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Conclusion

Discuss about the Determinants of profitability of Chinese commercial banks panel evidence from 2009 to 2016.

In this chapter, conclusion has been drawn to the current research on determinants of profitability of Chinese commercial banks using the panel evidence from 2009-2016.  In the perspective of the bank reforms in China, this research study analyses about whether the present reforms such as participation of foreign banks, bank listing and creation of financial institution adds to profitability of these banks. The profitability of the Chinese commercial banks has been measured by using two research methods that includes- Principal component analysis and Data development analysis (Azam & Siddiqui, 2012).  Furthermore, the recommendations given in this chapter highlights on the strategy that the Chinese commercial banks would adopt for improving their profitability.  The future research reflected in this study includes more internal factors and external factors of banks influencing the profitability of Chinese commercial banks.

Conclusion

After the global financial crisis, the banking industry in China has been changing at high pace. Although the banks have been commanded to increase their lending to the SME’s as well as the private banks, these banks found it difficult in adjusting and choosing another method to continue their lending to more state owned organizations, local governments and developers of real estate.  From the above research analysis and panel data evidence, it can be concluded that the profitability of state-owned commercial banks had increased at higher rate as compared to that of joint- stock commercial banks in this nation. Overall, the efficiency of both these commercial banks improved and the problem of nonperforming loan (NPL) was also solved during this period (2009-2016). The state-owned commercial banks in China not only increased their profitability level and achieved high scale efficiency but also increased their resources for enhancing market competitiveness. In the post-reform period and after GFC, the difference in profitability level as well as efficiency reduced between the state-owned banks and the joint stock banks in China as it was in the pre-reform period  (Zheng & Zhu, 2013). Even the disposal of NPL in these banks improved their efficiency level in these banks. In addition, the reform in joint equity of the Sate owned banks specifically increased their efficiency rate.


The three main principal component analysis that includes ROAA (Return on assets), ROAE (return on equity) and NIM (net interest margin) done in this research concludes that the level of profit margin in both state-owned and joint stock commercial banks in China increased and hence the risk of volatility in these banks also declined. The results of the mean T test done in this research shows that the mean profitability of the state –owned commercial banks in China was 0.207 while that of joint stock banks was 0.196. This signifies that the profitability of state –owned banks was slightly greater as compared to joint stock banks. However, the financial performance of the joint stock banks was not good as compared to the state –owned banks.   

In respect of the macroeconomic factors

The correlation analysis in respect of the internal factors of the banks shows that the size of the banks and their profitability were positive but with the equity to asset ratio (ETA), capital adequacy ratio (TIR) and cost to income ratio (CTIR) were negative. This indicates that after the GFC  all the internal factors excluding bank size had adverse impact on the banks profitability. It has been founded from the above research study that these commercial banks in China with higher insolvency risk level have higher level of profitability.  As a result, the financial performance of these commercial banks improved after the GFC (Tan & Floros, 2012).

It has also been concluded from the research study that, the intervention of the government of China also influenced the profitability level of their commercial banks. Both the government and the central bank of China adopted several policies in order to protect their assets and investment by ensuring that they remain profitability (Sufian, F., & Habibullah, 2012). Since the commercial banks in China have less fee income, they mainly depends on huge earnings between the deposits and the lending rate. Moreover, as the economy of China entered into the recovery phase, the commercial banks faced huge competition in the market.  The commercial banks in this nation then strategized to improve their management as well as innovation capability in order to compete in this business environment. It has been found out from the research study that less concentrated system of banking enhances the profitability level of bank, which basically highlights that the state owned commercial banks have been the actual drag owing to their bank size and their performance. In addition, acceleration in the financial innovation and the diversification strategy reduced risk as well as cost and improved efficiency in these banks (Kanas, Vasiliou & Eriotis, 2012). Based on the significance of coefficients and diagnostics, the results indicates that the dependent variable are the economic value added while the NIM as against the ROAE or ROAA. The findings from the study also highlights that the  determinant variables did not have uniform impact on all types of banks.. Analogous to the state owned banks counterpart, it has found out that the joint stock commercial banks with increase in credit risk apt to be highly profitable, whereas  increase in cost results in lower profitability level of joint stock commercial banks (Gunji & Yuan, 2012).  As the biggest challenge that faces China is to expand  their banking services to all the private businesses, both the state –owned as well as joint commercial banks implemented new technology for improving their services in banking. This in turn facilitated these commercial banks in gaining huge profitability during the period 2009-2016.

