A Study On The Factors Affecting The Sustainability Of Commercial Banks' Profitability In China

This paper reports dynamic panel estimations of a model designed to investigate the persistence of profit for Chinese Commercial banks, and to identify certain determinants of bank profitability measured as the difference between return on equity and an estimated cost of capital. The estimation results suggest there is significant persistence of profit from one year to the next. If a bank earns an excess profit in the current year, it is expected profit for the following year includes a sizeable proportion of the current year’s excess profit.Analyzing the market structure of Chinese commercial banking industry by market share, concentration ratio, barriers to entry and exit, it shows these factors are the main reasons that why Chinese commercial banking industry has a high level of profit persistence. Although competition is effective in eliminating excess profit eventually, it is by no means instantaneous. And according to the dynamic panel data estimation, bank that maintains lower cost to gross revenue, higher net interest margin and a higher share of non-interest income to gross revenue tends to perform better. A negative relationship between the capital ratio and profitability suggests that the opportunity cost of holding high levels of capital tends to depress shareholder returns and banks has the intendancy to increase capital leverage so as to get more risky returns. There is some evidence of a positive association between macroeconomic conditions and bank profit.