Eva Based Value Management System And Its Application In Chinese Commercial Banks

With the more and more stringent regulatory environment after the financial crisis since 2008, and under the background of foreign banks' entry and more and more competitive strength among domestic banks, it's an emergent and important topic for Chinese commercial banks to heighten its comprehensive competitive power and operation performance. Hence it is realistic important for banks to put the Economic Value Added (EVA) management in practice. This is because EVA is one of the best standards for banks to measure its market value and performance, and is part of its business strategy, and hence is a key indicator to improve the organization efficiency.In Chapter 1, it begins with the meanings of commercial banks to apply the EVA management system, such like to promote the joint-stock reform, to make the sound business strategy, to establish efficient incentive mechanism, to build the philosophy of maximizing the shareholder's value, to protect the shareholder's interests, to pay attention to the innovation and technical progress, and to meliorate the corporate culture. Then both the domestic and foreign preceding related research literatures are summarized as a basis for further study. And the main research idea and research methodology are introduced in this chapter. Finally, an airscape of the whole paper is put forward.There are two sections in chapter 2, which demonstrates the necessity on the theoretical and practical base for domestic commercial banks to introduce the need for EVA Value Management System. First, we give the EVA definition, and the basis of its theory and accounting correction. Then we discuss domestic commercial banks to introduce the theory of the need for value management system through the following 7 aspects, such as to establish a modern enterprise system, to formulate a reasonable development strategy to maximize shareholder value, to conciliate the interests among shareholders, managers and employees, to encourage innovative and technological progress, improving the corporate culture to adapt to the fiercer market competition,. Finally, the performance measurement of EVA value management system becomes more and more necessary in reality when domestic commercial banks neither meet the existing performance management status of commercial bank reform nor meet the market environment of globalization. In additional, it is suggested that the EVA management system be introduced to domestic banks to make up for its internal limitations.In chapter 3, we mainly discuss the application of EVA in the oversea banks through the various researches and application experiences. The previous discussion has focused on the effectiveness and the development of EVA and then introduced the function of EVA at various hierarchical levels and in various dimensions including enterprises value management, salary incentive, financial pre-warning and budget management and so on. We can get the inference that using EVA as a measure of economic performance can lead to management decisions that are fundamentally different from those based on traditional accounting measures while EVA is important to help to improve the economic performance from a shareholder perspective. Finally an example on the application of EVA in Wells Fargo Bank is introduced to bring some inspiration for domestic banks.With the special nature of commercial banks in financial management, financial management is an important content for commercial bank management. And as an advanced financial management concept and scientific measurement indicator, EVA can enhance the financial management of commercial banks with no doubt. In section I of Chapter 4 we introduce from the success factors for EVA Value Management in both foreign and domestic enterprises, to the importance of the implement of EVA Value Management, and the main obstacles to apply EVA management system in domestic banks. In section II, we firstly describe the goal of the domestic commercial banks and the four stages of development and change, followed by the analysis of the EVA value management system in the application of domestic commercial banks favorable factors, and then the argument of the EVA performance management system of values in the status and importance of the domestic firm. And a brief introduction of practical application of the EVA value management to domestic commercial banks is put forward. And last how to improve the applications of EVA performance management in domestic commercial banks is discussed in seven aspects.Chapter 5 focuses on the application of EVA in the domestic banks through the four main functions. Through the analysis of EVA definition we find the advantages of EVA value management system, which can be attributed to the "4M" system which are Measurement, Management, Motivation and Mindset. Such details allow management to discern which businesses, products, and customer relationships are creating value and which are not. Obviously, it has formed a complete Value-based Management system centering on the EVA value, with this system banks can make their business decisions more reasonable,accurate and efficient. The advantages and shortcomings of EVA evaluation indicators are also given in this section. Additionally, we analyze the definition and calculation of the indicators, and then focus on the reference and practice of the positive application of EVA in domestic banks for instance in China Construction Bank.With its improvement, the EVA value management system has been adopted by more and more enterprises all over the world, as well as in China. Based on the traditional EVA measurement model given by the Stern Stewart company, we introduce a new model in chapter 6, which is called risk-adjusted EVA measurement model taking risk as an important factor. We calculate the EVA of the Bank of Ningbo using the model. And the results show that companies must pay for the risks undertaking. Although the risk-adjusted EVA measurement model is imperfect at present, it is essential to introduce the risk model. The management system will be more useful and complete only when the risk factors are taken into consideration. It is obvious that, with the development of economic market and academic research area, the theory about risks in EVA value management system will be increasingly completed.With the tool of EVA measurement model, chapter 7 mainly analyses 11 listed Chinese banks'profitability from the year of 2006 to 2009. According to the results of EVA traditional measurement model above, it shows the accounting adjustments and calculation process in detail, which is necessary in the EVA measurement model. Taking the Bank of Ningbo for instance, we analyzed the correlation between its EVA, MVA, RORAC and traditional accounting indicators (such as ROA, ROE, EPS, NPR, etc.) with the SPSS software, the result shows that, the correlation between EVA and traditional accounting indicators was inconsistent, and EVA is highly correlated with MVA, RORAC. A series of indicators deriving from EVA have formed an integrated evaluation system, and it can explain the enterprise's market value better. Next we calculate EVA and the value of its related indicators of the rest 10 listed banks, including ICBC, BOC, etc. The result shows that Chinese banking sector has developed rapidly in recent years, and the overall operating condition of joint-stock commercial banks is better than state-controlled banks, this condition may give certain enlightenments to both banks managers and financial policy makers.One of the primary ends of the Market Value Management of commercial banks is to maximum the shareholder's value. As an efficient indicator to measure the performance of a firm, the Economic Value Added (EVA) helps a lot to improve its market value. The inherent relationship between EVA and market value is discussed through modeling in Chapter 8, and the approaches to enhance the mechanism of market value management are put forward. Hence we can point the benefits of market value management for China's commercial banks, which are (1) being helpful for listed banks to meet the more and more rigor regulatory requirements, (2) can promote banks operate in a capital-saving way, (3) can establish a sound philosophy of market value management inside the commercial banks through bringing in a performance appraisal system based on EVA, (4) can enhance the ability of value creation of banks, and heighten the market value management and comprehensive competitive power.The study suggests that there are at least following approaches to apply EVA to improve the market value management. First, optimizing the financing structure and reducing the cost of financing; second, referring to EVA to optimizing the structure of economic capital allocation; third, focusing on the key businesses which can bring most (Future Growth Value, FGV), and fourth, establishing the performance appraisal system based on EVA. Finally, advocating and forming the corporate culture which pays attention to EVA and market value management.Chapter 9 concludes the whole paper, and makes a look into the further research.