The Influence Of Chinese Listed Banks’ Business Diversification On Bank Profitability

In recent years, interest rates reform and direct financing trend in the financial sector are in steady progress. Besides, foreign banks and private capital have entered and growed after joining in the WTO and the economic restructuring reform. Internet of finance is also booming. Faced with these changes, the original development mode and profit mode of Chinese commercial banks are affected. To be more competitive and to grasp more opportunities in the banking sector, commercial banks are urged to develop diversified business. Business diversification of commercial bank means that, other than relying on traditional deposit and loan business, commercial banks make full use of their advantages and resources. On one hand, banks expand type and range of business through internal innovation, on the other hand, they develop through external cooperation, mergers and acquisitions of other finance-related fields such as securities, insurance, fund and so on. Therefore, commercial banks enlarge the sources of income and increase profit. Based on the background, this paper analyzes the impact of bank business diversification on profitability.Foreign studies on this topic have two conflicting views and haven’t reached the same conclusion. Also, as domestic research began late, the outcome is sparse and vague. While most foreign banks develop business diversification in mature stages, domestic banks are in the opposite way. Considering actual situation, this paper attempts to use the latest data of domestic listed banks to study the impact on bank profitability. Firstly, the article defines concept of business diversification, and then analyzes its business mode, development path, positive and negative effects, impact on bank income structure and existing problems, providing theoretical and practical basis for the empirical analysis.Based on theoretical analysis, using a sample of 16 listed commercial banks in China for the period 2004-2012, including 5 large state-owned and 11 small-and-medium-sized commercial banks, the paper constructs two panel data models. We find that laws and policies have an important influence on banking business diversification, whose level is relatively low compared to foreign banks. Besides, there is a positive association between business diversification and bank performance on total listed bank sample and small non state-owned sample, improving profitability. However, inverse association exists on state-owned sample, and its state-owned nature negatively affected the profitability.Based on the findings, this paper proposes policy recommendations from the perspective of commercial banks and regulators respectively: Commercial banks should firstly promote business diversification, expand business scale and increase its revenue in proportion; Secondly, commercial banks should explore diverse business according to their own advantages and features; Thirdly, commercial banks should establish business diversification performance management and assessment system. Besides, regulators should make systematic policies and laws to provide guide for bank business diversification process.