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Study on the Profit Model of Commercial Banks

Author: LuoZuo
Tutor: XuJia; JiangYueXiang
School: Zhejiang University
Course: Finance
Keywords: Commercial bank Profitability Pricing Power Interest rate liberalization
CLC: F832.33
Type: Master's thesis
Year: 2014
Downloads: 45
Quote: 0
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Abstract


Commercial banks play a leading role in China’s banking industry. However, Chinese commercial banks’ earnings growth dropped down and the net interest margin contract in2013due to the macro-economic slowing down, the interest rate liberalization continuing, the financial dis-intermediation highlighting and the capital regulation being strict. This paper tries to find factors affecting banks’ profitability and pricing power by constructing regression models.In the first place, this paper reviewed literatures in the areas and determined the research direction. Secondly, this paper described China’s commercial banks’ present stage of profitability and challenges. Combined with the research purpose, this paper made selections of explained variables (returns on assets and net interest margin) reflecting the power of profitability and pricing and explanatory variables representing bank characteristics, market structure factors and macroeconomic factors. The hard core of this paper is the empirical analysis of affecting factors of China’s commercial banks’ ability of profitability and pricing. Utilized cross-sectional data of100banks in2012, unbalanced panel data of50banks from2004-2012, and balanced panel data of16listed banks from the third quarter of2010to the third quarter of2013. Besides, the dummy variable was added in the balanced panel model to measure the effects of the relaxation of loan interest rates.Banks’ risk management ability, liquidity and non-interest income have a positive impact on profitability, while the ability of assets and liabilities management and cost management has a significant negative effect on profitability. The banks’ capital strength, financial leverage and non-interest income are important factors affecting the pricing power. When it comes to market structure factors, a high degree of market concentration will reduce banks’ profitability and pricing power. The current benign circumstances have a positive impact both on profitability and pricing power. The dummy variable shows that the relaxation of loan interest rates has a negative impact on banks’ ROA and NIM. Based on these conclusions, this paper propose that China’s bank should move toward diversification, enhance the ability of risk management, manage balance-sheet scientifically, change management concept and improve efficiency.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Financial organizations, banks > Commercial banks ( specialized banks )
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