Analysis On The Profit-making Model Of China's State-owned Commercial Banks

It has been widely agreed both in academia and in practice that retail banking, private banking, off-balance banking and mixed operation businesses are stable revenue sources with low risks and China's state-owned banks should focus on these businesses besides wholesale banking. This point is further proved by the fact that the income from the mentioned businesses accounts for a greater portion in the total income of banks abroad.After discussing the significance of making profits and new challenges faced by state-owned banks in making profits, possible profit-making model of the banks is presented and compared. It is revealed by analysis of the relationship between the current profit-making model and profit level of China's state-owned banks that the net profits are fairly low while the actual profits before deducting allowances and compensating for the past losses are high, due to their profit-making focus on wholesale banking. After adjusting the level of allowances, we find that the profit-making model that focuses on wholesale banking brings affluent profits to state-owned banks, but their poor risk management capability leads to their high allowance and compensation level.We have also compared the prospect of state-owned banks' wholesale banking with that of other banking businesses. In our opinion, under current economic circumstances, China's economy is growing very quickly with great dependence on indirect finance and wide interest spread, which enables the state-owned banks to share the fruit of economy growth and make great profits if they focus on wholesale banking. However, the state-owned banks are poor at making profits by other banking businesses, and they are in a more disadvantaged position with no easy access to these businesses. Though income from these businesses of the state-owned banks grows at a high speed, profits from those businesses are rather small, and the corresponding competition is fiercer than that of wholesale banking in China. Based on careful analysis, we present the new profit-making model that China's state-owned banks should stick to focusing on wholesale banking and improving its profitability.