The Effects of Marketing on Commercial Banks’ Operating Businesses and Profitability: Evidence from US Bank Holding Companies

Abstract

Purpose: This paper aims to explore the role that marketing plays in commercial bank management. Specifically, we examine the effects of marketing activities on banks' operating businesses, i.e. deposit, loan and service businesses. Furthermore, we investigate the effect of marketing activities on bank profitability. Design/methodology/approach: A series of hypotheses about the associations of marketing activities with banks' deposits, loans, services and profitability are developed. The fixed-effects linear model with an AR (1) disturbance is applied on the panel dataset of FR Y-9C reports to test these hypotheses. Findings: The results show that total loans and service proceeds are positively associated with marketing activities, which is measured by banks' advertising and marketing expenses. The effects of marketing activities on loan and service businesses are far-reaching to the second quarter in future. Moreover, the results reveal that profitability, measured as net income over total assets, increases with marketing activities. Practical implications: From the findings of this study, bank managers can learn the strengths and weaknesses of their marketing strategies and therefore better coordinate the marketing resources used in different areas of business. The study provides bank managers with a direction to examine the weaknesses in their marketing management. Originality/value: An issue in bank marketing that has not been explored yet is whether and how marketing activities affect commercial banks' specific businesses, such as deposits, loans and services, and how improvements in the specific businesses further affect bank profitability. This study is the first one to address this fundamental issue in bank marketing. Furthermore, the study provides the supplementary evidence that marketing contributes to commercial banks' profitability.