Profit Performance Evaluation Of Chinese Commercial Banks Based On Directional Distance Function

Finance plays an important role in the growth of national economy and has an important influence on the development and stability of national industrial economy.As the pillar of China’s financial industry,banking plays an important role in economic activities and social development.Today’s world is undergoing "unprecedented changes in a century".Foreign economies are experiencing abnormal fluctuations,while China’s banking industry is being impacted by both domestic and foreign financial markets due to various influences such as financial disintermediation,interest rate liberalization and rising risk of non-performing loans.In addition,the rapid rise of Internet finance(such as Alibaba,Tencent,etc.)in the Chinese market is also squeezing the profit space of traditional banks.As an intermediary institution in the financial market,banks can make credit provision in time through their credit intermediary activities,diversify and resist market risks,and maintain the stability of the financial market.Once the profitability of banks declines,it is bound to affect their ability to allocate financial market resources.Therefore,there are three main questions that banks need to answer in order to further improve their profitability and performance,promote their high-quality development and enhance their market competitiveness in the current complex business environment at home and abroad.First,how to evaluate the overall profitability and performance of China’s banking industry? Second,how sustainable is the development of the banking sector? Third,from the perspective of profit sources,which factors mainly affect the current level of profit performance of the banking industry? Basically,the answers to the above questions should be based on the profit decomposition model proposed by Grifell-Tatji and Lovell(1999).There have been related researches mainly focused on the measurement of bank performance at the aggregate level and the decomposition terms(input perspective or output perspective).However,we cannot ignore that in the actual market,banks can adjust the input end and output end at the same time,reduce costs and expand output,so as to improve their own profitability and performance.Therefore,on the basis of the profit decomposition model proposed by Grifell-Tatji and Lovell(1999),this paper introduces the directional distance function proposed by Chambers et al.(1996)to explore the driving factors of profitability from both input and output.The "total-score" logical structure relationship between bank profit performance and each driver is established,and the research framework of "level of bank profit performance-efficiency of factors affecting performance-contribution recognition of drivers" is further constructed.In addition,I incorporate risk factors into the production technology frontier to study their impact on production decisions and profit drivers.Based on the above research methods,this paper takes the operating data of 70 commercial banks in China from 2013 to 2019 as samples to measure the profit performance level of China’s banking industry,the efficiency level of different influencing factors and the contribution degree.This paper studies the main driving factors of the change of leading profit performance and analyzes the background reasons of the change of leading components from the level of the bank as a whole,the level of the three types of commercial banks,and the level of whether the bank estimates the risk in advance.Finally,this paper draws the following conclusions:(1)During the study period,the profitability of Chinese commercial banks decreased slightly,and the activity effect brought by business activities was the main factor affecting bank performance.In detail,the input combination effect and output combination effect are the main influencing factors,among which the input mixture effect restrains the level of bank’s profit performance to a certain extent,while the increase of output mixture effect will promote the improvement of bank’s performance.(2)There are significant differences in the profitability decomposition results of banks under different ownership.The performance level of state-owned banks and joint-stock banks increased significantly during the study period,while the performance level of urban commercial banks decreased progressively.There are also significant differences among the three types of driving factors of bank performance.(3)We have carried out a factory-input decomposition for all types of banks.For example,the productivity effect can be decomposed into two parts from the output side and from the input side from the source.The empirical results show that the output side is the main factor affecting the performance of banks.Therefore,all kinds of banks should also pay more attention to output projects.(4)Risk factors mainly affect activity effect and its driving factors,and have no effect on productivity effect.Taking China’s banking industry as the research object,after scientific research and concluding,this paper puts forward specific suggestions based on the conclusions:(1)attach importance to the training of banking professionals,establish an effective incentive system and a scientific salary system;(2)Optimize the steps of the bank’s internal production and operation,reduce unnecessary expenditure,increase income and reduce expenditure;(3)Establish a risk monitoring and early warning system,and strengthen the tracking and management of non-performing loans;(4)Grasp the tide of financial science and technology,organically combine it with Internet technology,and expand the scope of bank business activities.