Determinants Affecting Profitability of State-Owned Commercial Banks: Case Study of China

Ekaterina Koroleva,Shawuya Jigeer,Anqi Miao,Angi Skhvediani

doi:10.3390/risks9080150

Abstract

The study examines the relationship between internal determinants, external determinants and the profitability of state-owned commercial banks. We use pooled regression, fixed effect, and random effect models on the case of the top five Chinese state-owned commercial banks from 2007 to 2019. The results show that internal factors, measured by size, credit quality, and liquidity, significantly positively influence banks’ profitability. State-owned banks that have larger sizes, higher credit quality, and higher liquidity have accordingly higher profitability than other banks. On the contrary, the external factor, measured by the natural logarithm of GDP, negatively influences banks’ profitability. The decrease in GDP leads to higher profitability of state-owned commercial banks in China. Our results provide insight into the profitability of state-owned commercial banks, considering the latest changes in the Chinese banking industry.

Highlights

The results show that banks in the sample have an average return on assets of 1.06% and return on equity of 16.12% over the period 2007–2019
The regression result shows that bank internal factors and external economic conditions can explain the profitability of banks to a large extent
We show that in line with Hypothesis 1, the size of banks only makes a slightly positive contribution to the profitability of Chinese state-owned commercial banks

Summary

Introduction

The big four Chinese stateowned commercial banks (ICBC, CCB, ABC, and BOC) occupy the top four positions, with BoCom in 11th position. This means that Chinese banks play a significant role in the development of the global banking industry. China’s state-owned banks control the largest proportion of the world economy and represent the strongest financial capital. They have been actively responding to national policies, mainly focused on key areas of inclusive finance such as small and micro businesses, agriculture-related investment, poverty alleviation, increasing credit investment, and reducing financing costs. The above-mentioned makes Chinese stateowned commercial banks an interesting case for investigating the determinants affecting their profitability

Results

Discussion

Conclusion