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The Study on the Relationship of Commercial Bank’s Capital Structure and Business Performance

Author: ZhaoLei
Tutor: ZhangHeJin
School: Southwestern University of Finance and Economics
Course: Finance
Keywords: Commercial Banks Capital Structure Business Performance Empirical Study
CLC: F832.2;F224
Type: Master's thesis
Year: 2010
Downloads: 684
Quote: 1
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Abstract

Based on China’s commitment at 2001 when it accessed to WTO, the financial market of China has been fully opened up at December 11,2006, and all the banks of China have been in the global competition with faster development and progress. With the continuous influx of foreign banks, China’s commercial banks will compete with global banks and face a more severe test. In order to maintain a strong competitive edge, China’s commercial banks should learn from the successful experience of foreign banks, and strive to improve their business performance. Since the first outbreak of the financial crisis in the United States in 2008, the economy has been severely affected and economic growth slowdown all over the world. This environment is no doubt a new big challenge for the development of commercial banks in China.The core of modern economy is finance, which permeates in national economy at all fields, all levels, and all economic entities. There is phenomenon that general adoption of the market principle, the development of finance is even more important. Countries are generally recognized that only keep high-quality financial development, can maintain sustained and steady economic growth. Therefore, as a financial mainstay, the position of the banking industry in a country’s economy can not be repudiated. The core of modern economy is finance, which permeates in national economy at all fields, all levels, and all economic entities.From this we can see that, whether from the perspective of the external economic environment or the point that finance is the core of the economics, China’s commercial banks are facing greater challenges. China’s commercial banks must maintain a more stable and rapid development, to bring about progress from the overseas competition with major banks. Therefore, building a scientific, rational, and efficient capital structure of commercial banks to maintain a better operating performance has become one of the major issues in China’s commercial banking reform and development. This paper main study the ways that commercial bank capital structure affect the performance of their operations to explore how to improve the capital structure of China’s commercial banks to improving the operating performance of these banks. Based on the research purposes, the paper is divided into four chapters.In the first chapter, it introduced the research background, significance of this article and the predecessors’research of this subject. According to the analysis of this paper, whether from the external environment or the important position of the banking, studying the performance of commercial banks has a very important practical significance. Foreign scholars began to study the capital structure in the 20th century; the study of commercial bank capital structure began from 70 years, 20th. After the 80 years 20th century, scholars have begun to focus on the impact of commercial bank’s capital to performance. Most of the domestic research paradigm was with reference to the study abroad. On the basis of the abroad, these studies combine with the reality of our country to make our own theoretical and empirical analysis.In the second chapter, this article made an analysis of the relationship between the capital structure and business performance in the theoretical aspects. The capital structure this paper studied refers to that the structure and proportional relationship of the capital within the enterprise. There were three characteristics of China’s commercial bank capital structure:First, the limited sale stock with a larger scale in China’s commercial banks constitutes and equity concentration is higher; Second, compared to "The New Basel Capital Accord" requirement, subsidiary capital accounted for a low side. Third, the LEV is high. This paper described the measure of business performance from five aspects. There are profitability, liquidity, security, growth and asset quality status. In the impact of capital structure acted on performance, this article had analyzed from the ownership structure, debt structure and the proportional relationship between the two.In the third chapter, this article selected the semi-annual data in 2002-2009 of the seven commercial banks to analyze the impact that the capital structure act on business performance. There were the conclusions:There is a significant negative correlation between the largest ratio of the shareholding and the commercial banks operating performance. There is significant positive correlation between the sum of ratio of the top ten shareholders and the commercial banks operating performance. The limited sale of shares has significant negative impact to the commercial banks operating performance. The ratio of subsidiary capital and the core capital has significant positive impact to the commercial banks operating performance. There is no significant correlation between the LEV and the commercial banks operating performance.In the fourth chapter, based on theoretical and empirical results, this paper showed the policy recommendations of this article:to improve the equity structure of commercial banks; to gradually increase the stake liquidity in China’s commercial banks; to optimizing the structure of China’s commercial banks claims; to optimizing the internal and external environment of China’s banking industry. There was a summary of the innovative and shortcomings of this paper in the end of the fourth chapter, and how to do such issues in future studies had been put forward in this segment.There is not the first time of the study of the relationship between the capital structure and the business performance. Predecessors’study on this issue had provided a normative research paradigm for this paper, but there is not a simple repetition of the previous studies in this paper. First, this paper absorbed the conclusions of historical research, analyzed and explained various factors which affect the performance of the commercial banking operations combined with the actual situation of China’s current banking. It can greatly reduce the limitations of analytical results. Second, the paper wealth of research sample. Although there are not many joint-stock commercial banks in China, listing of which are even fewer, this article selected public joint-stock commercial banks and semi-annual data as much as possible. Through analysis of a large sample, we can closer to the objective reality of the results, especially can effectively guarantee the quality of analytical results in the process of mathematical empirical analysis. Third, this study focused on the analysis of the reasons conducted with the support of mathematical and empirical analysis results. This provides a reliable basis to discuss the reason for issues and to put forward the policy recommendations. The purpose of this empirical analysis is to investigate the causes of the problem and to give further policy recommendations on a reliable basis. So, the conclusion of this paper can possess more economic value.Second, this paper conducted a rigorous analysis on the definition of various terms. The understanding of capital structure was not identical based on modern financial theory and modern firm theory. This paper studied the capital structure based on the understanding of modern financial theory. There was also a detailed analysis of the measure of commercial banks operating performance measure in this paper. The state-owned banks play the role of ordinary commercial. In addition, they also play the role that helps the government to implement its macroeconomic regulation and control. So, to measure the state-owned commercial banks only with the indicators which was measured business performance was unfair. So, there was no state-owned bank in analysis the impact to operating performance of capital structure. There were different focuses from a different point of view of commercial banks operating performance. This paper analyzed mainly from commercial banks’own point of view on their operating process.Third, in the selection of variables, this paper selected variables and explanatory variables from the broader point as much as possible. To interpreted operating performance which were variables, this article selected seven indicators such as earnings per share, net rate of asset return, liquidity ratio, the ratio of non-performing loans, capital adequacy ratio, deposit growth rate, loan growth rate and so on from the profitability, distribution capabilities, security, growth and asset quality status. This can fully reflect the operating performance of commercial banks as much as possible. As explanatory variables, capital structure was selected from the ownership structure, debt structure and the proportional relationship between the two in this paper. There were six indicators to measure capital structure, such as the first largest shareholder equity ratio, the equity ratio of the top ten shareholders, the limited conditions of sale equity ratio, the proportional relationship between the subsidiary capital and the core capital and asset-liability ratio. In the empirical analysis, the paper first analyzed the seven indicators measures business performance using the principal component analysis method. Then three principal component factors were selected which can explain 90% of all indicators. Then, an integrated performance indicator was arrived based on making the characteristics values of the various principal components as weights. Then regression analysis was done on various indicators of capital structure using Eviews statistical software. Then the empirical results were obtained in this paper after the statistical results got by every tests.Fourth, this paper focus on reality in the process of empirical research and pay attention to the authenticity of empirical results, and put forward specific measures to improve the capital structure of the commercial banks based entirely on empirical results, which ensure the effectiveness of these measures.

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