Exploring the source of the financial performance in Chinese banks: A risk-adjusted decomposition approach

Abstract

The profitability is one of the most important information for any profit-oriented firm, especially for the banks. In order to investigate the financial performance of Chinese banks, this study proposes a profitability decomposition model based on the combination of profitability in Ball et al. (2015) and the profit change model in Grifell-Tatjé and Lovell (1999) by using the input distance function. This model cannot only consider risk factors but also can identify the determinants of performance. Furthermore, we incorporate the risk factor into the proposed approach to avoid bias when estimating profit performance. We take 70 Chinese banks over the period of 2013–2019 as the sample data. The results show that there a positive profitability improvement in Chinese banks and the activity effect derived by the scale effect makes a critically positive contribution to profitability performance. We also find that the risk factor can affect the quantity-related effects effect. Finally, there is a significant difference in their decomposed components and that the different components play different functions for different banks.