An Analysis of Cost Efficiency and Dynamic Profitability Determinants in Chinese Banking Industry

The purpose of this dissertation is to give an analysis of cost efficiency and dynamic profitability determinants in Chinese banking industry over the period 2011-2016, by using the BC95 model of Stochastic Frontier Analysis (SFA) and the System Generalized Method of Moments (SGMM) models, respectively. The unbalanced panel data of the top 107 Chinese commercial banks during 2011-2016 is utilized in the models. In the cost efficiency study, the Intermediation approach is applied to estimate the asset transformation process of banks, and the costs are generated by this process. In the empirical results, the BC95 model gives the cost efficiency scores for all the 403 observations of the 107 Chinese commercial banks. The BC95 model presents that the macroeconomic factors including GDP growth, unemployment, inflation and broad money growth have insignificant impact on the cost efficiency scores. Furthermore, from the comparison of cost efficiency scores in different types of banks and in different regions of banks, it can be found that Large commercial banks and City commercial banks have relatively lower cost efficiency than Joint-stock commercial banks, Rural commercial banks and Foreign commercial banks. In addition, the four municipalities and coastal provinces are found to have higher bank cost efficiency than the inland provinces. In the dynamic profitability determinants study, high return on average equity (ROAE) is found to be associated with high recurring earning power, low loan loss provisions to average gross loans ratio and low equity to assets ratio, whereas loan loss reserves to gross loans ratio, asset size, cost efficiency scores and Z scores have insignificant impact on ROAE. Moreover, GDP growth is found to have insignificant influence on ROAE of banks, whereas unemployment has negative influence and inflation has positive influence. Market capitalization to banking industry assets ratio is found to have insignificant impact on ROAE of banks, whereas banking industry assets to GDP ratio and 5-bank concentration ratio have positive impact. Lastly, the policy implication for both regulatory authorities and bank managers and recommendations for further research are presented