Study On Fore-front Branches' Operating Behavior Changes Under EVA Performance Evaluation Methodology

Under traditional operating mode, domestic commercial banks in China focus more on add-up of branches, growth of business volume and increase in market shares, but less on balancing of risks and returns. They often attract deposits without considering costs, extend loans without adequate risk awareness, and expand branches and employment without due regard to return. With more foreign-funded banks making entry into China and their business expansion, domestic commercial banks will have to face the pressure from competition against these foreign-sourced rivals that have strong financial position and leading management skills. To tackle increasingly fierce competition, domestic commercial banks must adapt themselves, by introducing latest industry-specific operating mechanisms that meet requirements from developing international market economy by establishing financial management system that suits operations of modern commercial banks, and by operating in reasonable ways and optimizing financial decisions to constantly amass wealth of banks. It has become a consensus among the shareholders, managerial staff and operators of commercial banks that maximizing value of banks should be the ultimate objective of operations and management. Thus, the development of a set of effective performance evaluation system has already become an imperative task for all stakeholders in the market. In recent years, as a value management tool, Economic Value Added (EVA in abbreviation), has been applied by commercial banks in performance evaluation to make up for the shortcomings of traditional financial indicators, hence having already developed into a scientific performance evaluation system.Discussions over EVA indices have lasted for years. Out of China, EVA indices have been extensively used by globally leading banks, and gradually become key reference for their strategic decision-making. Different from traditional performance evaluation methodology, EVA indices represent risk-adjusted returns, so they have high relevance to the value objectives of bank shareholders and are capable of effectively reducing vicarious costs. In both terms of theory and experiences, EVA as a guideline for evaluating corporate performance, is profoundly linked to the creation of shareholders'wealth; and for employees, it also corresponds with pursuit of higher bonuses. Such features endow it with conspicuous strengths in evaluating banking performance. Under EVA evaluation methodology, how to maximize the EVA of commercial banks' branches, will involve a myriad of aspects and high complexity, including operating policies, balance sheet adjustment and economic capital allocation that relate to operating philosophy, managerial model and centralized configuration of financial resources. This article attempts to pioneer in introducing background of EVA indices, disclosing shortcomings of traditional performance evaluation methodology and then deriving EVA's definition and model for commercial banks. Upon such, application of EVA in Industrial and Commercial Bank of China will be proposed as an example to explore how the fore-front branches, being the entities that follow the economic capital management system, to adjust operating behaviors and policies in accordance with EVA-cored performance evaluation methodology imposed by higher level branches, thus optimizing their own EVA indices.