Industrial and Commercial Bank of China

Introduction

Chinese economy is characterized by the liquidity nature and good production environment which enhances business. Chinese government has been encouraging locals and international producers and service providers to locate in the country by providing good and conducive political and financial environment where all can freely trade. The working culture and innovation as well as the wide spread use of technology, Chinese economy GDP has grown bigger (10%) reflecting a stable economy. To hold all factors constant, Chinese financial sector can be said to be one of its kind as compared to the others in the world (Young, 62). Holding the fact that Chinese economy plays a major contribution to the world economy and business operations, the local financial sector can be credited for this development. The industry is managed and controlled by the central bank, a body that acts as the bank of end result to the other financial institutions as well as regulating and coordinating activities in the financial sector in the Chinese economy. Commercial Bank of China is one of the key financial institutions that operate in this said liquid financial environment. The bank has many branches as well as holding the big market share in the economy. This financial institution has identified itself with the corporate and individual customers as a way of extending its service to the people. Government is also another major customer to the bank hence providing stable business. Holding the fact that this bank has a big customer base as well as having stable capital, the bank is said to be financially stable.

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With respect to the fact that Commercial Bank of China is a major economic institution in china, it was affected and still remains a subject to the world financial factors. This is because of the economic involvement in the international business hence subjecting the local financial institutions to the possible challenges emanating form the international financial platforms. It is with this understanding that Commercial Bank of China was affected by the financial challenges that were affecting others in the world as well. The bank’s main products or services to the targeted customers include loans, financial advice, cash handling services, investments and forex services. Most of these services are delivered directly by the bank officers at the bank but due to the availability of technology, this institution has let some of their services to be accessed online. This development has reduced customer-worker conflict as well as ensuring good service delivery to its customers.

Background

Financial sector in china have come of age. Banking sectors is a core sector in the Chinese economy and developments in other sectors have been influencing the sectors. Competition in the financial sector in the Chinese economy has also translated to the current development where technology has taken the center stage. With the changes in the economy financial status, Commercial Bank of China has been changing both by its customer’s targets as well as the operations. The bank therefore has diversified its operations and at the same time making its services accessible by majority economic contributors. Due to the various changes in the financial market, regulations are said to be minimal and the market forces are said to have been left free to determine the currency rate and the rate of interests. This development has ensured growth and development in the industry with this respect, the future of this industry is said to be encouraging where all stakeholders are given a fair playing field.

Banking industry

Commercial Bank of China is one of the main financial service player in the Chinese financial industry. This is so because of its wide range of products, customer’s base and the company capitalization. Beside this development, the industry can be said to be competitive in nature. This is because there are so many players in the market who offers the same products and at a considerable equal rate. This hold the strategies decisions in the industry sensitive and a move in one financial institution can mean a lot in the market. To the customers, competition in the industry has promoted business positively because there is a wide range of choice hence providing a fair rate to them. Commercial Bank of China on its part holds 30% of the market share hence remaining as a major player in the market.

With the increase of the production and demand of the Chinese products locally and internationally, financial sector in the region has been boosted by the increase of credit customers hence making credit offering as the main business in the industry. The change of the interest rate affects the borrowing rate hence determining the industry profitability. Holding the fact that Commercial Bank of China has managed to secure big market share as well as maintaining well diversified customer portfolio, the bank profitability remain steady. The company has created association with various customers of different interests raging from saving customers, producing customers, exchanging customers and advice section. This diversification helps the bank to remain active and profitable all through the year.

Financial industry in china has various players ranging from insurance firms, Saccos and banks. The services offered are almost similar hence making the industry more competitive. In the services delivery, this sector stands recognition because it has adopted improved technology hence making service delivery easy and less complex. It is import to note that the industry is directly controlled.and managed by the central bank of china where interest rate and customer’s interests are directly monitored by the government through the central bank. This is because this industry is sensitive to the local economy and to the well being of the locals and the identified customers both local and international.

