 1.000 1.000 1.000 0.996 1.000 1.000 1.000 0.996 1.000 1.000
Ave. 0.908 0.889 0.882 0.851 0.958 0.941 0.934 0.914 0.871 0.835 0.821 0.775
Note: CR-TE = credit risk technical efficiency; CR-AE = credit risk allocative efficiency; CR-CE = credit risk cost
efficiency

CR-TE and EPS Analysis

Table 3 shows the mean of CR-TE and the mean of EPS over the study period. In
order to understand the relevance between credit risk efficiency and profitability
of the DMUs, we depict the CR-TE and EPS of the Taiwanese commercial banks
over the period 2005-08 in Figure 1. In Figure 1, we employ the horizontal axis to
represent the individual mean of CR-TE at each DMU over the period 2005-08
for measurement of the competitiveness and the vertical axis to display the
individual mean of EPS at each DMU over the period 2005-08 for measuring the
profitability of each bank. We utilize the total average values of CR-TE and EPS
to determine the threshold values. From table 3, we have the total average value
of CR-TE 0.883 for the four years. And we obtain the total average value of EPS
Web Journal of Chinese Management Review • Vol.15• No 1 12

-0.03.

Overall, there are fourteen DMUs which have an average CR-TE above 0.883 and
an average EPS above -0.03. They are Bank 1, 2, 4, 5, 7, 8, 9, 10, 11, 12, 13, 18,
28, and 34. The result shows that these banks should hold and gain the
competition advantage and improve their profitability over the evaluated periods.
And this might indicate that these banks are right in their credit risk management.
They should maintain and gain the greater competitive advantage and seek to find
further improvements. On the other hand, Bank 6, 15, 24 and 29 have an average
CR-TE above 0.883, but an EPS below -0.03. At present, these four DMUs
should hold the competition advantage, but their EPS represent their profitability
deterioration. We consider that these banks maintain the competitive advantage,
but do not explore the opportunities to improve their profitability. Especially,
there are three DMUs, namely, Bank 3, 17, and 27, which have an average CR-TE
below 0.883, but an EPS above -0.03. Compared to other banks, although these
three banks do not have the competition advantage, they have their substantial
profitability for the four years. In the case of Bank 14, 16, 19, 20, 21, 22, 23, 25,
26, 30, 31, 32, and 33, these DMUs have an average CR-TE below 0.883 and an
EPS below -0.03. The result clearly implies that these banks have less
competitiveness and profitability deterioration than other banks. We regard that
these banks should reexamine their actions and activities in their credit risk
management.

Table 3 Credit Risk Technical Efficiency and Earnings Per Share

Bank CR-TE EPS
(DMU) 2005 2006 2007 2008 Ave. 2005 2006 2007 2008 Ave.
1 0.948 0.911 1.000 0.953 0.953 2.91 2.44 2.37 1.81 2.38
2 0.840 0.939 1.000 1.000 0.945 2.51 1.73 2.55 2.43 2.31
3 0.783 0.776 0.731 0.701 0.748 0.70 2.01 1.78 1.38 1.47
4 1.000 1.000 1.000 0.830 0.958 2.12 2.26 2.49 1.86 2.18
5 1.000 1.000 0.952 1.000 0.988 2.49 2.37 2.29 2.64 2.45
6 0.889 1.000 0.876 0.810 0.894 -7.67 1.79 1.37 0.78 -0.93
7 1.000 1.000 1.000 1.000 1.000 4.43 4.53 3.68 2.32 3.74
8 0.937 0.868 0.875 1.000 0.920 1.15 0.11 0.85 1.38 0.87
9 1.000 1.000 1.000 1.000 1.000 0.83 -0.72 1.31 0.92 0.59
10 0.962 1.000 1.000 0.738 0.925 0.78 0.97 0.28 -1.86 0.04
11 1.000 1.000 0.982 0.846 0.957 3.06 1.82 2.19 0.53 1.90
12 1.000 1.000 1.000 1.000 1.000 1.17 1.73 1.22 -0.48 0.91
13 1.000 1.000 1.000 1.000 1.000 0.64 0.39 0.84 -1.02 0.21
Web Journal of Chinese Management Review • Vol.15• No 1 13

