Ownership Structure Impacts on Bank Performance
Ownership Structure Impacts on Bank Performance
Abstract
This dissertation offers evidence that the kind of ownership structure substantially impacts on bank performance. Previous studies that have explored this relationship within the Chinese banking sector have ended up differing findings. Despite these different findings, it is clear that ownership structure substantially impacts bank performance in China. In other words, ownership structure affects profitability, efficiency, risk and value in the Chinese banking sector.
1 Introduction
Performance of the banking sector affects economic growth as banks play an important role in the economy through financial intermediation. Many studies using either parametric or non-parametric approaches have been undertaken since the late 1980s to assess bank efficiency and performance (Duygun and Pasiouras, 2010). Studying bank performance is important because it allows various stakeholders including customers, investors, policy makers and regulators to assess the impact of bank ownership structure on performance (Bonin et al., 2005a, b; Micco et al., 2007; Lin and Zhang, 2009; Dong et al., 2016), to monitor bank performance in the presence of risk such as inside debt, credit risk and bank default risk (Epure and Lafuente, 2015; Bennett et al., 2015; Chang and Chen, 2016), to study the relationships between bank size and performance (Molyneux et al., 2014; Inanoglu et al., 2016; Hosseinzadeh et al., 2016), to examine the impact of a changing market structure on bank performance (Ye et al., 2012; He et al., 2015; Hasan et al., 2015), to investigate the impact of banking sector globalisation on bank performance (Ghosh, 2016; Inanoglu et al., 2016), to evaluate the effect of corporate governance on bank performance (Inessa and Rachinsky, 2015).
Most banks in China are state-owned with only a few foreign owned. Banking in the country is dominated by four very large state-owned banks sometimes simply referred to as the ‘‘Big Four’’ including Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of China (BOC) and Agricultural Bank of China (ABC). In terms of market capitalisation, all these four commercial banks were in the 2014 top 10 list of the largest banks in the world. Relative to other type of banks -including the city-level commercial banks, domestic joint-stock banks, and joint Chinese-foreign banks –the Big Four banks had poorer performance on profitability (Lin and Zhang, 2009). Most research evidencing bank efficiency in developing nations were consistent with China (Berger et al., 2004; Bonin et al. 2005a, b; Yildirim and Philippatos, 2007) and the results of their studies suggested that state-owned banks had less profit efficiency. China is, therefore, reforming its banking system by- for example- partially privatising and taking on minority foreign ownership.
The banking system in the country has experienced significant institutional and structural changes over the last 30 years and is presently transitioning from a centrally planned to a market-based system. The country’s economic environment had greater freedom and fewer restrictions on ownership takeover since 2001 when China entered the WTO. For example, Citigroup purchased 5% of Shanghai Pudong Development Bank which is a 40% state-owned Shanghai local bank in January 2003. The banking system is undergoing enormous reforms especially on the ownership structure (He et al. 2015; Funke et al. 2016; Xiaoxi & Daly, 2014). Moreover, the performance of Chinese banks especially after ownership reforms due to the current privatisation program has differently influenced some changes such as growth dynamics and financial performance (Hasan & Xie 2013; Xiaoxi & Daly, 2014; Luo, 2015). It has, however, always remained difficult to track the effects of these reforms-the ownership structure in the banks on performance such as profit, cost efficiency, investment, risk taking, and growth (Huang & Boateng 2013; Habib & Liu, 2014; Hosseinzadeh et al., 2016).
This study will use data in the Chinese Financial Yearbooks, China Banking Regulatory Commission as well as data collected by the Bank Scope databases. A total of 129 banks will be studied based on their annual data to determine performance. The annual data from the year 2003 to 2010 will be used in order to generate performance trends. The banks in the study were categorised into state-owned banks, policy banks, city commercial banks, rural commercial banks, other commercial banks, foreign banks, and overseas subsidiaries. The statistical trend on performance was determined by regression. The exclusion of some observations in the regression analysis is explained by the fact that some banks did not provide the required data for the whole.
2 Literature review
Since China became a member of the WTO in 2001, her economic environment has had greater freedom and fewer restrictions on ownership structure. Most of the state owned Chinese Banks have been privatised in the last one decade (Yang & Ma 2012; Chung & Chan 2012). The privatisation program is expected to have some considerable changes on the performance of these banks which have attracted various performance questions (Hasan et al. 2015). It is important to understand how the privatisation program has changed the performance indicators of these banks.
Estimating bank performance can help practitioners and policy makers investigate the impact of bank ownership structure on performance (Tao, 2013; Hasan et al., 2015; Dong et al., 2016), to examine the impact of macroeconomic factors such as market structure, industry growth and china economic growth model on bank performance (Ye et al., 2012; Xiaoxi and Daly, 2014; Funke et al., 2016; Khan et al., 2016), to assess the impact of bank ownership reform on performance (Micco et al., 2007; Lin and Zhang, 2009; Fu et al., 2009), to investigate the impact of banking sector globalisation and foreign bank entrance on bank performance (Sufian and Habibullah, 2010; Hasan et al., 2013; He et al., 2015), to evaluate the effect of corporate governance on bank performance (Gang, 2007; Luo, 2015), to study the relationship between banking innovation and performance (Chen et al., 2014).
Ownership structure has always been one of the main factors affecting bank performance. The study of Berger et al. (2007) used parametric approach (Stochastic Frontier Analysis) and analysed 38 commercial banks in China to study the profit and cost efficiency effect over the period from 1994 to 2003. They found that the foreign banks and state-owned banks had relatively high cost efficiency, while the private domestic banks had the least cost efficiency. They also found that foreign banks were the most profit efficient while state-owned banks- especially the Big four including Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Agricultural Bank)-were the least profit efficiency. This is because stated-owned banks had higher non-performing loans leading to poor revenue performance. Their study suggested that shifting resources from stated owned banks to foreign banks may likely enhance bank performance in China.
