Study On Profitability Of Commercial Bank Of China Based On The Perspectives

Financial intermediaries is vital for an economic progress of a country, which has been verified so long by the researchers, so a steady and sound banking industry powerful serves economic development with the counterevidence of financial crisis of 2008 which engulfed the world and caused mass unemployed persons, triggered economic depression. It has been 30 years since the initiation of economic reforms in 1979, and the banking sector in China has been numerous developments profiting from the reform of financial system. In the latest The Banker's 2009 ranking ( based around end-2007 tier one capital ) ,there are four Chinese commercial bank in top 25 world bank, meanwhile not surprisingly ICBC of China ranks the most profitable in the world with a profit of $21.2 B. Internal and external factors that affect bank performance, in terms of financial reform deepening, the economy rapidly developing, banking industry structure going to reasonable, and the management efficiency up-to-up, can explain the higher profitability of Chinese banks.The subject of bank performance has been and still is a subject of much debate among researchers in the financial institutions area. Many literatures in developed countries have proved the positive relationship between bank performance and economic growth of the country. Safety,profitability and liquidity are the banks'business aims, but profitability is a security for the safety aim and liquidity aim by provide for adequate capital through retained earnings as well as the quality and source of earnings. So the issue of profitability has grate meaning for the financial institution managers, analysts, researchers, and especially regulators, among others.In the literatures, too much focuses were put on the profitability of commercial bank of China however from the single perspective of financial theory, so the profitability was treat as ability of finance management, which determines to measure the profitability and examine the effect of bank organization structure, institution, and operation on the profitability based on the analysis framework of DuPont ysis. The distinct limit of the angle of view was not cognizant of the particularity of monetary which is the commodity of bank trading in and definition of profitability. One hand, banking industry trades in monetary as commodity, while the currency circulation, accommodation channel, and efficiency in money use concern the financial safety of a country, allocating efficiency of a society, and the development of a region. So the factors associated with monetary accommodation such as financial institutions, macroeconomic policy and environments will have a profound effect on profitability of banking industry. On the other hand, profitability, a synthetic ability of commercial bank forming in making profit, is defined as a set of ability combined with abilities in different operating process of making profit, including competition capability in the industry and micromanagement capability of a bank. To analysis the profitability of commercial bank, the angle of industry organization and micromanagement are essential. From the single perspective of traditional view, the studies has narrow limitation and imperfectness for dissevering the integrate chain of monetary circulation and accommodation, as while as in defect of competition conduct of banks in the industry which influences its position in banking.The aims of the paper: Taking a different point of view from those adopted in former researches, first, this dissertation built a sound mechanism in the process of forming profitability based on multiple perspectives, aiming at the limitation of single- view point. The report investigates the mechanism of action of different factor on bank profitability, of course the interaction among the factors, from the different perspectives including the view of financial institutions arrangement, macroeconomic environments, industry organization, and bank internal micromanagement. The dissertation analyzed the formation mechanism of profitability of commercial bank, and then studied the mechanism of action from the view of institution arrangement, macro economy, industry organization, and micromanagement. Second, to ensure the perfections of formation mechanism, the paper examined the explanatory power of formation mechanism to profitability applying the data of Chinese commercial bank. Finally, based on the mechanism the paper conduct overall assessment of commercial bank profitability to provide policy and business implications to regulatory authorities and banking managers.Commercial bank as a visual financial intermediary influenced by lots of internal and external factors, such as financial institutions, macroeconomic policy and environments, industrial organization, micromanagement of bank, which plays different role in the process of forming profitability.First, the financial institution of a country laying the foundation for commercial bank making profitability, determines the macroeconomic policy, industry structure, and the micromanagement from the scope, businesses, pricing mechanism which commercial bank operating. Second, from the view of macroeconomics, the supply demand relationship of currency and interest rate, which under the action of price mechanism further more determined the trade size and price level, will influenced by economic circle. And the trade size and price determined the profitability of whole banking industry by means of influencing cost and income of all banks. Credit risk is influenced by economic growth, as they affect the borrower's repayment ability. In many countries, the funds supporting the economic development mainly depends on the deposit of financial intermediaries, so the monetary in these institutions is the main object of macro-control by means of currency policy. Some foreign literatures show empirical evidence that inflation is generally associated with higher profitability as it implies additional earning from float, which tend to compensate for the higher labor cost. Higher real interest rates have also been found to foster profitability, especially in developing countries. Third, from the view of the theory of industrial organization, two factors affect the profitability: one is degree of competition in the industry; the other is the position of the bank in the industry. The degree of competition of banking industry mainly depends on the market concentration. The interaction between structure, conduct of bank and profitability, hold the bank in its position in the industry. Also, the profitability of a bank in turn affects its competition conduct which changes the industry structure and degree of competition. So a financial market with moderate competition will promotes the efficiency of banking industry, accordingly products more social welfare. Finally, We perspective the bank-specific factors, corporate governance, for example, inherited from market economy compose a part of internal institution of bank. Otherwise ability of risk management focus on the technique to operating risk, and operating efficiency measure the level of input-output.The paper assesses the explanation power of formation mechanism using the data of Chinese commercial bank over the period 1986-2008. The following conclusion from normative study combined empirical research can be reached: (1) the institution arrangement of transition economy of our country improve the profitability of commercial bank, (2) the macroeconomic policies and macro environment has significant influence to the market profitability of allover the banking industry as well as the 4 state-owned commercial banks ( SOCBs ) for their leading share of the market profitability, but less significant to joint-stock commercial banks ( JSCBs ), (3) moderate competition in banking industry will make for improving profitability. The result from empirical research did not support concentrate-collusion hypothesis and efficiency-structure hypothesis, while the relative market power hypothesis explained the relationship between bank performance and market structure well, (4) efficiency and risk management ability also influenced profitability of bank, especially efficiency factor was core factor forming profitability. Bank governance maybe affect profitability, but it is difficult to reach a definite conclusions according to our empirical result for the governance is hard to measure. The formation mechanism of commercial bank profitability based on perspectives explains clearly the profitability of commercial bank of China, as a result, the mechanism give us frameworks to analysis correctly the commercial bank of China.In the paper, we also put the formation mechanism of commercial bank profitability into applied practice. According to the roles of factors from multiple perspective analysis, we build a measure model for synthetically evaluation of commercial bank of China. The empirical result reflects the condition of profitability of Chinese commercial banks, while the three models built in the paper to measure profitability of the near 8 years average level, 2007 level, 2008 level,draw conclusions be in substantial agreement. It is give the proof that the synthetical measurement system has the nature of stability and practicality.The originality of the dissertation includes: first, the paper, by systemic normative study, built up a formation mechanism of profitability of commercial bank and analysis the interaction on profitability and influence factors. Second, this dissertation assesses the explanation power of formation mechanism using the data of Chinese commercial bank. Third, originally using the efficiency theory and method into the process of profitability analysis, promotes the precision of model. Finally, from multiple perspectives, the article built a measure model for synthetically evaluation of commercial bank of China in order to correctly, perfectly, and scientifically recognize and measure profitability.