The Assessment of Bank Efficiency and Profitability: an empirical study on the Chinese banking industry, 2011-2017

Abstract This study uses recent estimation techniques with extensive panel datasets to estimate bank efficiency and profitability. Within the two-stage framework, Stochastic Frontier Analysis (SFA) is used in the initial phase to estimate the banking sectors’ cost efficiency, which is also an independent variable in the second phase of the determinants of bank profitability. In the second stage, the fixed effect model is used to analyze bank-specific characteristics, macroeconomic variables and industry-specific factors affecting the profitability of 200 commercial banks operating in China from 2011 to 2017. The purpose of this study is to investigate the underlying determinants of China's banking industry's profits and to try to find out the relationship between bank profitability and its important determinants. At each stage, several interesting results were found. The results show that the bank's cost efficiency reflects the state of the banking industry during the study period. There is a gap between the best and the worst performing banks. Most banks are relatively high cost efficiency. In addition, each profitability determinants vary quite widely at different levels of significance, symbol and size of the effect. Bank efficiency levels have an important impact on bank profitability. Therefore, we can find ways to improve competitiveness in the banking market. The study found that credit and cost are significant factors in the internal determinants of bank profitability (ROAA). External determinants, including inflation and GDP, are also important to the bank's profits