Ownership structure affects bank size which in turn influences performance (Tao, 2013; Dong et al., 2016). It is, therefore, important in this respect to compare the size of the banks and performance. The performance of Chinese banks on the domestic market is influenced by various performance indicators such as investment and ownership (Ye et al., 2012; Fu & Heffernan, 2009). The ownership structure of the Chinese banks also influences the ambition to invest in the overseas market (Brendea, 2014; Khan et al. 2016). Research was conducted on the performance in the overseas markets of Chinese banks that have undergone ownership restructuring in the recent past (Li et al., 2015; Molyneux et al., 2014).
The relationship between ownership structure and performance has gained an increasing attention among many scholars. Studies have explored different types of ownership structures and how they influence performance of firms. Cheng, Zhao and Zhang (2013, pp. 605) explain that “ownership structure fundamentally determine the corporate governance and behaviour choices. Different studies offer varying arguments about the relationship between bank ownership structure and performance. In light of these circumstances, the main objective of the present paper is to provide readers with comprehensive evidence about the relationship between bank ownership structure and performance in China.
The discussion will begin with a background of the Chinese banking system before offering a review of literature about the subject. The paper then provides facts about the relationship between bank ownership structure and performance in China. The paper will analyse reforms in the Chinese banking sector before recommending ways in which China can improve performance of its banks.
Background to the Banking System in China
The banking industry in China has undergone immense process of transformation over the last 30 years (Yusuf, 2005). Rather than being a mono-bank system, the industry has become a multi-bank model. Gone are the days of monopoly as competition has become the norm. Furthermore, the industry has become relatively open. These changes have significant outcomes. Besides improving the industry, such transformations have boosted economic development in the country (Cheng, Zhao & Zhang, 2013).
Bank reform as a concept is not new in China as it was adopted in 1978. Literature informs that the initial transformative measures were meant to accomplish two objectives. First, they intended to alter the banking system. The second objective was to create “a two tier banking system” (Cheng, Zhao & Zhang, 2013, pp. 696). Consequently, the People’s Bank of China was split to form four state-owned banks. These were Industrial and Commercial Bank of China, Agriculture Bank of China, Bank of China, and China Construction Bank. These four banks are also known as the ‘Big Four’. For the government, these banks were policy-lending channels although they later became the commercial banks in the country. In 1994, the Export-Import Bank of China, Agricultural Development Bank of China, and China Development Bank were created. These three banks served as specialised policy banks. Consequently, a distinction between commercial finance and policy finance was adopted.
The government established joint-stock commercial banks between 1986 and 2009 so as to promote competitiveness in banking by eliminating the monopoly that existed during the ‘Big Four’ era. The government enacted the Commercial Banking Law in 1995 which permitted the creation of city-level commercial banks. This was followed by a gradual lifting of constraints based on geographic and customer categories. These developments have mitigated discriminatory limits against foreign banks (Cheng, Zhao & Zhang, 2013).
The government has initiated share-holder reforms since 2003. This has especially been in commercial banks. The reforms cover various aspects including corporate governance, financial restructurings as well as listing of shares domestically and internationally. This has been accompanied by opening of bank ownership to other players from foreign countries. This change in listing of shares is expected to trigger substantial changes not only on the ownership structure of banks but also on performance and management (Huang, 2010).
Literature review
Over the past few years, several studies have explored corporate governance-in particular firm ownership structure, performance-and the relationship between ownership structure and firm performance (Stepanova & Ivantsova, 2012). Country-level attributes of corporate governance determine ownership structure encouraged in a certain country. These characteristics encompass, but are not limited to the nature of government regulation and intervention as well as stock market development. They have substantial effects on agency oversight, acquisitions and mergers, business incentives, and competition (Son et al., 2015).
Literature classifies ownership structures into two categories. These are ownership mix on the one hand and concentration ownership. In ownership mix, ownership is controlled by different parties (major shareholders) including domestic ownership concentration and foreign ownership. Concentration ownership on the other hand recognises the biggest shareholder. Monitoring costs and absolute risks influence concentration ownership (Son, et al., 2015). These ownership structures are not uniform across the globe but tend to vary from one region to another.
A study by Azureen, Rahman and Reja (2015) found that ownership structures differ between countries and especially between developed and developing countries. While ownership structure in developed countries is relatively decentralized it is more concentrated in developing countries.Azureen, Rahman, and Reja (2015, pp. 484) inform that “different types of ownership structure have important implications for corporate governance and performance.”
Prior studies offer varying empirical evidence regarding the association between ownership structure and bank performance. This variety in empirical evidence is more apparent in ownership concentration. For instance, some studies report positive relationship between concentration ownership and bank performance. Such studies report that higher concentration of ownership can help overcome agency conflicts between management and shareholders (Al-Amarneh 2014). It can also help mitigate costs associated with management monitoring which can then trigger enhanced productivity and performance. Other studies, however, report that there is no association between concentration ownership and bank performance.
The relationship between ownership structure and performance has substantial impacts on different shares. Prior studies categorise shares into state shares, employee shares, and legal person shares. Local governments, independent government-owned enterprises or the central government hold state shares while domestic institutions-like non-bank financial institutions and stock companies- own legal person shares. On the other hand, managers and employees of a listed firm own employee shares (Jiang, 2004). Prior studies have found a substantial influence of ownership structure on performance of company stocks. For instance, Jiang (2004, pp. 88) explains that “performance has negative correlation with state shares and positive correlation with legal shares.”
Furthermore, in an effort to determine the relationship between ownership structure and performance, previous researchers categorised shareholders into two groups. These groups are external shareholders on the one hand and internal shareholders on the other (Jiang, 2004). The former lack voting rights while the latter have management rights. The studies found that shares of internal shareholders are the most determinative firm value.
