EVA-based Commercial Bank Operating Performance Evaluation And Driving Factors

Since December11,2001, China formally approved to join WTO, in order to comply with the commitment, our government and regulators increasingly open capital markets, actively promote the process of China’s banking industry’s fully opened, and continuously relaxing the access threshold of foreign banks, a large number of foreign banks into China greatly impact the day-to-day operations of China’s commercial banks, especially in the competition for resources on high-end customers, foreign banks have an absolutely competitive advantages with its advanced level of IT, the globalization of capital operation platform and powerful product innovation capabilities, the pattern of competition between the banking industry become more and more white-hot; In addition, with the internal governance structure of commercial banks in China is getting more sophisticated and the business philosophy of modern commercial banks is gradually established, the bank’s operators and managers have changed their focus from the blind pursuit of market share and operating profit to maximizing the value of banks,increasing shareholders’wealth and promote the sustainable development of the bank. Under the multiple driven by the internal and external business environment and the modern commercial bank conception, operating profit as the core banking performance evaluation system is no longer applicable to the performance evaluation of the current bank, so the establishment of a comprehensive and rational new business performance evaluation system has been imperative.The Economic Value Added business performance evaluation method can fully meet the needs of modern commercial banking business objectives to maximize shareholders’value as the core concept. Firstly, the calculation of EVA requires to excluding the equity cost of capital, cost of debt capital, and risk factors from the corporate after-tax operating profit, and only when the EVA value is greater than0(that is when there is a surplus after the after-tax net operating profits to meet the minimum expected return of the shareholders’ invested capital) can indicates the commercial banks achieved a positive operating performance, so the EVA evaluation can protect the interests of all shareholders to the greatest extents and reflects the business objectives of banks’ shareholder value maximization; Secondly, in order to eliminate differences in accounting standards and financial distortions, there will be some certain adjustments of accounts in the calculation of bank’s EVA, so it can reflect the level of commercial banks operating performance more realistically; In addition, the EVA performance evaluation of management system includes not only the evaluation system, but also has established a comprehensive management framework include management systems, incentive systems and corporate culture mindset, so it will be more conducive to business owners and operators to pursue the unity of the enterprise value maximization goal and to promote comprehensive and sustainable development of the commercial banks. Thus, in China’s banking industry, the introduction of EVA evaluation system has far-reaching significance to accelerate the upgrading of China’s banking market competitiveness, and ensure the banks comprehensive and sustainable development.This paper is divided into five parts:The first part mainly introduces the research background and significance of the paper, the literature review and thesis research methods, the framework structure, the main innovation and the inadequate in this paper. The second part focuses on the overview of EVA performance evaluation theory. First it briefly reviews the theoretical basis of the EVA conception--the economic profit theory, MM theory, and the residual income model theory, then through the induction of the basic conception and general calculation method of EVA leads to the connotations of the EVA evaluation, next, it introduces a complete EVA performance management system--the "Four M’s" system. On the basis of a combination of the general EVA model formula, the third part focuses on the amendment and estimated of the EVA performance evaluation model applicable to commercial banks in China, First through a brief review of the development and present state of the performance evaluation of the commercial banks in China leads to the necessity and feasibility analysis of promoting the EVA performance evaluation method among commercial banks in China, then obtained a new model formula for the calculation of the commercial banks’EVA by adjusting the after-tax operating profit, total investment capital and the weighted average cost of capital in the general model of the EVA formula, next, obtained the banks’EVA value and REVA value by collecting and collating the relevant data in the selected11samples banks, at last through comparing with the traditional performance evaluation indexes, such as operating profit and the return on equity rate, it demonstrated the effectiveness and advantages of the EVA evaluation method on the one hand, on the other hand it also carry out a comprehensive evaluation about the bank’s true operating performance and value create capacity. The fourth part is take a empirical regression analysis on the bank EVA value drivers by the Stata11.0statistical analysis software and the regression obtained five core factors which can significantly affect the bank’s EVA value---total assets, non-performing assets provision coverage ratio, capital adequacy ratio,net interest income ratio and investment in fixed assets ratio. On the basis of the empirical results in the fourth part, the fifth part generalized some effective ways on how to improve the operating performance of China’s commercial banks, and prospected the further research direction and content in the future study.This paper preliminary draw the following three conclusions:Firstly, compared to traditional performance evaluation index, EVA evaluation can be more realistic to restore the bank’s actual operating performance, and is more conducive to help bankers to establish the modern commercial banking Business philosophy, so the new EVA business performance evaluation system should be depth promotion in China’s bank. Secondly, removing the scale factors, small and medium-sized joint-stock banks tend to have higher operating efficiency and value-create ability than large state-owned banks, this is also a concrete manifestation of the increasing competitiveness of small and medium-sized joint-stock banks in these years; Thirdly, targeted on the improvement of various driving factors which significantly affect the EVA value changes, can effectively improve the level of commercial bank’s EVA, because of the EVA value is the core quantitative indicators of bank performance, the improvement of EVA value is bound to improve the bank’s operating performance and enhance the bank’s ability to create value.In this paper the possibility of innovation is mainly concentrated in select commercial banks as the analysis sample and use the combination of normative analysis and empirical analysis research methods, collect the newest sample data and add the bank’s internal governance structure factors as a new explanatory variables in the empirical analysis which broaden the angle of empirical analysis of the bank’s EVA driving factors.At the same time, there also have many inadequacies in the analysis process:Such as differences may exist in the EVA measurement caliber with foreign banks, as the China’s capital market is not perfect the number of listed banks in the sample is inadequate、the data is not comprehensive and China’s banks overall risk identification capacity is limited resulting the bank equity capital cost estimates and the actual level of risk of the banking market cannot effectively match, the limited data collection and research capacity makes some qualitative factors which may impact the bank performance are not included in the empirical analysis model, all of these inadequacies above may have a certain impact on the accurate measurement of the EVA value、the goodness of fit in the driving factors empirical analysis model and the result accuracy. And all of these left a further reflection and analysis space on the China’s commercial banks operating performance study, and it also gives me some space to make future efforts.