How does digital transformation affect the profitability of rural commercial banks?

Under the impact of the business sinking of large commercial banks and the cross-border competition of fintech companies, digital transformation has become a strategic priority for rural commercial banks. However, can digital transformation improve the profitability of rural commercial banks (PORCB)? This aspect has not been thoroughly examined in academic literature. This study utilizes unbalanced panel data from 54 Chinese rural commercial banks spanning from 2010 to 2021. The Peking University Commercial Bank Digital Transformation Index is employed to gauge the extent of digital transformation, while ordinary least squares estimation is used to examine its effect on the profitability of rural commercial banks and elucidate its underlying mechanisms. The findings show that: (1) Digital transformation can significantly improve the PORCB. (2) Digital transformation improves the PORCB by enhancing asset quality, operating efficiency and risk-taking. (3) The profitability-enhancing effect of digital transformation is more pronounced among rural commercial business banks with larger assets and lower equity concentration, as well as among state-owned rural commercial banks. This paper's findings represent a novel investigation into the correlation between digital transformation and the profitability of rural commercial banks. They offer a theoretical foundation and empirical evidence for future studies examining the economic implications of bank digital transformation, and offer valuable insights for enhancing the digitalisation of rural banks.