Studies on the relationship between ownership structure and firm performance has not ignored banking sector. Researchers have recently explored this kind of relationship in the banking industry. This is “due to international consolidation and cross border activities in the banking sector” (Orazalin, Mahmood and Lee, 2015, pp. 47).
In an attempt to evaluate the relationship between ownership structure and bank performance, previous researchers have used varying measures. One such measure is bank efficiency where it was found that “banking sectors with fewer large well-capitalised banks are more likely to generate better efficiency” (Huang, 2010, p. 5). Bank privatisation, especially those involving change of share ownership, nevertheless, has insignificant impact as far as efficiency improvements are concerned.
Prior studies also used profitability as a measure to determine the relationship between ownership structure and bank performance. Under profitability, researchers employed different profit variables including net interest margin (NIM), return on assets (ROA) and return on equity (ROE). It was found that certain determinants, including operating costs, growth in labour productivity, and availability of capital have substantial impact on bank profitability. Prior studies also found that ownership structure has significant influence on the profitability of banks although the findings were not uniform. For instance, a study by Huang (2010) found that private banks generate relatively lower profits compared to state-owned banks. In contrast, a study by Son, et al. (2015) found that privately owned banks generate relatively higher profits compared to their state-owned counterparts.
The above findings were different from findings obtained on the Chinese banking sector. Studies used ROA and ROE to evaluate the relationship between ownership structure and bank performance in China (Beirne, Liu & Sun ,2013). For instance, Son, et al. (2015) found that there is now an apparent relationship between ownership structure and performance of banks in China. This finding is, however, not in all banks since state-owned banks demonstrated significant relationship between ownership structure and ROE.
Furthermore, concentration of the banking industry also affects their profitability as witnessed in Malawi between 1970 and 1984. During this period, banks in Malawi portrayed positive correlation between industry concentration and bank performance in long-run (Huang, 2010). Other studies, however, report negative correlation between ownership concentration and profitability of banks. A study by Son, et al. (2015) on Kenyan banks found that these banks generated lower profitability due to ownership concentration.
Prior studies also report that there is a positive relationship between bank performance and foreign ownership. This is because foreign ownership offers a variety of advantages, including improved expertise, large capital, higher capability to diversify risks, and diversification, among others (Azureen, Rahman & Reja, 2015). Consequently, the performance of Chinese domestic banks is lower than that of foreign banks, especially those from Western countries, which are said to have stronger governance structures in their boards. For instance, it is reported that “boards with stronger governance structures produce superior financial performance in Chinese banks” (Rowe, Shi & Wang 2011, p. 26). Other researchers, however, report that there is no significant relationship between ownership structure and bank performance as far as foreign and domestic owned banks are concerned. A study on six South-Eastern European countries which analysed profitability of banks between 1995 and 2004 found out that the performance disparity between domestic and foreign owned banks is very minimal (Son, et al. ,2015).
METHODOLOGY
Introduction
The Chinese banking sector is undergoing significant reforms especially on their ownership structure (He et al., 2015; Funke et al., 2016; Xiaoxi & Daly, 2014). Most of the banks are state-owned with a few foreign owned banks. It has always remained difficult to track the effects of these reforms (the ownership structure in the banks) on performance such as profit, cost efficiency, investment, risk taking, and growth (Huang & Boateng, 2013; Habib & Liu, 2014; Hosseinzadeh et al., 2016). Ownership structure of the Chinese banks will also be compared with other sectors. These parameters will also be compared between state-owned banks and private owned minority banks.
Investment
The performance of Chinese banks especially after ownership reforms due to the current privatisation program has influenced some changes such as growth dynamics and financial performance in different ways (Hasan & Xie, 2013; Xiaoxi & Daly 2014; Luo, 2015). In the year 2010, a study by Bank Scope database, which investigated 209 licensed banks in China and identified that 38 banks had total capitalisation of more than US$ 20,000, 27 banks had total asset capitalisation from US$ 8,000 to US$ 20,000, 51 banks had total asset capitalisation from US$ 3,000 to US$ 8,000, and the remainder (93 banks) had combined total asset capitalisation of less than US$ 3,000.
Bank Deposits and Loans
| 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | |
| Total deposit | 220364 | 253188 | 300209 | 348016 | 401051 | 478444 | 612006 | 733382 | 826701 |
| Saving deposit | 110695 | 126196 | 147054 | 166616 | 176213 | 221503 | 264761 | 307166 | 347401 |
| Total loans | 169771 | 188566 | 206839 | 238280 | 277747 | 30129 | 425597 | 509226 | 581893 |
| Domestic short term loans | 87398 | 90808 | 91158 | 101698 | 118898 | 128609 | 151353 | 171237 | 217480 |
| Domestic medium term loans | 67252 | 81010 | 92941 | 113010 | 138581 | 164195 | 235579 | 305128 | 333747 |
| Domestic bill financing | 9234 | 11618 | 16319 | 17333 | 12884 | 19314 | 23879 | 14845 | 15154 |
Table 1: Bank deposits and loans from 2003 to 2011
Equity
The ownership structure affects the bank sizes which in turn influence performance (Tao, 2013; Dong et al., 2016). This makes it important to compare bank size and performance. The performance of Chinese banks on the domestic market is influenced by various performance indicators such as investment and ownership (Ye et al., 2012; Fu & Heffernan, 2009). Ownership structure of the Chinese banks also influences the ambition to invest in the overseas markets (Brendea, 2014; Khan et al., 2016). In this regard, the Chinese banks that have undergone ownership restructuring in the recent past have been studied on their performance in the overseas markets (Li et al., 2015; Molyneux et al., 2014). This study will also conduct a comparison of the performance of the banks that have acquired overseas markets to those operating only in the local market. It should be noted that before the initiation of the privatisation program, the previously state-owned Chinese banks moved to the overseas markets to serve their corporate clients.
