An Empirical Study On Profitability Factors Of Commercial Banks In China

Finance is the core of economy, and banks play a leading role in the financialsystem in China. For a long time the level of competitiveness of commercial banksare concerned by the whole society, and one of the major keys to enhance thecompetitiveness of commercial banks is to improve the profitability. Since the Reformand Opening, especially after joining the WTO, as the capital market opens further tothe foreign banks, the domestic commercial banks face more challenges and pressurefor their survival and development. Chinese commercial banks want to be in aninvincible position in the competive with foreign banks, the most important is toenhance the profitability, and grow their own strength. As a result, in this context, todiscuss the profitability of Chinese commercial banks can help us to find out thecurrent earning performance of the banking industry in China. In addition, it can alsobe helpful to guide the commercial banks in our country to respond to the externalchallenges betterly and to achieve internal management more effectively.This paper first introduces the background, purpose, significance of this study,and then we analyse the research outcomes of influencing factors of the profitabilityof domestic and foreign commercial banks. As far as theoretical side, this paperillustrates commercial banks in which one aspect is the conception while the otheraspect is business principle, introducing the related theories of profitability from twopoints of view that profitability defining and profitability model. According to thenormative analysis on the inside and outside factors affecting the profitability, thethesis puts forward seven assumptions:firstly, capital adequacy ratio and theprofitability of commercial banks in China is significant positive correlation; secondly,assets quality and profitability of commercial banks in China is positive correlation;thirdly, the ratio that noninterest expense divides total assets has significant negativecorrelation with profitability of commercial banks in China; fourthly, the scaleeconomic phenomenon exists in the commercial bank of our country, or meaningthere is significant positive correlation between bank size and profitability; fifthly, taxand profitability is a significant negative correlation; sixthly, macro economyenvironment influence the profitability of commercial banks markedly, and exchangerate fluctuation and profitability is significant negative correlation; seventhly,financial structure influences the profitability of commercial banks markedly. In empirical part, the thesis constructs an index system including a dependentvariable and13explanatory variables in terms of the real conditions in China,choosing the panel data of14of16listed commercial banks of the panel data(2003to2010). After descriptive statistics about China’s SOCB（state-owned commercialbanks） and share commercial banks, the thesis take linear regression of panel data onfour SOCBs,ten share-holding banks and14commercial banks. According to theempirical analysis results, we find the following conclusions: these indexes such asEQ/TA, efficiency, deposits, bank size, GDP growth rate, inflation, exchangefluctuation and particular position among all China’s banks are related to profitabilitypositively; both tax and interest rate and bank profitability are negative correlation;Bank monopoly impairs the profitability of SOCB, however, is to the benefit ofshare-holding banks to improve their returns.On the basis of the previous empirical analysis, considering the developingsituation, the forth part of this thesis gives the measures and suggestions to improvethe profitability of China’s commercial banks, including: improve the quality of loans;enhance the capability of financial innovation; establish a effective risk controlsystem; introduce strategic investors and attracting foreign equity participation; lowerbank concentration and promote effective competition in banking; create a favorableexternal economic environment, etc.