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2.3 Analysis of Profitability Performance
In China benchmark loan interest rate and deposit interest rate are controlled and adjusted by the PBC, according to article 38 of 〈Law of the People’s Republic of China on Commercial Banks〉, lending rate determined by commercial banks must fluctuate in the range between upper limit and lower limit loan interest rate regulated by the PBC.
In order to promote marketization of interest rates and increase pricing power of financial institutions to further prevent financial risks, on October 29, 2004 PBC decided to raise benchmark deposit and loan interest rates of local currency, and downward deposit rate was allowed to widen fluctuation range between deposit and loan interest rate.
Excluding urban and rural cooperatives, the loan interest rate ceiling of other sorts of financial institutions will be cancelled; however, the lower limit remains the same as 0.9 times the benchmark rate. Due to lack of competition, urban and rural cooperatives still implement upper limit management of loan interest rate; the ceiling is 2.3 times the benchmark rate.
Table 2-9 shows that since year 2002, the benchmark lending rate of RMB loans maintains slightly upward trend, but in 2008 China inevitably confronted with global financial tsunami and risk of slow economic growth, began in September PBC adopted loose monetary policy to stimulate the economy; therefore, the benchmark lending rate of 1-year-term RMB loans fell from 7.47% to 7.20%, as for other term of loans the interest rate also dropped.
Now in China the current benchmark loan interest rate for 1-year-term RMB loans is 5.31%, while the benchmark rate for 1-year time deposit is 2.25%, without upper limit of lending rate, the interest spread is very high.
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Table 2-9: Benchmark Interest Rate of RMB Loans
Unit: %
Adjust Time
(Year/Month/Day)
Short Term Medium and Long Term
6 month 6 month
Source: The People’s Bank of China, Monetary Policy Department, http://www.pbc.gov.cn/publish/zhengcehu obisi/627/index.html. (In Chinese)
Table 2-10 shows that in 2009 the total profit after tax of banking institutions in China was RMB 668.4 billion, 49.63% greater than which in 2007, during the same period profit after tax of SOCBs increased from RMB 246.6 billion in 2007 to RMB 400.1 billion in 2009 with 62.25% growth rate; profit after tax of JSCBs increased from RMB 56.4 billion in 2007 to RMB 92.5 billion in 2009 with 64.01% growth rate.
In 2009 profit after tax of city commercial banks doubled to RMB 49.7 billion from RMB 24.8 billion in 2007, and profit after tax of rural commercial banks even grew 246.51% to RMB 14.9 billion from RMB 4.3 billion in 2007.
From 2007 to 2009, every sort of commercial banks in China has maintained positive and double digits growth rate of after-tax profit annually, but in 2008 only
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after-tax profit of foreign banks decreased from RMB 11.9 billion to RMB 6.5 billion in 2009.
Although in 2009 SOCBs gained almost 60% of overall after-tax profit in China banking industry, among all commercial banks rural commercial banks surprisingly had the best profit growth performance, and city commercial banks ranked the second.
Table 2-10: Profit After Tax of Commercial Banks in China－2007~2009
Source: China Banking Regulatory Commission, Annual Report, 2009.
Figure 2-6 demonstrates distribution of different sources of profit of banking institutions in China. In 2009 profit of banking institutions consisted of net interest income (63%), investment returns (24%), net fee-based income (12%) and others (1%), the first three were major components of profit in China’s banking industry, however, among them net interest income was the most important source of profit that banks in China rely on.
Total Banking Institutions 4,467 5,834 6,684 49.63
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Source: China Banking Regulatory Commission, Annual Report, 2009.
Figure 2-6: Profit Distribution of Banking Institutions in China—2009
Among different kinds of financial statements, income statement represents the whole process of income and expenses of a bank’s business operation; hence if we want to examine a bank’s profitability, the best approach is to start from analyzing income statement. In a bank’s income statement, operating income is the sum of every income obtained from banking activities and representing the outcome of bank’s performance.
Figure 2-7 illustrates the composition of income statement of each SOCB by dividing operating income into net interest revenue and other operating income. If the proportion of net interest revenue is larger than the proportion of other operating income, which means that profit of this bank mainly comes from spread between lending rate and deposit rate by giving loans to customers.
In 2009 net interest revenue accounts for over 70% of operating income of each SOCB, and ABC and BOCOM particularly relied on net interest revenue as source of income. As for other operating revenue, BOC has the highest percentage of 28.9%,
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suggesting that once the interest spread in China becomes narrower, and then BOC will suffer less than other SOCBs.