This study will use data in the Chinese Financial Yearbooks, China Banking Regulatory Commission, and that collected by the Bank Scope databases. In this study, 129 banks will be studied based on their annual data to determine performance. In order to generate performance trends, the annual data from the year 2003 to 2010 will be used. The banks in this study were categorised into state-owned banks, policy banks, city commercial banks, rural commercial banks, other commercial banks, foreign banks, overseas subsidiaries. The statistical trend on performance will involve regression. Some banks did not provide the required data for the whole period hence some observations were excluded in the regression analysis.
Type of Bank Ownership
| Year | Total | ||||||||
| Type of Bank | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |
| State-owned | 4 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | 32 |
| Policy Bank | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 24 |
| City Commercial | 5 | 9 | 15 | 25 | 29 | 13 | 11 | 8 | 115 |
| Rural Commercial | 0 | 3 | 6 | 9 | 10 | 9 | 6 | 4 | 47 |
| Other Commercial | 6 | 9 | 9 | 9 | 9 | 11 | 11 | 10 | 74 |
| Foreign | 12 | 12 | 14 | 15 | 30 | 33 | 35 | 25 | 176 |
| Overseas Subsidiaries | 6 | 12 | 16 | 15 | 16 | 18 | 20 | 15 | 118 |
Table 2: Bank selection based on type of bank ownership structure
Most of the state owned Chinese Banks have been privatised in the last one decade (Yang & Ma, 2012; Chung & Chan, 2012). The privatisation program is expected to have some considerable changes on the performance of these banks which have attracted various performance questions (Hasan et al., 2015). It is important to understand how the privatisation program has changed the performance indicators of these banks. This question will be answered using the econometric model to analyze the effects of various types of bank ownership structure on performance. This method will be applied on the specific level of Bank data.
Research Samples
The state-owned banks included in this study are the four biggest banks in China based on total assets. They include Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of China (BOC), and Agricultural Bank (Chen et al. 2014). These banks are financial enterprises owned by the government.
Three policy banks were studied and they included China Development Bank Corporation, Agricultural Development Bank of China, and Import-Export Bank in China (Gang 2007). The Chinese policy banks are usually established by the government. Their main role is to implement the national industrial policies and policies for regional development.
City commercial banks are urban-based credit unions that have grown and/ or undergone restructuring into financial enterprises. These financial institutions have a characteristic smaller net assets compared to other banks (He et al., 2015; Funke et al.,2016; Xiaoxi & Daly, 2014). This is mainly caused by the geographical restrictions. China has many city commercial banks but this research selected the top 29 biggest city commercial banks based on total asset worth.
The rural commercial banks are the rural-based credit unions that have grown and/ or undergone restructuring into financial enterprises (Huang & Boateng, 2013; Habib & Liu, 2014; Hosseinzadeh et al., 2016). They are restricted to operate in rural areas. There are many rural commercial banks in China but this research criterion selected the top 10 rural commercial banks based on total assets.
Other commercial banks are the general commercial banks -excluding the state owned banks -operating in China (He et al., 2015; Funke et al., 2016; Xiaoxi & Daly, 2014). There are many general commercial banks in China but based on this research criterion, only the top 12 commercial banks based on total assets were selected for the study.
The foreign banks are the foreign-owned financial institutions which have branches in China (Huang & Boateng, 2013; Habib & Liu, 2014; Hosseinzadeh et al., 2016). Foreign banks are characterised by different ownership structures categorised as joint ventures which are foreign owned banks by foreigners on the one hand and joint venture banks which are jointly owned by the Chinese and foreigners on the other hand.
The overseas subsidiary banks are the Chinese financial multinationals/ corporations that have branches and subsidiaries in both domestic and overseas markets (Huang & Boateng, 2013; Habib & Liu, 2014; Hosseinzadeh et al., 2016). This study selected 20 overseas subsidiaries.
It is important to note that the ranking status of the banks kept shifting across the years hence some of the banks observed in a particular year could not be analysed the following year since they were replaced by other banks in the annual ranking. Additionally, since the data required for analysing some of the performance parameters were not continuously available across the years, this study relied on the distribution of data observations to create significant statistical analysis. For instance, the state-owned banks provided 32 successful observations, the policy banks provided 24 successful observations, city commercial banks (36) provided 115 successful observations, rural commercial banks (14) provided 47 successful observations, other commercial banks (11) provided 74 successful observations, foreign banks (39) provided 176 successful observations, and the Chinese overseas subsidiaries provided 118 successful observations. The table below indicates the number of banks that provided these observations.
| Year | Total | ||||||||
| Type of Bank | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |
| State-owned | 4 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | 32 |
| Policy Bank | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 24 |
| City Commercial | 5 | 9 | 15 | 25 | 29 | 13 | 11 | 8 | 115 |
| Rural Commercial | 0 | 3 | 6 | 9 | 10 | 9 | 6 | 4 | 47 |
| Other Commercial | 6 | 9 | 9 | 9 | 9 | 11 | 11 | 10 | 74 |
| Foreign | 12 | 12 | 14 | 15 | 30 | 33 | 35 | 25 | 176 |
| Overseas Subsidiaries | 6 | 12 | 16 | 15 | 16 | 18 | 20 | 15 | 118 |
Table 3: Number of observation on the selected banks
Bank Performance Model and Variable
Dependent Variable
Each type of bank, based on the ownership structure, were observed for various performance parameters that included profitability, return on assets (ROA), return on equity (ROE), measure of efficiency [non-interest expense-average assets ratio (NIE)], and measure of asset quality [impaired loans to gross loans ratio (NPL)].
