ANALYSIS ON SIZE EFFECT TO

COMMERCIAL BANKS OPERATION

——BASED ON COMPARISONS OF CCB BANK AND CRCB BANK

小组成员杨秋芸、许艺宁、徐林炜、王聪、墨鹏宇

The most widely used indicators of the qualityand quantity of bank performance and some performance indicators can be used to measure banking’s principal competitors.

The success or lack of success of institutions in meeting the expectations of others is usually revealed by a careful study of their financial statements.

Li abi l i ty st ructure of CCB Deposi t s f romcustomers

Deposi t s andpl acements f rom banksand non- bank fi nanci ali nst i tut i onsFi nanci al assets sol dunder repurchaseagreements

Debt secur i t i es i ssued

Other l i abi l i t i es

l i abi l i ty st ructure of CRCB Deposi t s f romcustomers

Deposi t s andpl acements f rom banksand non- bank fi nanci ali nst i tut i onsFi nanci al assets sol dunder repurchaseagreements

Debt secur i t i es i ssued

Other l i abi l i t i es

From the CCB liabilities structure can see, CCB deposits ratio, respectively, are 89.77%, 87.11%, 87.10% and CRCB of deposit ratio is, respectively, 78.1%, 78.24%, 72.60% is very intuitive and the proportion of CCB deposits ratio can be seen the agricultural higher.

This is because compared to the big banks with high credit basis, the interest rate is not market-oriented, people still choose the largest bank in deposits, small banks in deposits weaker. 

41%

21%

16%

4%

14%2%2%

Net l oans and advancesto customers

I nvestments

Cash and deposi ts wi thcentral banks

Deposi ts and pl acementswi th banks and non-bankfi nanci al i nsti tuti onsFi nanci al assets hel dunder resal e agreements

I nterest recei vabl e

52%

22%

19%

3%2%

0%2%

Net l oans and advances to customers

I nvestments

Cash and deposi ts wi th cent ral banks

Deposi ts and pl acements wi th banks and non- bank fi nanci al i nst i tuti onsFi nanci al assets hel d under resal e agreements

You can see from the asset structure of the CCB, CCB three years in terms of investments in securities are 26.87%, 22.32%, 20.52%, and CRCB is 20.79%, 20.69%, 17.86% large banks with good risk control, so more stringent control over the investment of assets. Securities investment assets than smaller banks. In the asset structure CCB Financial assets purchased under resale agreements are 1.68%, 1.63%, 2.27%, and CRCB is 13.01%, 14.48%, 12.43%. Small banks can be seen in financial assets purchased under resale agreements far more than the assets of the big banks in this regard. Because large banks tend to avoid these financial risks. Financial assets purchased under resale agreements can continue to move to get will the original assets amplification times causing foam.  

In the revenue structure, the Construction Bank in non-interest income accounted for about 24% of the income of only 4% of the heavy agricultural. The big banks have a competitive advantage in the creation of non-interest income business, because the larger business provides more opportunities for specialization and cross-selling. Its main advantages are: to achieve a critical mass, economies of scale and economies of scope, to provide a wider range of products and services, improve productivity, efficient cost structure and risk diversification.

Judging from the bank's non-performing loans, the bank's non-performing loan rate lower than the overall non-performing loan rate of re-farmers, the big banks have a better internal management mechanism, the correctness of the decision-making, structural grasp of the loan portfolio than small banks good. Furthermore, due to the small banks facing small businesses, non-performing loan rate will be relatively large.

ROA which stands for return on assets is primarily an indicator of managerial efficiency. It indicates how capable management has been in converting assets into earnings. It combines concerned items in balance sheet with those in income statement synthetically.

Compare of ROA

This shows that big banks represented by CCB always take more profits than small banks like CRCB.

ROE is short for returns on equity, and is a measure of the rate of return flowing to shareholders. It approximates the net benefit that the stockholders have received from investing their capital in the financial firm. That is to say, the owners place their funds at risk in the hope of earning a suitable profit.

We know that CCB obtains more benefits in the process of investing than CRCB.

Compare of ROE

NIM, meaning the net interest margin, in contrast, measures the amount of noninterest revenues stemming from service fees the financial firm has been able to collect relative to the amount of noninterest costs incurred, including salaries and wages, repair and maintenance of facilities, and loan-loss expenses. Typically, NIM is negative because noninterest costs generally outstrip fee income, though fee income has been rising rapidly in recent years as a percentage of all revenues.

NIM of two banks

We can find that small banks frequently display larger NIM, thus, greater spreads between interest revenue and interest costs because most of their deposits are small-denomination accounts with lower average interest costs. Moreover, a large proportion of small banks loans tend to be higher-interest consumer loans. Generally speaking, small banks often provide better service to customers.

Another traditional measure of earnings efficiency is the earnings spread(ES), which measures the effectiveness of a financial firm’s intermediation function in borrowing and lending money and also the intensity of competition in the firm’s market area. Greater competition tends to squeeze the difference between average asset yields and average liability costs. If other factors are held constant, the spread will decline as competition increases, forcing management to try to find other ways to make up for an eroding earnings spread, such as generating fee income from new services.

ES of CCB and CRCB

Compare of NPL

As NPL rises, exposure to credit risk grows, and failure of a lending institution may just around the corner.

Nonperforming Loans can be abbreviated as NPL, which are credits that no longer accrue interest income or that have had to be restructured to accommodate a borrower’s changed circumstances.

Loan-to-Deposit Ratio, as the name suggests, is total loans in commercial banks divided by total deposits. From the perspective of banks, the higher the ratio is, the greater the profitability is. Interests are required to pay when depositing, which is so-called fund cost.

Loan-to-deposit ratio

If there are a large number of deposits but a few loans in a commercial bank, its cost is high but it is lack of benefits, which means the bank has a worse profitability.

At present, Loan-to-Deposit Ratio, in commercial banks is presented by reserve against deposit. As we all know, the rate of reserve requirements is decreased from 13% to 8% in March, 1998, and further declined to 6% in November, 1999. Therefore, the ratio should be reflected on the amount of excess reserve. Analyzing the banks’

motivations, we know that holding plenty of excess reserve can not only reduce the risk of NPL but also gain relative high interest income from the central bank.

As this ratio grows, examiners representing the regulatory community may become more concerned because loans are usually among the riskiest of all assets for depository institutions, and, therefore, deposits must be carefully protected. A rise in bad loans or declining market values of otherwise good loans relative to the amount of deposits creates greater depositor risk. Small banks appear to be more liquid, as reflected in their lower Loan-to-Deposit Ratio, because loans are often among a bank’s least liquid assets. Larger banks also appear to carry greater credit risk as revealed by their higher Loan-to-Deposit Ratio.

ROA

ROE

NIM

ES

NPL

When the performance of one commercial bank is compared to that of another, all indicators of above, which are highly sensitive to the size group in which a financial institution finds itself, become critical factors. In the eye of the data we’ve collected, key earnings change dramatically as we move from the small banks to the large banking firms.

Thank you