Noninterest Income and Performance of Commercial Banking in China

Limei Sun,Alec Stephenson,Zili Zhu,Siqin Wu

doi:10.1155/2017/4803840

Abstract

Noninterest income is what most Chinese banks are striving for in recent years because of the vigorous competition among commercial banks due to the increasingly open market and tough regulation from the central bank of China. But the problem is the real effect of noninterest income on profit and risks. A panel threshold model is used with balanced panel dataset of 16 listed Chinese commercial banks, for the period of 2007 to 2013, to investigate the relationship between noninterest income and performance. The findings show two main conclusions: (1) the existence of two thresholds shows that there is nonlinear relationship; (2) there is a general negative correlation between the noninterest income ratio and performance of commercial banks. Furthermore, when the noninterest income ratio is higher than the two thresholds, the negative correlation decreases. Implications of the paper are that the ratio should be controlled in a range or noninterest income will not positively affect the performance, and a high level of performance can be gained only by raising the ratio to a certain level.

Highlights

With the significant development of financial liberalization and globalization, banks choosing to expand their noninterest income activities are confronted with increasingly severe interbank competition so as to grow, realize efficiency, and reduce idiosyncratic risk [1]
Noninterest income of Chinese commercial banks is influenced by regulations from the central bank, techniques, and innovation
Faced with intensified competition induced by increasingly open market policies of China, Chinese commercial banks strive to compete in noninterest income activities

Summary

Introduction

With the significant development of financial liberalization and globalization, banks choosing to expand their noninterest income activities are confronted with increasingly severe interbank competition so as to grow, realize efficiency, and reduce idiosyncratic risk [1]. The Chinese banking industry has just started its focus on diversification of business in recent years. The noninterest income business has had continuous development. Whether noninterest income can help enhance bank performance has always been controversial. Some previous literature pays a lot of attention to the relationship between noninterest based activities and the performance of banks in countries outside of China. This paper investigates the relationship between noninterest income ratio and the performance of Chinese commercial banks’ and the influence of noninterest income ratio on its performance.

Methods

Results

Conclusion