Return on Assets (ROA)
Return on assets (ROA), also referred to as return on investment is an indicator of profitability (Golin & Delhaise, 2013). ROA is commonly used to measure or determine the efficiency of management. In this study, ROA has been used to measure the efficiency and performance of the owners of the bank based on the ownership structure. ROA is usually calculated by dividing the annual earnings of the company by the total assets it owns. In other words, ROA is the ratio of annual earnings and total assets. ROA is commonly expressed as a percentage.
The formula of
It should be noted that in this study, interest expense was considered by adding it back when calculating the net income (Aydin, 2008). This is because bank returns are expressed based on the operating returns before the borrowing cost.
Return on Equity (ROE)
Return on equity (ROE) is the ratio of net return on income to shareholders’ equity (Golin & Delhaise, 2013). ROE is commonly used to measure the profitability of a company relative to shareholders’ equity and is expressed as a percentage. The calculated ROE value reveals the amount of profit generated from the money invested by the shareholders.
ROE is calculated using the following formula:
The net income used in this calculation is the total/ full fiscal year income. It is the amount of income that the company generated before dividends were paid to the common holders of the banks’ shares/stock) (Aydin, 2008). It is important to note that the shareholders’ equity used in this study excluded preferred shares.
Bank Efficiency Ratio
Bank efficiency ratio is the overheads posted by the bank and is expressed as a ratio of bank’s expenses to revenue (Golin & Delhaise, 2013). The general formula for calculating bank efficiency ratio is:
In this study, bank efficiency ratio was calculated as the ratio of the non-interest expense to average assets. This ratio was used to measure the financial efficiency of the banks.
Non-Performing Loans (NPLs)
Non-performing loans (NPLs) is the total amount of money that the debtors of the banks have not conducted any scheduled payments for at least 90 days (Bikker & Bos, 2008). NPLs are sometimes considered default or closer to be in default. A loan that is considered NPL usually has substantially lower odds that it will be repaid in full both in the required time or any period of time thereafter. NPLs is one of the most critical determinants of financial performance in the banking sector hence cannot be ignored by this study.
| VARIABLE | SYMBOL | VARIABLE EXPRESSION (Formula) | APPLICATION |
| Return of Asset | ROA | Net income after tax relative to total assets | Measure of profitablitity |
| Return on Equity | ROE | Net profit relative to total equity | Measure of profitablitity |
| Bank Efficiency Ratio | NIE | Non-Interest Expense/ Average Assets | Measure of financial efficiency |
| Non-Performing Loans (NLPs) | NLPs | Impared Loans/ Gross Loans | Measure of asset quality of the banks |
Table 4: Table of Dependent variable
This study utilised firm data to determine performance of groups of banks categorised according to their ownership structure. Measure of profitability of the group (type of bank) used two variables – ROA and ROE. Note that the ROA is the measure of profit relative to the total assets whereas ROE is the measure of net profit (net income after tax) relative to total equity. The measure of profitability based on ROA and ROE was influenced by the fact that the former biases upwards hence significant for financial institutions that generate profits from operations that are considered off-the balance sheet transactions. These operations cannot be identified as assets though they are characterized by generation of revenue and expenses. In this regard, ROE is included in the measure of profitability as an alternative parameter.
The efficiency of a group of banks-type of banks-will be measured using the ratio of non-interest expense to average assets ratio (NIE). Another important parameter for determining the performance of banks is the measure of asset quality. This parameter will be investigated using the ratio of impaired loans to gross loans (NPL).
Independent Variables
The independent variables for this study included assets, equity, and net interest margin.
- Assets
In this study, assets are the bank resources with assigned economic value (Bikker & Bos, 2008). They were obtained from the banks’ balance sheets. It is strongly believed that assets play a greater futuristic role such as generation of cash flow, reduction of expenses and improvement of sales among others. In this study, assets were considered independent variables because they are usually acquired to increase -multiply- the value of the company which in turn benefits the company through measures such as higher return on assets (ROA), higher return on equity (ROE), and higher financial efficiency such as bank efficiency ratio. In this study, all forms of assets were considered in calculating the total assets value and they included fixed assets, long-term assets, business assets, and current assets.
| VARIABLE | SYMBOL | EXPRESSION |
| City commerical bank assets | A-CITY | Total assets (City commercial banks) |
| Foreign Banks assets | A-FORGN | Total assets (Foreign banks) |
| Other commerical banks assets | A-OTHER | Total assets (Other commerical banks) |
| Policy banks assets | A-POLICY | Total assets (Policy banks) |
| State-owned banks assets | A-STATE | Total assets (State-owned banks) |
| Rural commercial banks assets | A-RURAL | Total assets (Rural commercial banks) |
| Chinese overseas subsidiaries | A-OVERSEAS | Total assets (Chinese overseas subsidiaries) |
Table 5: Analysis of Assets
- Equity
Equity is defined as the value of assets following the deduction of all the liabilities from the total assets (Golin & Delhaise, 2013).
Equity = Assets – Liability (Shareholders’ Equity = Total Assets – Total Liabilities)
The following elements were considered when calculating equity and they included share capital, retained earnings, treasury shares, and shareholder equity. In this case the shareholders’ equity was calculated as follows:
Shareholders’ Equity = Share Capital + Retained Earnings – Treasury Shares
Equity was used as an independent variable because it affects the performance of assets relative to liabilities.
| VARIABLE | SYMBOL | EXPRESSION |
| City commerical bank equity | E-CITY | Equity (City commercial banks) |
| Foreign Banks equity | E-FORGN | Equity (Foreign banks) |
| Other commerical banks equity | E-OTHER | Equity (Other commerical banks) |
| Policy banks equity | E-POLICY | Equity (Policy banks) |
| State-owned banks equity | E-STATE | Equity (State-owned banks) |
| Rural commercial banks equity | E-RURAL | Equity (Rural commercial banks) |
| Chinese overseas subsidiaries equity | E-OVERSEAS | Equity (Chinese overseas subsidiaries) |
Table 6: Analysis of Equity
- Net interest Margin
Net interest margin is a measure of financial performance that is used to determine the success of investment decisions to firm relative to its debt conditions (Aydin, 2008). A negative value of the performance metric indicated that the banks did not make optimum decisions since the expenses on interest were greater than the revenue generated through investment.