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Historical analysis

Commercial Bank of China is a financial institution owned by the government by the majority shareholding. This means that it is owned by the government. It started as a financial institution which was aimed as offering alternative in the financial industry. It was governed and managed by the government directly hence making it a government owned institution. Due to the unfolding financial changes, government has sold some shares to the private investors hence making the institution more appealing to the majority. With time, the bank has extended its interests all round the economy hence making it one of the financial institutions in Chinese economy that holds a big infrastructure (Tsai, 45). This works positively to the institution hence attracting many willing and able customers. With the introduction of the technology in the financial sector, Commercial Bank of China has turned to be one of the best serve delivering financial institution in the economy. This has helped the institution to attract more customers both corporate and individuals. All factors held constant, the company capital growth has been constantly growing as well as remaining profitable for a long time.

Strategic decisions

Commercial Bank of China management has decided to incorporate technology as one of the key tool of trade. This strategic decision has helped to reduce the cost of production hence increasing the institution profitability and reliability. Technology has improved communication between the company stakeholders as well as improving services delivery to all targeted customers. Another noticeable move of the decision makers in the Commercial Bank of China is the need to incorporate all financial attractive customers. This objective has been reached by identifying various customers of different interests. The institutions has been encouraging both corporate and individual customers. The micro saving in the bank has helped the bank to remain liquid all the time irrespective of the economic condition in the environment. At the same time, this move provides a pool of risk where the bank has managed to form a big pool of risk hence reducing the risk ratio in large ways. Corporate customers are only interested in the loan facility offered by the bank a serves that have proved to be risky. Globalization and the interests of the borrowing class to go international have increased the risk ratio of the loans given to those institutions that are providing services in the international platform (McKibbin, 84). To only way to mitigate or to diversify was to incorporate other alternative to reduce the risk.

As part of the strategic management decisions, the bank has opened international subsidiaries (branches in Canada and Europe) to help the bank diversify. The bank has been getting a 10% profit contribution from this involvement. Beside the possible opportunities, the company also faces various challenges. It is clear that the bank faces all financial effects in the area of interests directly. This affects the company operations and the future profitability. Currently, the /bank has invested more than 1 billion dollars to establish this branches among other interests. It means that the company holds a substantial risk of capital loss as well as holding a possible growth opportunity in these targeted areas.

Customers

Commercial Bank of China has managed to attract 30% of the banking community in the China economy. These customers comprises of corporate institutions and individuals. Most of the corporate customers are producing customers while individuals are the saving customers. The bank customers are attracted by the company infrastructures and the stability. Corporate customers are motivated by the company stability as well as competitive interest rates offered by the bank. The bank has also attracted international customers mostly those who do business in China and use the bank facility as a media of storage while doing business.

Commercial Bank of China Basel

The bank has managed to form a Basel committee with an intention to reduce the capital loss risks. The company has been managing a reserve of 35% of the bank savings in the reserves as the only way to assure the investors and other stakeholders. These reserves are used as insurance to the customers and to the other stakeholders. Beside all, this activity is a statutory requirement and it must be provided to the central bank before the company start off.

Equity capital breakdown

The company has retained a 35% reserves with the central bank as a way of assuring its customers that the bank is stable and incase of a collapse, then the customers will be paid back. Reserves are banks illiquid assets which are statutory requirement for every financial institution. The company also owned physical assets which are valued at 100 million dollars. The company liabilities are manageable hence making the company capitation strong.

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Ratio analysis with graphs

Risk and Return Ratio on commodities of Commercial Bank of China from the year 2001 to 2010:

Ratio analysis with graphs

Risk and return ratio on equity of Commercial Bank of China from the year 2001 to 2010:

Ratio analysis with graphs

Financial statements

The company has a stable financial statement.

Operating and financial analysis

Commercial Bank of China has identified its self as the bank of the producing and saving community in the China economy. Many customers as a result have identified themselves with the bank hence making the bank operations smooth and realistic. It is with the same note that this bank has embraced technology as a media of trade. This has helped the company operations to be smooth as well as meeting customer’s expectations. Irrespective of this impressive development in the operation, the region economy holds a brighter future. Chinese economy is growing very first as compared to the developed nations and precisely the Euro region. The ability to produce goods and services at a large scale has impacted the local economy positively where the economy GDP has been in it rise irrespective of the economic meltdown.

