Immediately after the financial crisis of 1997, the Thai government had closed down 64 of its 91 domestic financial companies, leaving only 27 open with 13 local banks in operation. Those remaining banks and financial companies were allowed to create 300 billion baht for new capitalization by issuing preferred shares and new debt debentures in exchange for 10-year government bonds. Financial institutions were also required to increase their reserve funds for the existing large non-performing loans (NPLs) (see Bangkok Post, 1999]. Although the NPLs were reduced to 12.65 percent by the end of 2003, they still continue to burden the financial system in 2007. In addition, the Financial Sector Restructuring Authority (FRA) and Asset Management Corporation (AMC) were created to handle the assets of now defunct financial companies. The FRA seized the assets of defunct financial companies and banks, then selling them at an average bid of 37 percent of book value. The process was very slow with many assets lacking the full, proper, and official documentation. By the end of 2003, there were only 13 domestic commercial banks and 18 foreign banks operating in Thailand.

Industry Since the inception of a global integration, international competition in the financial services industry around the world has greatly intensified. During the last 20 years, only a few firms have swiftly advanced their cause like that of the banking industry. The competitive sector in which they had competed took advantage of the financial deregulations and rapid technological advances worldwide in the 1990s. With deregulation removing the regulatory barriers to entry and technological advances reducing the cost of managing affiliates in distant markets, banks had undertaken a strategy of growth by merger & acquisition to accomplish two objectives: defend a position within their domestic stronghold by merging with other domestic competitors, thereby fending off potential foreign competitors establish presence in foreign markets by acquiring interest in foreign institutions1 While the extent of the industry’s outreach into the global arena through international acquisitions is debatable, 2what is clear is the full effect of deregulation and technological advances (i.e., cross-border, mega-size mergers & acquisitions recently undertaken by multinational banks). The large multinational banks now offer a full range of financial products and services, fiercely competing in both the domestic and global markets. 3. Bank Performance Literature on Other Countries Many specialists have a mixed point of view on the effects of deregulation and technological advances. For US banks, Berger & Mester (2003) found that cost productivity worsened even though profit margins substantially improved for banks engaging in mergers. Focarrelli and Pozzolo (2001) and Williams (2003) had evaluated the profitability of international banks in the OECD, as well as that of domestic and foreign banks in Australia, respectively. Both studies had argued that efficient banks expand abroad seeking higher profits, but that profits are negatively correlated to their market share. Using Italian data, Focarelli, Panetta, and Salleo (2002) had shown that mergers increase income from expanded services and product lines, but the increase is offset by higher costs. However, the return on equity improves because of a decrease in the capital base of the acquiring bank. Similar studies of commercial banks in other countries have been undertaken, i.e., studies of Japanese banks by Drake & Hall (2003); Indian banks by Kumbhakar and Sarkar (2003); Portuguese banks by Mendes and Reblo (1999); Turkish banks by Isik and Hassan (2003); and Spanish banks by Grifell-Tatje and Lovell (1996). While the analytical designs and econometric variables used in these studies had considerably varied, one common theme had emerged: following the deregulation or technological change, the measures of profitability and/or productivity had generally declined for banks in these diverse countries. 4. Measure of Global Bank Performance and Determinants Properly gauging all aspects of profitability is a generally accepted way to measure the performance of businesses, specifically commercial banks. However, banks vary considerably in terms of size, types of products offered, and types of assets

See Larosiere (2000) for an excellent discussion on banking consolidation in Europe and why most European banks favor merger and acquisition for their growth. Examining how more than 2,000 affiliates of large MNC’s patronize banks in 20 European nations, Berger, Dai, Ongena and Smith (2002) argue that the banking industry may never become fully globalized.

