From X-efficiency to Bank Profitability: An Analysis for Chinese Commercial Banks

Abstract

Using data from 2010-2015 of 151 banks, this study first exams the X-efficiency of Chinese commercial banks under the SFA estimator and finds out their efficiency is on an upward trend which is in line with other literature. Their average X-efficiency is relatively high (0.8761) and there are scale economies and minimum efficiency scale in Chinese banks. Then this study uses bank-specific factors, industry-specific factors and macroeconomic factors to analysis the determinants of bank profitability in GMM model. The results show that both size and Z-score positively affect bank profitability while capital level and liquidity negatively associated with bank performance. Furthermore, Chinese commercial banks are greatly influenced by external factors with market concentration, banking sector development and stock market development all bring positive effects on profitability. However, GDP growth adversely affect bank performance. The results denote increasing credit risk, high regulatory costs, inadequate competition, and high volatility among Chinese banking sector