Determinants Of Bank Profitability

Banking industry is the core and pillar of China’s financial system and its stabilityand development is the key for the healthy development of its entire economy. In recently2years, Market competition and the composition of China’s banking sector has undergonetremendous changes, especially after the global financial crisis, the Chinese commercialbanks have been pressured in the same way of global financial crisis, but they remainprofitable. It may benefit from a serial of proactive reforms and development. Chinesebanks have seen a great improvement on corporate governance, profitability andcompetitiveness. But because of some historical problems, Chinese commercial bankswere relatively weak in asset quality and innovation of bank’s financial products, etc.,compared to their foreign counterparts. Although Chinese commercial banks had been aseries of changes and improvement, there’ll still be improvement to come, such asoperational efficiency, new businesses of bank, etc. So the research of enhance theprofitability for commercial banks have important implications on future bankdevelopment and stand out from the intense competition.Under this background, we try to do the research about the profitability of China’scommercial banks. First of all, based on theoretical studies of the profitability ofcommercial banks, the factors to affect the profitability of bank are divided into two typesin this paper: internal environment and external environment. We use the panel dataduring1997to2010and GMM method to analyze144Chinese commercial banksempirically. Based on the above we examine the implications of bank activity for bankreturn. First step is that paper uses fixed effects to analyze empirically what explainsbanks’ noninterest income. Secondly we use paneled data GMM method to analyzeempirically how noninterest income affect the profitability of sample banks, withnon-deposit funding as a control variable. According to the empirical analysis results, wefind that profitability of these banks is not only related to the bank characteristics, but alsothe structure of financial market power and macroeconomic environment.More details are as follows:①The percentage of non-performing loan, the amount of bad debt, the bankruptcyprobability and other risk indicators are related to the ratio of profit significantly andnegatively.②The share of bank deposits and operational efficiency are related to profit significantly and positively.③In addition, China’s financial market monopoly situation has still impact oncommercial banks’ profitability.④The factors of external macro-environment, such as GDP growth, inflation andthe benchmark rate of deposits and loan, etc., also impact the profit of commercial banks.⑤The noninterest income increases the rate of return on assets, and also could offersome risk diversification. Chinese banking should further explore the non-interest incomeand non-deposit funding business, improve operational level and build profits ofmulti-channel mode.