Recommendations


The external factors including the macro environment and the structure of industry or the level of market concentration also reflects that the banking industry in China have increased their level of profitability (Paradi & Zhu, 2013). It had been seen from the research study that the macroeconomic factors including, real GDP growth rate, money supply and the unemployment rate have direct or indirect relationship with the profitability of banks.

The results of regression coefficient T-test showed that the coefficient of real GDP growth rate was positive, which signifies that this indicator helped the commercial banks in improving their profitability.  As the real GDP growth rate of China began to increase after the GFC, the commercial banks started to lend huge amount of money to the business and this allowed them to charge higher margins and improve their quality of assets (Fungá?ová Pessarossi & Weill 2013).

In fact, the regression coefficient of unemployment rate in China was positive, which indicates that the bank profitability has improved after GFC. Besides this, stable rate of unemployment also stabilized the NPL rate and hence did not adversely influenced the Chinese commercial banks.

The regression coefficient of bank money supply in China was negative, which signifies that increase in supply of money was not favorable to the profitability of the joint stock commercial banks. . (Fungá?ová,  Pessarossi & Weill, 2017). Furthermore, it was also found that rise in GDP and decrese in money supply enhanced the profitability of these commercial banks.  

The recommendation is provided to the Chinese government, mangers of banks and the regulatory authority for implementation of new policy for improving bank profitability. These suggestions are explained as under:

  • The banks should recruit skilled employees and also provide proper training to the existing employees in order to increase efficiency of the employees. This in turn will help the state-owned banks to manage the operation effectively in regards to bank size.
  • Both the state-owned and joint stock banks should provide the loan to the customer by over viewing their actual purpose for which they are taking loan. This will help the banks in decreasing the NPL rate.
  • The joint stock commercial banks should engage in diversified activities
  • The Chinese government should support the commercial banks from risk and hence should have higher equity to asset ratio.
  • The Chinese government should also implement proper monetary policy in order to reduce inflation rate in the economy. This is because higher inflation rate adversely affects GDP of economy, which in turn reduces loan demand and decline bank’s profitability.

As the research study was based on panel data evidence from 2009 to 2016, it has certain limitations that includes-

  • Several problems occurred regarding research design and collection of data
  • As the study was based on divergence between temporal features between the state owned and joint banks, this study was no acquiescent to time effect.
  • Huge difficulty occurred while collecting information about these Chinese commercial banks as it gathered from secondary sources.
  • Collection of information was time consuming

Future Work must be done in accordance to this particular research study that aligns with determinants of profitability of Chinese commercial banks after the GFC (2009-2016). The precise work can be started by utilizing the sample before the GFC in order to discover more accurate results about the difference in profitability level between state-owned and joint stock banks of China. Furthermore, the restraint of time for doing this research should not be limited, so that the researcher can gather more knowledge about the research study and produce correct outcome.

References

Azam, M., & Siddiqui, S. (2012). Domestic and Foreign Banks' Profitability: Differences and Their Determinants. International Journal of Economics and Financial Issues, 2(1), 33.

Borio, C., Gambacorta, L., & Hofmann, B. (2017). The influence of monetary policy on bank profitability. International Finance, 20(1), 48-63.

Fungá?ová, Z., Pessarossi, P., & Weill, L. (2013). Is bank competition detrimental to efficiency? Evidence from China. China Economic Review, 27, 121-134.

Golin, J., & Delhaise, P. (2013). The bank credit analysis handbook: a guide for analysts, bankers and investors. John Wiley & Sons.

Gunji, H., & Yuan, Y. (2012). Bank profitability and the bank lending channel: Evidence from China. Journal of Asian Economics, 21(2), 129-141.

Haslem, J. A., & Longbrake, W. (2015). A discriminant analysis of commercial bank profitability.

Kanas, A., Vasiliou, D., & Eriotis, N. (2012). Revisiting bank profitability: A semi-parametric approach. Journal of International Financial Markets, Institutions and Money, 22(4), 990-1005.

Paradi, J. C., & Zhu, H. (2013). A survey on bank branch efficiency and performance research with data envelopment analysis. Omega, 41(1), 61-79.

Qian, J. Q., Strahan, P. E., & Yang, Z. (2015). The impact of incentives and communication costs on information production and use: Evidence from bank lending. The Journal of Finance, 70(4), 1457-1493.

Sufian, F., & Habibullah, M. S. (2012). Globalizations and bank performance in China. Research in International Business and Finance, 26(2), 221-239.

Tan, Y., & Floros, C. (2012). Stock market volatility and bank performance in China. Studies in Economics and Finance, 29(3), 211-228.

Zheng, Y., & Zhu, Y. (2013). Bank lending incentives and firm investment decisions in China. Journal of Multinational Financial Management, 23(3), 146-165.

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