14 0.828 0.859 0.771 0.768 0.807 -3.74 0.28 0.27 0.02 -0.79
15 1.000 0.866 0.905 1.000 0.943 2.03 -3.16 -0.26 0.01 -0.35
16 0.777 0.753 1.000 0.720 0.813 -1.19 -5.56 1.42 0.15 -1.30
17 0.746 0.714 0.701 0.734 0.724 -0.47 0.12 0.32 0.05 0.01
18 1.000 0.910 0.863 0.888 0.915 6.53 4.35 0.39 0.39 2.92
19 0.754 0.761 0.713 0.693 0.730 0.47 -0.86 0.33 -0.68 -0.19
20 0.884 0.833 0.787 0.757 0.815 -0.18 -5.16 0.73 0.12 -1.12
21 0.884 0.931 0.945 0.739 0.875 0.69 0.02 -0.93 -1.89 -0.53
22 0.720 0.707 0.727 0.711 0.716 0.17 -1.10 0.57 -1.06 -0.36
23 0.731 0.740 0.858 0.698 0.757 0.74 0.16 0.18 -1.74 -0.17
24 1.000 0.968 0.970 1.000 0.985 -1.94 0.17 -2.65 -0.63 -1.26
25 0.911 0.785 0.788 0.812 0.824 0.80 -0.89 -0.42 -1.43 -0.49
26 0.763 0.857 0.764 0.799 0.796 0.04 -3.71 -1.37 -1.47 -1.63
27 0.878 0.918 0.824 0.818 0.860 0.98 0.55 -0.11 -0.60 0.21
28 1.000 1.000 1.000 0.967 0.992 1.64 0.15 0.86 0.25 0.73
29 1.000 0.948 0.843 0.862 0.913 0.06 -8.56 -6.58 -3.67 -4.69
30 1.000 0.827 0.807 0.837 0.868 -1.32 -7.02 0.68 -1.03 -2.17
31 0.823 0.799 0.744 0.730 0.774 0.58 -2.75 -3.90 0.04 -1.51
32 1.000 0.771 0.747 0.774 0.823 -3.62 -8.04 -1.60 -2.55 -3.95
33 0.824 0.773 0.788 0.755 0.785 0.00 -3.07 -7.61 -3.83 -3.63
34 1.000 1.000 1.000 1.000 1.000 2.61 -2.19 1.77 1.75 0.99
Ave. 0.908 0.889 0.882 0.851 0.883 0.59 -0.73 0.16 -0.15 -0.03
Note: CR-TE = credit risk technical efficiency; EPS = earnings per share

13 9 7
34
1.000 5
24 12
28

4
1

0.950 15 11

2
10 8

29 18

6
0.900

21

30
27
CRTE

0.850

32 25
16 20

26
0.800 14
33

31

23
3
0.750

19

17
22
0.700

-6.000 -4.000 -2.000 0.000 2.000 4.000

EPS

Figure 1 CR-TE and EPS

Web Journal of Chinese Management Review • Vol.15• No 1 14

Conclusion

This study examines credit risk efficiency of the 34 Taiwanese commercial banks
over the period 2005-08. This paper uses output-oriented DEA model with
financial ratios to measure CR-TE, CR-AE and CR-CE.

The DEA results show relatively low average efficiency levels in CR-TE, CR-AE
and CR-CE in 2008. It is possible to have the adverse effects in the average
efficiency scores due to the global financial crisis over the period of analysis for
the banking systems in our sample. However, in order to analyze the relevance
between credit risk efficiency and profitability of the DMUs over the four years,
we utilize the individual mean of CR-TE as the measurement of the
competitiveness and employ the individual mean of EPS to measure the
profitability of each bank over the years from 2005 to 2008.

According to the values of the individual mean of CR-TE and the individual mean
of EPS of our sample, we classify the 34 banks into four groups, namely, high
competitiveness and high profitability, high competitiveness but low profitability,
low competitiveness but high profitability, and low competitiveness and low
profitability. Different groups of banks should have different strategies of credit
risk management to survive in this changing environment. For example, the banks
have low competitiveness and low profitability should consider to be merged with
other banks or reexamine their actions and activities in their credit risk
management.

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