Management & Engineering 22 (2016) 1838-5745

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Management & Engineering

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A Study on the Impact of Capital Structure of Chinas Listed

Commercial Banks on Profitability
Ziwei HUANG , Haiying PAN
Business School, Hohai University, Nanjing 211100, Jiangsu, P.R.China

KEYWORDS ABSTRACT

Capital structure, Based on the annual report data of 13 listed commercial banks from 2009 to 2011, this paper
Liner relationship, studies the impact of capital structure of Chinas listed commercial banks on profitability.
Listed commercial banks, The result indicates that return on equity (ROE) has a significant negative linear relationship
Profitability with the proportion of the largest shareholder, capital adequacy ratio, non-performing loan
ratio and loan-to-deposit ratio, and has a significant positive linear relationship with the
proportion of the top five shareholders and the proportion of supplementary capital to core
capital, and has no significant linear relationship with the nature of the largest shareholder
and asset scale. At the end, we propose our solutions to the banks based on the results and
their current situation.

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1 Introduction

Since China's accession to the WTO, with the rapid and steady development of the domestic economy, banks have made great
progress in scales, profitability and risk resistance ability. Meanwhile the competition in banking has become increasingly fierce.
Specifically, at the end of the year of 2006, with the full opening of Chinas financial markets and the entrance of a large number of
foreign banks into the domestic market, China's banking have to face the competition from all around the world. How to win in the
competition is one of the practical problems faced by each bank. As for commercial banks, profitability directly reflects the ability of
management, risk control and sustainable development. Therefore, China's commercial banks should continue to enhance their
profitability in order to remain an invincible position in the competition. According to the modern theory of capital structure such as
MM theory, Trade-off theory, Agency theory, Pecking order theory and so force, capital structure can affect the cost of capital and
governance structure, thereby affecting operating performance. Specific to the banking, the impact of capital structure of commercial
banks on profitability are mainly reflected in two aspects: on one hand, there is a direct impact on the profitability by affecting the
cost of capital; on the other hand, there is an indirect impact on the profitability by affecting governance structure. From the capital
adequacy ratio requirements that agreed in Basel II, we know that capital adequacy ratio is required to be higher than 8%, the ratio
that equity capital accounts for the total capital of commercial banks is quite small, in addition to the fact that commercial bank is a
high-debt industry, the financial leverage is quite high. As a matter of fact, the effect of capital structure is mainly showed on the
indirect aspect the governance structure. Meanwhile, as special enterprises, banks get earnings through operating risks, the level of

Corresponding author.
E-mail address: huangziweihj@163.com

English edition copyright ST. PLUM-BLOSSOM PRESS PTY LTD

DOI:10.5503/J.ME.2016.22.013
65