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The political and leadership environment in the economy has also played a major role in the current achievement. Stable and reliable political movements enhance stability in the local economy. The political class in the economy has established legal framework that is supportive to the financial industry in the region. The ability to control the rates and the political willingness to support the private sector by ensuring readily market of their goods.and services promotes the financial sector directly. This is because their customers are able to repay the loan on time hence improving the institutions stability and liquidity.

With respect to the fact that Commercial Bank of China holds 30% of the local market share, this financial institution stand to grow relative to the growth of its customers financial capacity. On the same note, the bank also face a critical challenge form this development. This is because Commercial Bank of China and others are supported by customers who are producing goods and services to the world. This means that what happens elsewhere in the world will have to be translated back home financially. The decision making process to the bank will be complex because there is so many factors to consider. In case of an economic challenge in another region, for example Euro region where most of the bank customers sales their goods and services, this economic challenge will have to be translated back (Greenwald, 76). Globalization has both positive and negative to the Chinese economy and mostly to the financial institutions mainly because there are more sensitive as compared to the other sectors. In future, it is expected that Commercial Bank of China will have a bigger role to play financially as its involvement is advancing beyond China economy. There is a possibility that it stand to expand but it will have to come up with a stable strategy for future development.

Risks Facing the Bank

Economic patterns in the world financial market remain a challenge to all financial institutions irrespective of the location. Globalization has made this possible and all financial institutions share the same risk. Holding the fact that the Euro region is currently unstable, Commercial Bank of China stands to absorb some of these economic challenges. World financial systems operate in a single platform and a fairer of one major institution means the others might also surfer the same setback. Holding the fact that the bank has recorded a 17% growth within and outside China economy, there is a posing threat of managing this growth. It is important to note that there are more factors to consider while making decisions and managing this big portfolio. There are also uncertainty on whither the growth will be manageable or sustainable.

Instability in the interest rates as a result of the inflation and deflation discourage the bank strategic decisions. It is also advisable to note that this ever changing factor affects the bank profitability directly. This is because in case of inflation, the central bank of the region will tend to increase the rate as a way of discouraging borrowers to continue adding more money in the market. In such a case, there will be few willing and able borrowers hence reducing the bank profitability ratio. In case of a deflation, the bench mark rate will be lowered hence affecting the banking strategies adopted by the financial institutions. Due to the fact that these economic events will continue to occur, Commercial Bank of China will continue to hold or to operate with this risk.

Trend-cyclical analysis

Commercial Bank of China has set a trend where its profitability rate continues to go up after every financial year. This is a positive trend which portly this institution as a growing one. There is a possibility that this trend will be maintained due to the already existing infrastructures and the economic expectations in the region. It is also noted that Chinese economy is stable mainly because it is based on production hence reducing speculations in the times of financial challenges. It is noted that this economy has emerged stable in various financial challenging times. This proves that the country financial systems and institutions are stable and reliable.

Ratios: profitability, solvency, liquidity

In the resent financial years (2011, 2010 and 2009), Commercial Bank of China has retained a positive profit margin of more than 10% consecutively. This proves that the company is stable and there is no possibility of solvency in the near future. There are high economic expectations that the business environment will continue to be conducive for this institution for a long time. The company products and services are attractive hence creating demand of its financial offers in the economy. Holding the fact that Commercial Bank of China has diversified its products and customer targets, the company liquidity ratio has been on a rise. There is a reduced bad loan cases as well as having increased saving rate from its customers (Caprio, 19). The intention to attract all kind of economic stakeholders in the economy as well as opening various service centers in the economy has helped the bank to remain liquid. There is also a program in the industry where internal borrowing and overnight borrowing is encouraged with a better terms. This ensures that all financial institutions are liquid enough to meet their daily demand.

