Banks' sustainable growth challenge under economic recessionary pressure

Abstract

Purpose

This is a comparative study of the nature of operating decisions made by agricultural and non-agricultural banks, affecting their actual growth plans in the years around and during the Great Recession of 2008. The main empirical question is whether banks under greater economic stress shortly before, during, and immediately after the recession made deliberate adjustments in their growth decisions vis-à-vis predetermined sustainable levels.

Design/methodology/approach

Higgins' sustainable growth challenge is employed to evaluate banks' growth decisions involving four growth levers (profitability, earnings retention, asset management, and financial leverage). Actual growth trends are related to business growth rates deemed sustainable given available financial capability as prescribed by Higgins' model.

Findings

Both banking groups made cautious growth decisions during the sample period. Actual growth rates were below sustainable levels. Agricultural banks registered steadily increasing sustainable growth rates from the pre-recession years until the recovery period, while non-agricultural banks were more constrained to grow given their declining sustainable growth levels. Notably, agricultural banks showed relatively more aggressiveness in raising slightly actual revenue growth to levels much closer to sustainable levels. This could have resulted from their less volatile profit margin trends and usual pressure to maintain acceptable liquidity conditions in order to gain access to external funds.

Originality/value

This study presents an additional application of Higgins' model to agricultural finance. The comparative analysis of banking groups becomes even more relevant these days as recent economic discussions focus on indicators of an imminent recessionary period.

Citation

Zheng, M. and Escalante, C.L. (2020), "Banks' sustainable growth challenge under economic recessionary pressure", Agricultural Finance Review, Vol. 80 No. 3, pp. 437-451. https://doi.org/10.1108/AFR-07-2019-0077