The Net Internet Margin was calculated using the following formula:
Net Interest Margin =
| VARIABLE | SYMBOL | EXPRESSION |
| City commerical bank Net interest margin | N-CITY | Net interest margin (City commercial banks) |
| Foreign Banks Net interest margin | N-FORGN | Net interest margin (Foreign banks) |
| Other commerical banks Net interest margin | N-OTHER | Net interest margin (Other commerical banks) |
| Policy banks’ Net interest margin | N-POLICY | Net interest margin (Policy banks) |
| State-owned banks Net interest margin | N-STATE | Net interest margin (State-owned banks) |
| Rural commercial banks Net interest margin | N-RURAL | Net interest margin (Rural commercial banks) |
| Chinese overseas subsidiaries Net interest margin | N-OVERSEAS | Net interest margin (Chinese overseas subsidiaries) |
Table 7: Analysis of Net Interest Margin
Table 8: Total equity ownership according to type of bank ownership structure (Source: Chinese Financial Yearbooks, China Banking Regulatory Commission)
Table 9: Profit after taxed according to type of bank ownership structure (Source: Chinese Financial Yearbooks, China Banking Regulatory Commission)
Table 10: Total liability analysed according to type of bank ownership structure (Source: Chinese Financial Yearbooks, China Banking Regulatory Commission)
ANALYSIS
- REGRESSION RELATIVE TO ASSETS
RETURN ON ASSETS (ROA)
Relationship between Return on assets (ROA) and Assets
Regression Analysis
Y = Mx + intercept
Where Y= ROA; x = Assets
Value of M = =
M is the relationship between ROA and assets within group/ type of banks
RETURN ON EQUITY (ROE)
Relationship between Return on equity (ROE) and Assets
Regression Analysis
Y = Mx + intercept
Where Y= ROE; x = Assets,
Value of M = =
M is the relationship between ROE and assets within group/ type of banks
BANK EFFICIENCY
Relationship between Bank Efficiency (Non-Interest Expense/ Average Assets) and Assets
Regression Analysis
Y = Mx + intercept
Where Y= Bank Efficiency; x = Assets
Value of M = =
M is the relationship between Non-Interest Expense/ Average Assets and assets within group/ type of banks
QUALITY OF ASSETS (NLPs)
Relationship between Non-performing Loans (NPLs) and Assets
Regression Analysis
Y = Mx + intercept
Where Y= NLPs; x = Assets
Value of M = =
M is the relationship between NPLs and assets within group/ type of banks
| Performance | City Commercial | Foreign | Other Commercial | Policy | State-owned | Rural Commercial | Overseas Subsidiary |
| ROA | -0.35 | -0.66 | -0.268 | 0.403 | 0.44 | 0.758 | 2.82 |
| ROE | 0.49 | -0.244 | -1.284 | 1.238 | 1.9 | 1.658 | -0.63 |
| Efficiency | 0.65 | 0.894 | 0.223 | 0.237 | -0.01 | 0.142 | 10.9 |
| NLPs | 1.12 | 0.982 | 0.356 | 1.24 | 0.33 | 1.578 | 1.287 |
Table 11: Findings of Regression relative to Assets
The analysis of ROA, ROE, and NLPs relative to assets indicated a highly significant and positive relationship in policy banks, state-owned, rural commercial banks, and overseas subsidiaries based on the figures indicated in the table above. Investment, nevertheless, had a negative relationship with return on equity (ROE). However, city commercial banks, foreign banks, and other commercial banks posed negative relationship. This is a strong indication that investment on assets for overseas subsidiary banks had a significant positive relationship with return. This can also suggest that the more the overseas subsidiaries invested on assets, the higher the financial performance. Among the type of banks that posed negative relationship, only the foreign banks posed a regression value that can be considered significant (i.e. 0.66). However, city commercial banks had a weak negative relationship hence considered insignificantly negative. This is an indication that the more the foreign banks invested on assets the weaker the financial performance relative to assets. This also strongly suggested that asset investment among the foreign banks failed to influence strong performance.
This analysis indicated that ownership structure influence how the bank take risks on investment. Considering the fact that banks owned by the government and the rural people -i.e. state-owned banks, policy banks, and rural commercial banks- showed positive relationship between investment on assets and financial performance is an indication that the owners of these bank do not easily invest on projects that do not guarantee positive financial performance. On the other hand, the banks that posed negative relationship between financial performance relative to assets indicated that the owners of these banks might have invested on assets that did not guarantee positive financial performance. This is a strong indication that the owners of these banks easily take risks on investment.
