Noninterest Income And Commercial Bank Profitability

Since the1980s, most commercial banking industry of developed countries experienced a rapid growth in noninterest income process. In recent years, the Chinese commercial banking industry also saw increase in noninterest income. Facing intense competition from foreign banks and non-bank financial institutions, facing the challenges of interest rates marketwise and rigid require on capital adequacy ratio, the development of noninterest income has become Chinese commercial banks’inevitable choice to achieve sustainable development. In fact, since2005, noninterest income, along with ratio to net operating income, has been increased rapidly in Chinese commercial banks. By the third quarter of2013, the noninterest income ratio (NIIR) has exceeded20%. But many researchers believe that NIIR of Chinese commercial banks need to be further improved compared with40%-50%of their international peers.Whether the growth of NIIR has a positive impact on the profitability of commercial banks, whether banks should further enhance noninterest income, what noninterest income strategies should be taken by different types of commercial banks, and what the proper NNIR is, answers of above questions really make sense for the future development of Chinese commercial banks. Referring to existing studies, this paper empirically examines the profitability model using2005to2012data of16listed banks. The empirical results show that:20%NIIR in China is reasonable referring to the NIIR of the U.S in1980s; during the sample period, without considering the volatility risk, increase of NIIR enhances banks profitability on the whole; higher NIIR raised net profit volatility of state-owned commercial banks while it is not true to other listed banks; when considering the volatility of earnings, increase NIIR has no significant effect on risk-adjusted return of both state and non-state-owned listed banks.This paper proposes such suggestions:the noninterest income of Chinese commercial banks should continue to be improved on the whole; the state-owned commercial banks may increase NIIR,3O%-35%is recommended next decade. They also need to pay attention to the increased risks when NIIR grows; The national joint-stock commercial banks should emphasize the improving of noninterest income and optimize its internal structure,20%-30%NIIR is recommended next decade; Other small commercial banks should focus on interest income,10%-15%NIIR is recommended next decade. Finally, the paper also presents some principles of supervisions on noninterest income.