The Research Of Credit Risks Affecting The Profitability Of China’s Commercial Banks

In recent years, affected by the international financial crisis, China’s commercial banks’ environment are becoming more harsh, the operating has also been affected by the Internet banking, Shadow banking, and it is a very big impact to their profitability. At the same time, the level of credit risk of commercial banks in recent years, also appeared in some of the upward trend, which also makes the business risk of commercial banks has increased to some extent. And the healthy development of commercial banks need steady stream of earnings to support, while commercial banks’ profitability will be affected by the process of credit risk. With the continuous progress of China’s reform process, the independent pricing of commercial banks is increasing. And they will also face greater credit risk. So how will credit risks affect the net interest margin of commercial banks? For different types of commercial banks, is the extent of the impact the same? This is the core issue of this paper to study.The paper study the issues in-depth from the theoretical and empirical aspects of the above. Theoretically, this paper first introduces the research on credit risks and the profitability of commercial banks, followed by a brief introduction to the concept of commercial bank profitability and credit risks. By introducing Gerald Hanweck and Lisa Rya (2005) model to explain the behavior of bank credit risk to the profitability of commercial bank impact mechanism. According to bank behavior model, the credit risks affect the commercial banks by influencing pricing decisions and a change of the assets and liabilities in the structure and number, cause a change in net interest income, and ultimately affect the profitability of commercial banks.Empirically, this paper selects commercial banks net interest margin in line with China’s banks’ development as a commercial bank profitability explanatory variables, the explanatory variables into credit risk variables and control variables. Where the credit risk by non-performing loan ratio and loan loss reserve indicators to measure, the control variable is the CPI index, the inflation indicators.Firstly, using OLS makes a linear regression analysis, the data from China’s commercial banks throughout the industry from 2007 to 2015, the results shows that in the credit risks, non-performing loan ratio, loan loss provisions are significantly positive related to the net interest margin, and China’s commercial banks net interest margin reflects the credit risk premium, which shows the profitability of commercial banks significantly affected by credit risk. Among the control variables, the net interest margin and the inflation rate positively correlated, suggesting that the macroeconomic environment for the development of China’s commercial banks also have a profound impact.Then, this paper use State-Owned Commercial Banks, Joint-Equity Commercial Banks and Urban Commercial Banks, and use their data since 2007 making a regression analysis, to find whether the impacts of credit risks on various types of commercial banks’net interest margin are different. The results show that these three commercial banks net interest margin has different sensitivity on credit risks, and reflecting the extent of the risk premium is also different. State-Owned Commercial Banks’ net interest margin for the non-performing loan ratio is t sensitive, to the loan loss reserve is more sensitive, to changes in the CPI is also more sensitive; Joint-Equity Commercial Banks’ net interest margin to loan loss reserve and the CPI index is very sensitive; while for Urban Commercial Banks, the net interest margin for the non-performing loan rate and CPI index is very sensitive, but is not sensitive to the loan loss reserve. Comprehensive view, State-Owned Commercial Banks and Joint-Equity Commercial Banks profitability are more sensitive to credit risk, and Urban Commercial Banks is limited by a very significant impact of credit risk.Finally, based on the empirical results obtained, as well as for the entire commercial banks and different types of commercial banks, their profitability has a different relationship with credit risks. Meanwhile, according to these conclusions we put forward some suggestions.