Commercial Banks Activity-based Profitability Analysis

Since western countries releasing regulation on banking, the overseas commercial banks have been measuring their performance by using financial indexes or balance model including financial indexes and non-financial indexes. Contrast with corporation performance measurement, the foreign commercial banks developed their performance measuring more lately and involved some limitation for their overemphasizing financial indexes, but they have made great progress both on the management skills and operation performance, because they benefited from the advanced ideas of corporation performance measurement, especially Activity-based Costing(ABC) popularizing in the banking. Conversely, the local commercial banks confront with some troubles, such as severe regulation, poor management, competing with the foreign banks and so on. Therefore, the local commercial banks must improve management skills and upgrade performance by learning the overseas fellows.Looking back on the history of the aboard and domestic corporation and bank performance measurement, we recommend that Activity-based Profitability Analysis (ABPA) will be an advisable choice for its focusing on the banking. Basing on the ABC, ABPA involves two paths: the first one is Customer Profitability Analysis (CPA); the second Activity Profitability Analysis (APA). By showing CPA and APA, we can conclude that customer profitability and activity profitability instead of the integrated performance, moreover, performance measurement will be more direct and thorough only by evaluating customer revenue, customer costs, activity revenue, and activity cost. The merits of the commercial banks ABPA are as follows: basing on ABC takes the especial qualities in cost and time-span in revenue of commercial banks into consideration, customer profitability and activity profitability make the relationship between performance measurement and compensation policies become more apparently, independence in organization framework, and the choice of differentiation strategy connecting with low-power strategy.The frame and contends of this thesis:Introduction: To overcome improper fabric of commercial banks revenue and drastic competition with the foreign, it is necessary to adopt ABC and ABPA. Chapter 1 Performance measurement methods review. This chapter mainly reviews the historical development of Performance measurement methods both in corporation and in banking, and summarizes four points we must think about in Performance measurement system: the characteristic of industry, organization framework, compensation policies, and involving non-financing factors. And then, we recommend that commercial banks ABPA will be a good choice because it meets the above four points.Chapter 2 The framework of ABPA. Before analyzing the theoretical framework of commercial banks ABPA, we pay much attention on two of the most important characteristics of banking: the first one is indirect relation between activity and revenue, the second span of time. The former determine cost structure of commercial banks, the latter make us review revenue more comprehensively. The theoretical framework of ABPA consists of two paths and four elements. One path is CPA, The other APA. The four elements involve customer, revenue, activity and cost. We get customer profitability by calculating the balance between customer revenue and customer cost calling for ABC. Activity profitability is equal to the amount of activity revenue subtracting activity cost by methods of direct adscription, proportion and statistical analysis. Moreover, CPA benefits from APA and both of them can evaluate some basic activities effectively. At last, we discuss that ABPA is different from ABC.Chapter 3 How to put ABPA into practice in commercial banks. The realization of the first path must adopt ABC and CPA. We can carry out APA only by disassembling customer revenue and then decomposing finance products revenue. Basing on CPA and APA, ABPA advocates a separated organization in which customer sector, supporting sector and system sector operate independently. Accordingly, customer sector chooses the differentiation strategy, the latter two the low-cost strategy. Therefore, ABPA benefits from the differentiation strategy, and take advantages of the low-cost strategy at the same time. Also, the separated organization supports this reciprocally linked strategy. Chapter 4 Studying on case. The matrix of"CNR-Customer profitability"urges employees follow the"study-do-study again"cycle to improve their performance and upgrade customer profitability in Global Financial Services (GFS). Simultaneously, both customer profitability and activity profitability act on the compensation policies, especially for employees who take responsibility of basic activities. Both of above will emphasize the transparence which exists between performance measurement and compensation policies. Hence we introduce the non-financial factors into ABPA.Then, taking the problem-solving activity as an example, we explain that how activity profitability improves performance of GFS.Lastly, we suggest that GFS should make great efforts to meet hypothesis and enrich APA.Now, we accomplish the elementary research of commercial banks ABPA. Contribution of this thesis:1. Different from other Performance measurement, commercial banks APBA is based on the analysis of the characteristics of banking. There are two main characteristics of commercial banks, namely indirect costs accounted for most of the total cost and deferred revenue in commercial banks. Indirect costs exist because there is no direct relationship between activities and operating income in commercial banking. Considering deferred revenue is to conduct business analysis to a more comprehensive understanding of the structure of the commercial banks operating income.2. This paper incorporates content of the commercial banks APBA. It combines implementation of ABC in commercial bank, as a result, commercial banks APBA performance appraisal system is more concrete and more closely linked with the bank's business practices. 3. Analysis of activity profitability is more specific in this thesis. Marshall W. Meyer only puts forward in his monograph"Rethinking Performance Measurement: Beyond the Balanced Scorecard",that the activity profitability of this concept, and it should be able to evaluate the implementation of the grass-roots level. This paper analyzes the process of calculating the profitability of operations: customer revenue→product revenue→activity revenue→activity cost→activity profitability; proposed three ways to divide customer revenue into activity income, they are direct adscription, according to the ratio of activity cost in cost of products and statistical analysis. We use activity profitability to assess the support units and personnel system...