Performance of Brazilian banks in the context of digitalization

Abstract

In the context of digitalization of the Brazilian banking system, the present study evaluates how the investment in technology affects the performance of financial institutions. Many studies have evaluated the impact of digitalization on banks’ results. Hernando & Nieto (2007) and Ciciretti et al. (2009) identify improved profits and cost reduction with the implementation of internet banking in Spanish and Italian banks. In the present study, linear regressions are used to analyze the relationship between investments in IT and measures of profitability (ROA, ROE and margin of intermediation) and expenses (personnel and total administrative expenses). A Data Envelopment Analysis (DEA) is used to evaluate the development of Brazilian banks’ technical, cost and allocative efficiencies, with data segregated according to level of investment in IT. Results suggest that banks’ investment in information technology has a significantly positive relationship to profitability variables and to decreased administrative expenses, partially corroborating the work of Hernando & Nieto (2007). Improvement in Brazilian banks’ technical efficiency during the period analyzed is also shown, mainly among those banks with highest investment in IT.