Measuring profit efficiency of Colombian banks: a composite non-standard profit function approach

We analyse the evolution of profit efficiency of Colombian banks from 2001 to 2013, the most important period of consolidation for this industry. Unlike previous studies, we estimate revenue, cost, and profit efficiency within a unified framework. We find that profit efficiency significantly increased from 80% in 2002 to 91% in 2013. Median profit, revenue, and cost efficiency estimates are around 90.3, 85.2, and 99.5%, respectively. Median return on equity (ROE) was 8%. Without inefficiency, it could have been as high as 14.6%. Cost inefficiencies explain 92% of median unearned ROE while revenue inefficiency explains only 8%. Revenue and cost efficiencies are negatively correlated. However, both correlate positively with profit efficiency. Foreign banks and banks taking on more credit risk are more profit efficient while bigger banks and banks taking on more liquidity and market risk are less profit efficient.

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