- REGRESSION RELATIVE TO EQUITY
RETURN ON ASSETS (ROA)
Relationship between Return on Assets (ROA) and Equity
Regression Analysis
Y = Mx + intercept
Where Y= ROA; x = Equity
Value of M = =
M is the relationship between ROA and Equity within group/ type of banks
RETURN ON EQUITY (ROE)
Relationship between Return on equity (ROE) and Equity
Regression Analysis
Y = Mx + intercept
Where Y= ROE; x = Equity
Value of M = =
M is the relationship between ROE and Equity within group/ type of banks
BANK EFFICIENCY
Relationship between Bank Efficiency and Equity
Regression Analysis
Y = Mx + intercept
Where Y= Bank Efficiency; x = Equity
Value of M = =
M is the relationship between Non-Interest Expense/ Average Assets and Equity within group/ type of banks
QUALITY OF ASSETS (NLPs)
Relationship between Non-performing Loans (NPLs) and Equity
Regression Analysis
Y = Mx + intercept
Where Y= NLPs; x = Equity
Value of M = =
M is the relationship between NPLs and Equity within group/ type of banks
| Performance | City Commercial | Foreign | Other Commercial | Policy | State-owned | Rural Commercial | Overseas Subsidiary |
| ROA | 0.508 | 0.522 | 0.447 | -0.416 | -0.027 | -0.388 | -4.15 |
| ROE | -0.413 | 0.219 | 1.687 | -0.455 | -1.476 | -1.28 | 0.29 |
| Efficiency | -0.721 | -0.57 | -0.244 | -0.323 | 0.082 | 0.024 | -4.5 |
| NLPs | -1.247 | -1.6 | -0.524 | -2.225 | -1.32 | -1.54 | -1.9 |
Table 12: Findings of Regression relative to Equity
The analysis of the relationship of ROA, ROE, and NLPs relative to equity indicated a weak to strong negative relationship. Only city commercial banks and foreign banks posed positive relationships. This indicates that investment on equity influenced the financial performance of city commercial banks and foreign banks. This finding indicated that most local banks -or local owners- are not keen on pursuing stronger equity performance in order to enhance positive financial performance. On the other hand, the positive relationship between equity and financial performance for foreign banks strongly suggests that foreign bank owners strongly rely on the performance of equity to enhance financial performance. This is another indicator of how bank ownership structure influence financial performance.
- REGRESSION RELATIVE TO NET INTEREST MARGIN
RETURN ON ASSETS (ROA)
Relationship between Return on Assets (ROA) and Net Interest Margin
Regression Analysis
Y = Mx + intercept
Where Y= ROA; x = Net Interest Margin
Value of M = =
M is the relationship between ROA and Net interest Margin within group/ type of banks
RETURN ON EQUITY (ROE)
Relationship between Return on equity (ROE) and Net Interest Margin
Regression Analysis
Y = Mx + intercept
Where Y= ROE; x = Net Interest Margin
Value of M = =
M is the relationship between ROE and Equity within group/ type of banks
BANK EFFICIENCY
Relationship between Bank Efficiency and Net Interest Margin
Regression Analysis
Y = Mx + intercept
Where Y= Bank Efficiency; x = Equity
Value of M = =
M is the relationship between Non-Interest Expense/ Average Assets and Equity within group/ type of banks
QUALITY OF ASSETS (NLPs)
Relationship between Non-performing Loans (NPLs) and Net Interest Margin
Regression Analysis
Y = Mx + intercept
Where Y= NLPs; x = Net Interest Margin
Value of M = =
M is the relationship between NPLs and Equity within group/ type of banks
| Performance | City Commercial | Foreign | Other Commercial | Policy | State-owned | Rural Commercial | Overseas Subsidiary |
| ROA | 2.72 | 2.16 | 0.78 | 1.071 | 0.345 | 1.84 | 5.91 |
| ROE | 4.94 | 1.42 | 1.758 | 0.179 | -0.792 | 2.41 | 2.103 |
| Efficiency | 4.83 | 1.385 | 1.686 | 0.9 | 1.078 | 2.087 | 4.0 |
| NLPs | 2.22 | 1.819 | 0.757 | 3.822 | 1.502 | 0.363 | 3.42 |
Table 13: Finding or Regression Relative to Net Interest Margin
The analysis of relationships of ROA, ROE, bank efficiency, and NLP relative to Net Interest Margin indicated significant and strong positive relationships across all the types of banks based on ownership structure (Sufian & Habibullah, 2010). This is a strong indication that net interest rate is one factor that has a strong influence across the banking sector irrespective of the ownership structure.
The facts
Profitability
Ownership structure affects the profitability of banks. Some banks are privately owned while others are state owned. A study by Azureen, Rahman and Reja (2015) explain that state-owned banks experience not only lower profitability, but also higher costs compared to privately owned banks. This is particularly so in developing countries. Another study by Jiang (2004, p.88) informs that “performance has negative correlations with state shares and positive correlations with legal shares.”
Apart from the effects of ownership structure on performance of shares, profitability of banks also depends on their ownership structure. This is apparent in Chinese banks where the state owns a large percentage of banks, especially in joint-stock banks and state-owned banks in contrast city commercial banks where the local governments hold a certain proportion of shares. A study by Rowe, Shi and Wang (2011, p. 31) found that “this kind of control may influence the operating strategy of a bank and hinder it from acting freely according to market law.” The big percentage of shares that the Chinese government holds, therefore, has negative impacts on profitability of banks.
Studies on the impact of corporate governance- as a dimension and measure of ownership structure-find that characteristics of governance, in particular size of the board, have substantial impacts on the performance of banks. For instance, Rowe, Shi and Wang (2011, p. 31) explain that “the effect of board size on bank’s operating performance is two-folded.” For instance, a big board is very advantageous as far as improved bank performance is concerned. This is because such board facilitates democratic or diversified policy formulation regarding significant operation al decisions and development strategy of a bank.
Large boards can, however, have negative impacts on the operating performance of a bank. For instance, unlike small boards, large boards are associated with lack of efficiency, especially in making decisions. This is because large boards incur much more time in making decisions compared to small boards (Rowe, Shi & Wang, 2011). It is, therefore, imperative to consider the size of a board and its implications on the performance of banks.
Efficiency
The efficiency of a bank is subject to ownership structure. In other words, ownership structure influences bank efficiency. Bank ownership structure differs from one country to another which in turn triggers efficiency disparities between banks (Maddison, 2007). For instance, banks from Western countries encourage majority ownership structure while Chinese banks demonstrate minority ownership structure. Because of these disparities in ownership structure, foreign banks in China have the highest level of profit efficiency while Chinese state-owned banks have the least profit efficiency (Berger & Zhou 2005). Also, disparities in ownership structure reveal differences in cost efficiency between banks.
