Song, Ming (2018) Lending Structure, Risk Management and Performance of Joint-Stock Commercial Banks and City Commercial Banks in China: A Corporate Governance Perspective. PhD thesis, Victoria University.

Abstract

Lending structure, risk management and corporate governance (CG) are important banking management issues and pertinent to banks’ performance in terms of profitability and operating efficiency. Although existing research has demonstrated the link between CG, lending structure, risk management and bank performance, limited studies have established such a relationship among fast-growing joint-stock commercial banks (JSCBs) and city commercial banks (CCBs) in China. This study investigated two sets of relationships between lending structure, risk management, CG and the performance of Chinese JSCBs and CCBs from 2007 to 2014. The two relationships were: (i) between CG factors (identities of influential shareholders, ownership structure, board of directors, CEO duality), lending structure of banks and bank risk management, and (ii) between CG factors, risk management and performance of banks. The CG mechanisms employed in this study examined the structure and composition of boards, as well as ownership structure. The variables employed were board independence, board size, political connection of boards, CEO duality, nature of influential shareholders, ownership concentration, state ownership and foreign ownership. Lending structure was measured via lending asset allocation in industrial loans, commercial loans and real estate loans. The following variables were also employed to measure bank risk management: (i) capital adequacy ratio (CAR), (ii) loan-to-deposit (LTD) ratio and (iii) non-performing loan (NPL) ratio. Performance of banks was measured using return on average asset (ROAA) ratio, return on average equity (ROAE) ratio and cost-to-income (COI) ratio to reflect the profitability and operating efficiency of JSCBs and CCBs in China. The data used in this study were manually collected from the disclosed annual financial reports of JSCBs and CCBs. The sample covered 49 JSCBs and CCBs from 2007 to 2014. The two sets of relationships were expressed in a structural model that was further developed into six simultaneous equations. The equations were estimated using both an ordinary least squares (OLS) approach and a generalised method of moments (GMM) approach in EViews. This study reports and discusses the GMM estimation results because of their robustness against the problem of endogeneity. The estimation results demonstrated that among the CG mechanisms, political connection of boards, ownership concentration and state ownership have a significant effect on bank performance represented by all three measures (CAR, NPL ratio and LTD ratio), while board size does not affect any of the bank performance variables. However, no CG mechanism had a consistent effect on all three risk management variables, with board independence having no effect on any of the risk management variables. In addition, the lending structure variables had a limited effect on the LTD and NPL ratios, while CAR was not affected by any of the lending variables. The following potential policy implications arise from this study. First, JSCBs and CCBs should focus on strengthening the function of board of directors through a more meritocratic recruitment process based on required expertise and experience. As part of this recommendation, there should be fewer government-appointed directors of JSCBs and CCBs. Second, the government should be cautious about dispersing shares held by government agencies because of the positive effect of government shareholding on bank performance. Third, the public listing of JSCBs and CCBs should be encouraged to promote their performance. Fourth, government and foreign investor block shareholding should be retained to enhance the performance of JSCBs and CCBs, while block shareholding by state-owned enterprises (SOEs) should be discouraged.

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