Analysis on CMBC and BC

Group member: Le hangxin Zhang shuting

Pan bilin Xi hanping

Bank of China, or Bank of China Limited in full, is one of China’s four state-owned commercial banks. It was established in 1912 pursuant to the approval of Mr. Sun Yatsen. Its businesses cover commercial banking, investment banking and insurance. Members of the group include BOC Hong Kong, BOC International, BOCG Insurance and other financial institutions. The Bank provides a comprehensive range of high-quality financial services to individual and corporate customers as well as financial institutions worldwide. It is mainly engaged in commercial banking, including corporate and retail banking, treasury business and financial institutions banking.

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Founded in 1987 with its head office in Shenzhen, China, the Company mainly focuses on the market in China. As at 31 December 2012, the Company had 99 branches, 853 sub-branches, 2 branch-level operation centers (a credit card center and a credit center for small enterprises), 1 representative office, 2,174 self-service centers and 1 wholly-owned subsidiary, CMB Financial Leasing in more than 110 cities in Mainland China.

The Company provides customers with various wholesale and retail banking products and services, and maintains treasury businesses for proprietary purpose and on behalf of customers. Many innovative products and services of the Company, such as “All-in-one Card”, “All-in-one Net”, dual-currency credit card and private banking services, have been widely recognized by consumers in China.

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Compared the above two tables， we find that the total liabilities of CMBC is 3,207,712 and the total liabilities of BOC is 10,468,716. The liabilities of BC are three times more than that in CMBC.

In the following, we are going to compare the differences of liabilities between the two commercial banks.

Analysis on the Liability Structure of Two Banks

CMBC:

BC:

CMBC:

CMBC:

CMBC:

BC:

BC:

BC:

Asset structure & loan structure &security investment structure

As at 31 December 2012, the total assets of Bank Of China (hereinafter referred to as BC for short) is RMB11, 242,120 billion representing an increase of 7.28% as compared with the end of 2011.On the other hand, the total assets of China Merchants Bank (hereinafter referred to as CMB for short) amounted to RMB3, 408, 219 billion, representing an increase of 21.94% as compared with the end of 2011. According to the former data, we can figure out that the size (often measured by total assets) of BC is larger than CMB while the rate of increase is just the opposite.

It’ s clear from the “asset” charts above, that the item “loan” and the item “investment securities” are both the most important parts in this two banks. To make the further and more detailed comparisons in total assets, we will continue to compare the loans structure and security investments structure of these two commercial banks.

The item of “loan” can be divided into two parts, “Corporate loans and advances” and “Personal loans”, and we can use the data from the annual report to get the following pie charts. As at the dates indicated, the loans and advances by product type so that we can find out that the big banks are more willing to offer the personal loans to further optimize loan structure and systematically control various risks.

Normally, available for sale investment, held to maturity investment and investment receivables constitute the investment securities. The component of investment in CMB is more detailed, and the conclusion is really different in the banks of different scale.

Holding the held to maturity investment which is generally in the form of bonds of fixed maturity and income accords with the principle of conservation that most big banks required. On the other hand, the available for sale investment shows better liquidity than other investment securities and the holders have the opportunity to get the capital gains.

According to the above analysis, it is clear that the size effect to commercial banks can influence the various aspects. Big banks and small banks have different decision and strategy in their operating activities.

The banks of big scale prefer to hold the investment securities asset because the risk of investment securities is often smaller than the loan, but the return is steadier.

Analysis on the Income Structure of Two Banks

Now we will analysis the income differences between large banks and small banks. From every part of the income structure, the total revenue of the two banks is composed of two parts, one part is net interest income, and another part is non–interest income

Net interest income is composed of three parts, the first part of it is interest spreads of deposit and loan, the second part is due from banks and other financial institutions, and the last part is investment in securities. Because of two banks focus on different aspects, the three aspects in net interest income are not same.

From these three points, we can find the different between large bank and small bank. The difference is the importance of interest spreads of deposit and loan for small banks is more than the importance of interest spreads of deposit and loan for large bank.

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Non–interest income is composed of three parts, one part of it is net fee and commission income, one part of it is other net non-interest income, and the last part of it is other net income. Fee and commission income refers to the company for the customers to deal with various businesses charging handling fees and commission incomes.

We can know that the importance of net fee and commission income for small banks is the same as the importance of net fee and commission income for large bank. With the increase of net fee and commission income in recent years, it is in the proportion of non-interest income will be bigger than now.

(3) (4)

Compared with picture (5) and picture (6), we can know that the impartment thing of total revenues is net interest income. The proportions of two banks’ incomes are slightly different, but they are roughly the same. Net interest income is still the largest proportion of total revenues. According to the longitudinal analysis on some years of data banks themselves, we can get a conclusion that with the trend of mercerization of the interest rate, the return the bank can get on the interest income will be less and less, so non-interest income in total income accounted for the proportion will be more.

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Comparisons on the Performances of Big Bank and Small Bank

As small banks have larger possibilities to increase their scale, business and so on, they are the potential increaser. While big banks have set up for many years, their scale, possibilities for mature is much lower, they have already formed their own fixed ways of business operations, and can’t be changed in short-terms. Because big banks have larger assets and liabilities scales, their liquidity of assets is also higher than small banks, they don’t need to worry about the source of money and tend to focus on some fixed big customers rather than small and retail investors, because more retail and unfamiliar customers means larger credit risks.

Greater competition tends to squeeze the difference between average asset yields and average liability costs. Almost every bank has the same basic business, what they can do to make a difference is to form their special business, or to create a new kind of business.

When talking about banks, risk is also a very important aspect. Small banks needs large scales of money to support it’s financial work, as they don’t have much money and reputation, what they can do is to increase the times and the numbers of their trades. Thus, they get the money from private investors that many big banks don’t want. These investors may be carried with large default risk.