For instance, a study by Berger and Zhou (2005,. 5) explain that “the cost efficiency findings present the anomaly that state-owned institutions have relatively high measured cost efficiency.” This is because of certain aspects, especially government subsidies particularly on side of cost. It is further reported that poor loan revenues consume such revenues due to much more levels of non-performing loans in state-owned banks.
Risk
In addition, the relationship between bank ownership structure and performance influence risk in banks. As already discussed earlier, change in bank listing is among the apparent reforms in Chinese banking industry. This reform has triggered a change in bank ownership structure, which in turn affects risk in Chinese banks. A study by Cheng, Zhao and Zhang (2013) explain that change in bank listing and ownership structure subjects banks to stricter regulations which in turn mitigate bank risk. This can, however, also encourage banks to invest in riskier projects thus increasing bank risk.
Value
Furthermore, prior researchers report that ownership structure has significant impact on firm (bank) value. This is apparently portrayed by the performance of foreign banks and domestic banks in China. Differences in ownership structure trigger disparities in governance mechanisms, organisational practices, and objectives of the organisation (Al-Amarneh, 2014). If foreign investors invest in Chinese banks, this will send a signal to other domestic and foreign investors that the investors (who have invested in the banks) have high confidence in the banks. As a result, the value of the banks will improve. In other words, foreign investment is positively associated with improved value of banks in China.
Analysis of Reforms in China
Reforms on ownership structure in the Chinese banking sector have positive impacts on the performance of banks. The reforms are boosting the function of foreign ownership while mitigating the state-owned banks in the country. This has created a more favourable and efficient impact on Chinese banks (Berger & Zhou, 2005). A study by Fuand Heffernan (2009), however, presents differing arguments about the effect of reforms on in the Chinese banking sector. The study explains that the Chinese banking sector, especially joint-stocks, experienced a significant decline in efficiency between 1986 and 2003, a trend which is associated with ineffective reforms.
The government encouraged reforms in the banking sector to accomplish various goals, especially enhancing efficiency and competition in the industry. This has, however, led to increased quantities of bad debts. It should also be noted that this has occurred due to “state lending policies and a lack of clarity about bankruptcy” (Fu& Heffernan, 2009, pp. 46). Although the government created three policy banks in 1994, this has not been the solution to increasing bad debts. This is because the government pressured state banks not only to review, but also to offer more loans to enterprises controlled by the government.
Ways of Improving Bank Performance in China
The above discussion apparently reveals that ownership structure affects the performance of a bank. This is also true of the banking sector as it is true in other sectors. In other words, ownerships structure affects the efficiency, profitability, and value of a firm. There are, therefore, various ways in which the Chinese government can improve performance of the banking sector in the country as far as the relationship between ownership structure and bank performance is concerned.
The Chinese government can mitigate the negative impacts on banks’ performance, especially on efficiency by encouraging and promoting minority foreign ownership structure. This can be achieved by encouraging foreign ownership in the Chinese banking sector. Berger and Zhou (2005, p. 5) notes that minority foreign ownership structure “increases the efficiency of the state-owned banks.” Such ownership structure is encouraged in private banks and some domestic banks, which demonstrate higher profit and costs efficiencies than state-owned counterparts (Yeqin, 2007).
Permitting foreign investors to invest in Chinese banks can also lead to positive outcomes. This is because the foreign investors in the board of governance are more likely to trigger positive effects on the performance of the banks. These findings are also supported by a study by Jun and Lele (n.d., pp. 693), which explains that “foreign investors holding and the performance of commercial banks is a significant positive correlation.”
China has attempted to open its banking sector to global markets over the last few years. This has created an open opportunity for foreign investors to invest in the Chinese banking industry. The trend has also promoted competition in the industry. Through opening the industry to foreign investors, foreign investors have been able to invest in Chinese commercial banks. These banks intend to introduce foreign investments in order to garner improved governance as well as advanced management quality (Rowe, Shi & Wang ,2011; Wang, 2014). The government can, therefore, boost performance of Chinese banks by encouraging more foreign investments and ownership.
Block holders are the majority shareholders. These shareholders hold more than five percent of the bank’s outstanding shares, thus fewer block holders own bigger percentage of share in the banking sector. This encourages concentration ownership structure (Rowe, Shi & Wang, 2011). This kind of concentration negatively impacts not only on small shareholders, but also the profitability of banks. This apparently indicates that low profitability of Chinese banks is associated with block holders which in turn encourage concentration ownership structure.
Furthermore, China can promote improved performance of its banks by reducing state ownership of banks (Delios, Wu & Day, 2014). As initially discussed elsewhere in the paper, state ownership is a norm in the Chinese Banking sector. This norm in ownership hinders banks’ efficiency. However, by promoting foreign ownership while mitigating state ownership, China can create strong favourable bank efficiency (Huang 2010; Young, 2015).
Conclusion
The above discussion has apparently revealed that there is a direct relationship between bank ownership structure and performance. That is, different types of bank ownership structures have substantial impact on performance of banks. Ownership structure can either be concentration ownership or ownership mix. In most Chinese banks, ownership concentration is highly encouraged. This is due to high state ownership and existence of block holders. High concentration ownership has substantial impacts on performance of Chinese banks. For instance, the paper shows that bank ownership structure affects efficiency, profitability, value, and risk in Chinese banks. Nonetheless, the government can improve performance of its banks through different approaches. That is, the government can improve performance of the banks by reducing state ownership while encouraging foreign investment and ownership. China’s government can also boost performance of its banks by encouraging elimination of block holders as well as opening the industry for more foreign investors.
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