Performance Of Chinese Commercial Bank Diversification

With the deepening of financial liberalization and integration, financialinnovation recent years, finance mergers and acquisitions occur frequently. TheChinese banking industry is steadily increasing its reliance on nontraditional businessactivities in the worldwide wave of financial diversification. Therefore, this paperanalyzes the effect of diversification strategy on banking performance.In the theoretical research part,theauthor analyzes the impact of diversificationon the profitability and business risk of commercial banks in a theoretical point ofview from both positive and negative sides. Then it discusses the actual results ofdiversification combined with its development situation and points out some existingproblems briefly. In the empirical research part, this paper introduces HerfindhalIndex to measure the degree of diversification. Based on the panel data of15majorcommercial banks from2000to2012it carried out a systematic analysis of therelationship between the diversification of the revenue structure, operatingprofitability and risks of China’s commercial banks through the establishment ofdiversified performance model. Then, according to the portfolio theory, the whole riskof banks isdecomposed in order to further investigate this relationship.Through theoretical analysis and empirical research,the main conclusions ofthispaper are following: diversification has a positive effect on profitabilitycause itimproved not only ROA but also ROE of banks in last decade while the volatility ofboth ROA and ROE declined, indicating that diversification can also smoothoperating risks of banks. Non-interest income reduced the volatility of banks’ totaloperating income through its function of dispersing risks. In general, diversifiedbusiness structure has a positive impact on commercial banks’comprehensiveperformance.Finally, basedon the conclusions, this paper put forward somereasonablesuggestions for governments and commercial banks, wishing to improve thediversification benefits for China’s banking industry.