Noninterest Income and Performance of Commercial Banking in China

Abstract

Noninterest income is what most Chinese banks are striving for in recent years because of the vigorous competition among commercial banks due to the increasingly open market and tough regulation from the central bank of China. But the problem is the real effect of noninterest income on profit and risks. A panel threshold model is used with balanced panel dataset of 16 listed Chinese commercial banks, for the period of 2007 to 2013, to investigate the relationship between noninterest income and performance. The findings show two main conclusions: ( 1 ) the existence of two thresholds shows that there is nonlinear relationship; ( 2 ) there is a general negative correlation between the noninterest income ratio and performance of commercial banks. Furthermore, when the noninterest income ratio is higher than the two thresholds, the negative correlation decreases. Implications of the paper are that the ratio should be controlled in a range or noninterest income will not positively affect the performance, and a high level of performance can be gained only by raising the ratio to a certain level.

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