Research In The Performance Evaluation Of Foreign Banks In China And Its Influencing Factors

This article first reviews the existing bank performance evaluation literature and literature of influential factors on foreign bank performance. From a variety of methods of performance evaluation, this article adopts the factor analysis method on foreign banks in China and presents their ranking. This paper integrates particular characteristics of foreign banks in China and develops an econometric model. The independent variables are selected based on the multinational banking literature and some reasonable hypotheses are given. The model then is tested on China's 25 foreign banks and thus gets the factors determining their performance.To explore how these factors influence foreign banks'performance:in which the way, on which aspect of performance?, the performance measurement is re-split into four common factors, which is already given by the factor analysis. The econometric model is tested respectively on these four common factors and follows an in-depth analysis on the result.Finally, this article finds that foreign bank's performance in China is positively related to its city coverage, access time, net interest margin of parent bank, FDI from home country, size of parent bank; and negatively related to the operating income to total assets ratio of its parent, the home country GDP, and China's foreign direct investment in its home country.Some important results and corollaries can be deduced from the empirical result.1) Foreign bank's length of operation time in China has stock effects, and the performance gap between banks caused by this factor can not easily be changed in a short time.2) The common strategy of foreign banks in China is to give priority to increase city coverage degree. This leads to a positive relationship between the size of foreign bank and the number of its covering cities. However, it makes no help to the profit.3) The empirical result reveals some geographic characteristics of China's foreign banks:First, Asian banks, especially banks from Hong Kong, enjoy many preferential policies from the government and have low entry barriers; and also have advantages of similar culture background and frequent bilateral trade thus getting more potential business opportunities. The high opportunities of money making and low cost of entry attracts all levels of Asian banks rushing into China, ending in a intermingled state of Asian banks'performance in China. Second, due to the biased favorable policy making, only a few European banks entering China and mostly are large international universal bank. Their business in China focuses on investment rather than deposits and loans, therefore they tend to remain small size but have high returns and economic efficiency. But if they want to compete as commercial banks in long term, their current small-scale may be the bottleneck.4) Parent's profitability in home country can influence its performance in China by two directions. It can work as an international operating experience which helps the foreign bank's performance in China. Meanwhile it is also the opportunity cost which hampers its development. However, empirical evidence shows that the positive force overrides the negative.5) FDI from home country of foreign banks and their bilateral trade provide more business opportunities to foreign banks, which are mostly loans, boosting the banks' performance. On the other hand, the increasing China's overseas investment to their country brings in more deposit-taking business, reduce their performance.Finally some recommendations and suggestions regarding governments'policy making and foreign banks'strategy in China are presented in this article.Proposal to foreign banks:1) Vertical expansion in well developed eastern cities might be more profitable than horizontal expansion.2) Foreign banks with investment ability should develop its trade sector, and balance to expand commercial banking as well as investment banking in order to form a diversified, and thus more stable, source of profits.Proposal to Government:3) Encourage firms to do overseas investment, which increase the potential business opportunities (mainly loans) to the Chinese banks abroad, boost their profits and enhance the Chinese bank's international competitiveness.4) As to the foreign investment promotion policy, it should not give Asian banks or Hong Kong banks too many preference, instead, it should focus on the quality of the banks applying for entry, and try to attract European and American banks with extensive experience of in mature financial markets.