Source: Bankscope, http://bankscope.bvdep.com/ip.
Figure 2-7: Composition of Operating Income of SOCBs in China—2009
Net profit is often referred as bottom line of income statement; it is the revenue earned by a bank in a period of time after deducting all expenses and taxes. Table 2-11 shows that from 2008 to 2009 net profit of ICBC grew by 16.34% to RMB 129,396 million; net profit of CCB grew by 15.32% to RMB 106,836 million; net profit of ABC grew by 26.33% to RMB 65,002 million; net profit of BOC grew by 29.90% to RMB 85,598 million, as for BOCOM the net profit grew by 5.71% to RMB 30,254 million.
As the largest state-owned commercial bank in China, net profit of ICBC was the highest one both in 2008 and 2009; however, while compare SOCBs in terms of growth rate of net profit, the profitability of BOC was the best one, the second was ABC, and ICBC ranked the third.
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Table 2-11: Net Profit of SOCBs in China—2008~2009
Unit: RMB million
Table 2-12 summarizes four indicators of profitability of SOCBs from 2007 to 2009, including Return on Average Assets (ROA), Return on Average Equity (ROE), Cost-to-Income ratio and Net Interest Margin; each indicator will be introduced and analyzed as below.
ROA is one of the most important ratios in comparing the efficiency and operational performance of banks as it looks at returns generated from the assets financed by the bank; as for ROE which is a measure of returns on shareholder funds, both of them are significant indicators commonly used to assess profitability of banks, and the higher ratio means the better profitability.8
According to statistics of last ten years, average ROA of the world’s top 100 banks is 1%, and average ROE of the world’s top 100 banks is between 12% and 14%
(Wu, 2008). In 2008 average ROA and ROE of the banking industry in China were 1%
and 17.1% respectively, which meant that profitability of China banking sector was good; however, in 2009 average ROA and ROE of the banking industry slightly dropped to 0.9% and 16.2%.
9 See China Banking Regulatory Commission (2008~2009), Annual Report, http://www.cbrc.gov.cn/english/in fo/annual/index.jsp.
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From 2007 to 2009, except for ABC, ROA of other SOCBs were higher than 1%, in 2009 only ROE of CCB and BOCOM were down from last year while other SOCBs had increasing ROE. It is worthy to pay attention that from 2007 to 2008 net profit of ABC has increased from RMB 43.79 billion to RMB 51.45 billion, but because in 2007 equity of ABC was negative so that resulted in negative ROE for past two consecutive years.10
As for Cost-to-Income ratio, which is commonly used to evaluate how operating costs are changing compared to operating income, and it is also called ‘‘efficiency ratio’’, the lower one reflects the better operating efficiency. In 2009 ABC had the highest Cost-to-Income ratio that was 43.11%, meanwhile, figures of other four SOCBs were below 40%.11
Table 2-12: Indicators of Profitability of SOCBs in China—2007~2009
Unit: %
Bank ICBC CCB BOC ABC BOCOM
Item Year 2007 2008 2009 2007 2008 2009 2007 2008 2009 2007 2008 2009 2007 2008 2009
ROA 1.02 1.21 1.20 1.15 1.31 1.24 1.10 1.02 1.09 0.82 0.84 0.82 1.07 1.19 1.01
ROE 16.21 19.34 20.13 18.38 20.82 20.81 14.37 14.01 16.60 -13.60 -23.55 20.53 18.23 20.11 19.24
Cost-to-Income ratio 35.27 29.99 33.18 36.30 30.95 33.17 36.20 35.37 38.92 33.52 44.71 43.11 34.45 33.57 39.25
Net Interest Margin 2.84 2.93 2.33 3.29 3.26 2.53 2.84 2.64 2.11 3.05 3.25 2.20 2.91 2.83 2.47
Source: B ankscope, http://bankscope.bvdep.com/ip; ABC, Annual Report, 2009.
In addition to ROA, ROE and Cost-to-Income ratio, Net Interest Margin (NIM) is also a useful measure to examine how well the ability of a bank is to profit from its
10 See ABC (2008), Annual Report.
11 Cost-to-Income ratio= overheads / (net interest revenue + other operating income)
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interest-generating assets, and the higher one also reflects the better profitability.12 In 2009 NIM of SOCBs all decreased compare to the previous year, because downwarding benchmark lending rate has reduced net interest income of SOCBs and also resulted in decending NIM. Because BOC has the smallest proportion of net interest revenue in its operating revenue; therefore, BOC suffers less than its peers from narrowing interest margin.