owned, among many other factors. Therefore, some standard form of measuring profitability is needed. Two potential measures of bank performance are return on assets (ROA) and return on equity (ROE). Due to the nature of bank assets (largely loans), ROE seems to be the more appropriate measure, at least from a purely logical perspective. For that very reason, ROE is used as the dependent variable for this analysis. Finally, regression analysis is the generally accepted tool for measuring the relationship among variables. Similar studies of international banks have used five variables (total assets, efficiency ratio, Tier1 capital ratio, loan loss provisions, and non-interest income) to explain bank performance, as noted by the likes of Allen and Raj (1996), Kim and Singer (1997), and Brimmer (1998). For purposes of comparing Thai domestic banks and foreign banks in Thailand, this analysis follows similar lines. Efficiency can be defined as the ratio of a given bank’s non-interest expense to total revenue. It is hypothesized that the coefficient of this variable will be negative because higher ratios imply the reduced efficiency of bank operations. Second, a measure of risk was ascertained by calculating the ratio of Tier1 capital to risky assets. The Tier1 capital ratio is defined as core capital (essentially the book value of a bank’s equity) divided by risk-adjusted assets (basically total assets, weighted more heavily for more risky assets). The coefficient of the Tier1 capital ratio is hypothesized to be negative. Thirdly, loan loss provisions are used to represent bad debts. Here a negative coefficient for the variable is anticipated since increases in the loan loss provisions suggest that the quality of the bank’s loan portfolio is reduced. The non-interest income variable is expected to have a positive impact on a bank’s performance. Finally, the total asset value is considered as the other potential explanatory variable, but the coefficient is not expected to produce statistically significant results. An empirical study done by Grosse and Gart (2001) reports that there are considerable variations in the key factors that influence the performance of multinational banks from different countries. For American banks, efficiency is the only significant variable, whereas, for UK banks, total assets, efficiency, and loan loss provisions are significant. For German banks, the total assets and noninterest income are significant, whereas the efficiency and Tier1 capital ratio are significant for Japanese banks. Surprisingly, none of these variables were found to be a significant determinant for the performance of Swiss banks. From 1993 to 1999, Chotigeat et al. (2004) had empirically studied the performance of the following three major French banks: Societe General, BNP Paribus, and Credit Lyonnais. It was found that the factors determining the banks’ profit are total assets, efficiency, Tier1 capital ratio, and loan loss provisions.

The least-square model used to measure a bank’s performance is expressed as: ROEit = α + β1ASSTit + β2EFFit + β3TIER1it + β4 NIIit + β5 LLPit + εit where, ROE = the return on equity, ASST = total assets, EFF = efficiency ratio, εit (error term) ~ N (0, σ2).

LLP = loan loss provisions. TIER1 = Tier1 capital ratio, NII = non-interest income, and

(X indicates a statistical significance of the coefficient.) Source: Chotigeat et al. (2004, p. 14).

Overall, our findings confirm the previous studies that efficiency and loan loss provision are the dominant factors that determine the profit performance of banks worldwide. For foreign banks, despite the fact that they… are from different countries operate under different banking systems under different organizational structures have different corporate cultures operate under varying national economies, they still share many common variables with global competitors from around the world. 7. Conclusion With new, financial systems that emphasize & enforce a policy of liberalization & transparency, many foreign banks are now seeking to operate in Thailand. What

Focarelli, Panetta and Salleo (2002); Grifell-Tatje and Lovell; and Kumbhakar andh Sarkar is of great interest is how Thai banks had performed after the crisis and how their performance compared to that of foreign banks that operated in the same environment in Thailand. Their performance (specifically, the value of the ROE capital ratio) was negatively influenced by the efficiency ratio and loan loss provisions, where each negative sign confirms our hypothesis. For the foreign banks in Thailand, only the loan loss provision factor confirms our hypothesis (negative sign) as a determinant of performance. When we compared the determinants of performance for both groups in this study with those of other top banks around the world, we found that the significance of efficiency for the Thai banks’ performance is similar to that of French, US, British, and Japanese banks. The loan loss provision is similar to that of French, British, and other foreign banks in Thailand. Lastly, foreign banks in Thailand only have loan loss provisions as their determinant, which is similar to that of French and British banks. On balance, loan loss provision is the only common factor that is applicable to the performance evaluations of the Thai domestic banks and foreign banks operating in Thailand. Globally, efficiency, total assets, and loan loss provisions are the three determinants of banks’ performance. We think foreign banks may have an edge over domestic Thai banks because foreign banks have recognized the competitive intensity of the financial services business. Simply put, multinational banks worldwide have had to react to the changing business environments brought forth by global deregulation by increasing their M&A activity. Therefore, Thai domestic banks could possibly benefit by learning form their foreign counterparts. Author statement: Tosporn Chotigeat, Department of Economics and Finance, Nicholls State University. E-mail: ecfi-tc@nicholls.edu. He is the editor of the Global Business and Finance Review.