Liquidity ratio for the immediate three financial years

Year
Ratio
2009 2010 2011* up to 3rdQ
Current Assets/
Current Liabilities
0.4619 1.538 1.76

Interest rates

Interest rate affects the bank lending capability. When the interest rates are high, then there will be few willing and able customers hence limiting the bank profitability. On the other hand, when the bank interests rate are low, then it means that there will be more customers who will be interested with the facility. It is unfortunate that these rates are set by the central bank with an intention to regulate the amount of money flowing in the economy. It is important to note that Commercial Bank of China has maintained a relatively lower and rational lending rate as compared to the other market players hence attracting more willing and able buyers.

Interest rate ratio for immediate financial years

Year 2007 2008 2009 2010 2011
SAIBOR/LIBOR 0.1 0.99 10.8 19 20

Capital

The bank main source of capital is share issuing and loans from the central bank.

Operational risks

Financial institutions operate in a high risk environment. To reduce the risk ratio, Commercial Bank of China has introduce many products some of which have little risk ratio. While issuing loans, the bank ensures that the customers have a capability to pay as well as making sure that the customers produce a collateral against the loan. Holding the fact that financial institutions operates in a high sensitive environment, the bank has been facing risk of employing untrustworthy employees. There is a high risk possibility of the employees to take advantage of their position against the corporate interests. To avoid this risk, the institutions have adopted a high remuneration strategy as a way of motivating professionalism among its employees.

Beside this internal risk, Commercial Bank of China poses external threats among them is competition and change of interests rate and shift of the cost of living as a result economical changes. The occurrence of one of the possible risk, subject the institution operation at halt. For example, if the cost of living change, it means that the saving rate will reduce hence reducing the bank interests gotten from the multiplier effect. High interests rate discourage the borrowers hence killing the bank main business.

Positive and/or Negative Gap in the Bank’s Receivables and Payables

Increase in receivable means that the bank holds a chance to make more money. It is advantageous for the bank to have more receivable as they are treated like assets. In our case, receivables are loans offered to the customers. This means that the bank stand a chance to make profit from good loans. On another hand, a negative gap means no loans offered and the bank is not taking the advantage of the time value of money. Also an increase in receivables in the banking case might lid to an increase of bad depts. Bad dept can be treated as losses hence negatively affecting the bank profitability. The gap between the payable also has both advantages and disadvantages. The increase in payable decrease the bank profitability and vice versa is also true. To maximize the company profitability, the bank management must be willing and able to reduce or to keep the gap as small as possible as compared to the business receivables.

Conclusions

Commercial Bank of China has a chance of stabilizing its self even more it at all the business environment will continue to be conducive. The bank financial position is currently stable and to maintain this trend, prudent management of the bank resources is must. To ensure that this institution expands, management must be willing and able to diversify the company products as a way of reducing the risk ratio (Barth, 34).

Recommendations

Holding all factors constant, Commercial Bank of China must ensures that their rates are competitive and attractive to the producing and consuming population. This will make it possible for them to make more profits from the loan facility. On the same hand, it is appropriate that the management set conducive requirement for one to qualify for a loan. This enhance loan facility will increase bank customer base as well as forming a good portfolio which has a capability of reducing risk emanating from this facility.

To make sure that Commercial Bank of China remains the face of the Chinese financial institution, the bank must open service centers to all viable locations. This will enhance bank presence hence serving most of the customers. Micro banking should not be neglected mainly because low income earners form a big bankable population. This strategy will also improve the bank competitiveness in the market hence securing big market share as compared to other financial institutions (Emerald, 15). The bank must be willing and able to use technology. This will reduce cost of production which will then mean improved profitability ratio.

Works Cited

Asia pacific financial markets in comparative perspective issues and implications for the 21st century. Bingley, U.K.: Emerald, 2005. Print.

Barth, James R.. Financial restructuring and reform in post-WTO China. Alphen aan den Rijn, The Netherlands: Kluwer Law International, 2007. Print.

Caprio, Gerard. The future of state-owned financial institutions. Washington, D.C.: Brookings Institution Press, 2004. Print.

Greenwald, Bruce C. N., and Judd Kahn. Glob·ali·zaʹ·tion n. the irrational fear that someone in China will take your job. Hoboken, N.J.: John Wiley & Sons, 2009. Print.

