Stock market volatility and bank performance in China

Abstract

This paper evaluates the determinants of bank performance in China. In particular, we examine the effects of stock market volatility, competition and ownership on bank performance in China. The sample comprises a total of 11 banks (four state-owned and seven joint-stock commercial banks) listed in the Chinese Stock Exchanges. The period under consideration extends from [2003][2004][2005][2006][2007][2008][2009]. The Generalized Methods of Moments (GMM) difference and system estimators are applied. Empirical results show that high level of stock market volatility can translate into higher Return on Equity (ROE) and Excess Return on Equity (EROE). Rather than leading to improved profitability, the labour productivity has a negative impact on Economic Value Added (EVA). Ownership does not have any effect on the profitability of Chinese banking industry. The bank profitability in terms of ROE and EROE is lower in the banking industry with higher competition. When using the GMM with ROE-COC and ROE, we find that high taxation has a negative impact on both state-owned and joint-stock banks, while the capital level is negatively related to joint-stock commercial banks. With regards to the other two performance indicators (EVA and NIM), the result suggests that higher cost efficiency and labour productivity improve the performance of both state-owned and joint-stock commercial banks. Large volume of non-traditional activity is the explanation of poor performance of stateowned commercial banks, while higher credit risk, lower taxation and mature banking industry are helpful in improving the performance of joint-stock commercial banks.2

Bank profitability: Insights from the rural banking industry in Ghana

“…The literature posits that higher loan loss provisions imply lower profitability because higher provisions for loan losses signal higher risk and higher probability of loans becoming non-performing loans (Athanasoglou et al, 2008;Kosmidou, 2008). This has been confirmed by Tan and Floros (2012), who observe that credit risk is negatively and significantly related to bank performance in China. On the flip side, credit risk can be measured by the loans-to-asset ratio.…”

Profitability Determinants of Financial Institutions: Evidence from Banks in Pakistan

“…Studies have also been performed on Chinese bank's profitability (Tan and Floros 2012c;Tan 2016;Tan andFloros 2012a, 2012b;García-Herrero et al 2009;Heffernan and Fu 2008;Sufian and Habibullah 2009). A Study by Tan (2016) used ROA, ROE, NIM and PM as profitability indicators and categorized explanatory variables into bank-specific, industry-specific and macroeconomic variables in his study of 41 Chinese banks including joint-stock, state-owned, and city commercial banks over the period 2003-2011.…”

“…Banking Sector Development (BSD): It is calculated as the total assets of the banking industry to GDP ratio. This variable is widely used in the literature (Lee et al 2015;Tan 2016;Tan and Floros 2012a, 2012b, 2012c. The more developed banking sector indicates the demand for banking product and services which attracts more competition, and banks can increase their profitability with effective strategies (Tan and Floros 2012a).…”

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“…Due to the fluctuation of the Page42 stock market volatility, consumers are more likely to deposit their money into banks than investing in the stock market which makes banks have better performance (Albertazzi & Gambacorta, 2010). Tan and Floros (2012) find that the more volatile the stock market, the better performance the Chinese banks have. A high market capitalization ratio means economic expansion, while the easy access for firms to finance through stock markets reduces bank's business opportunities which results in a deterioration of performance (Liu & Wilson, 2009).…”