McKibbin, Warwick J., and Kam Ki Tang. The global economic impacts of trade and financial reform in China. Washington, DC: Brookings Institution, 1998. Print.

Tsai, Kellee S.. Back-alley banking: private entrepreneurs in China. Ithaca: Cornell University Press, 2002. Print.

Young, Arthur N.. China’s nation-building effort, 1927-1937; the financial and economic record. Stanford, Calif.: Hoover Institution Press, 1971. Print.

Appendices

Financial Statement

Income

2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 (expected) Total 2012 (expected)
Special commission income 5,814,293 1,208,732 1,198,469 1,233,510 1,334,92807 4,975,641
Special commission expenses 1,467,107 196,28 170,815 173,800 198,321 739,232
Net special commission 4,347,185 1,012,438 1,027,653 1,059,711 1,136,592 4,236,395
Operating income 5,960,108 1,469,410 1,527,259 1,498,160 1,648,103 6,142,935
Operating expenses 2,929,623 784,950 761,455 887,399 892,394 3,326,201
Net income 3,030,484 684,459 765,803 610,760 755,707 2,816,732
EPS 2.01 0.45 0.50 0.40 0.50 1.88

Assets

2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 (expected)
Cash & balance with SAMA 23,419,302 22,153,180 17,199,073 18,666,020 19,359,844
Due from banks 8,704,461 8,044,907 9,965,974 9,794,600 11,444,573
Net investments 32,308,076 32,225,513 32,649,320 31,667,473 32,564,122
Loans and advances 106,514,612 106,277,020 104,743,991 105,042,285 106,456,543
Other real estate 407,131 404,256 400,132 397,132 400,353
Properties & equipments 1,830,156 1,830,431 1,820,728 1,814,188 1,815,151
Other assets 3,215,513 3,352,210 2,557,850 4,335,230 4,155,641
Total assets 176,399,257 174,287,523 169,337,074 171,716,934 176,196,233
Return on assets 1.71% 0.32% 0.41% 0.36% 1.7%

Expenses

2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 (expected) Total 2012 (expected)
Salaries and employee-related expenses 1,118,171 293,187 269,615 296,875 315,215 1,174,895
Rent and premises-related expenses 226,914 65,673 62,465 65,023 70,826.7 263,990
Depreciation 262,247 62,911 67,613 70,680 73,775.8 274,982
Other general and administrative expenses 578,401 164,804 161,537 147,618 173,786.066 647,747
Impairment charge for credit losses, net 618,538 278,985 196,161 299,778 284,139.7 1,059,066
Impairment charge for investments, net 117,842 (85,000) -85,000
Other operating expenses 7,504 4,385 4,059 7,420 5,817.8 21,684
Total operating expenses 2,929,623 784,950 761,455 887,401 892,394 3,326,201

Liabilities

2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 (expected)
Due to banks 16,163,011 11,810,807 10,255,435 12,416,034 15,563,609
Deposits 125,278,105 128,105,033 124,100,690 124,235,935 125,535,647
Other liabilities 4,849,292 4,692,032 4,614,571 4,727,293 4,876,356
Debt securities in issue 1,873,402 1,873,211 1,873,547 1,873,635 1,873,714
Total liabilities 148,163,813 146,481,086 140,844,244 143,252,900 147,849,331
Share capital 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000
Required reserve 10,981,591 10,981,591 10,981,591 10,981,591 10,981,591
Excess reserve 605,817 627,350 547,941 808,382 635,053
Retained earnings 513,032 1,197,491 1,963,297 1,674,058 830,257
Dividends 1,135,000 900,000
Total shareholders’ equity 28,235,443 27,806,437 28,492,831 28,464,033 28,346,903
Total liabilities & shareholders’ equities 176,399,257 174,287,523 169,337,074 171,716,934 176,196,233
Debt ratio 84.1% 84.1% 83.3% 83.3% 83.3%
Debt to equity ratio 5.26 5.28 4.95 5.02 5.22

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