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Does artificial intelligence enhance bank profitability? Evidence from China

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  • Li, Zhen

Abstract

This study investigates how artificial intelligence (AI) adoption affects bank profitability in China. We develop a novel AI lexicon using Large Language Models (LLMs) and construct comprehensive AI adoption indicators from annual reports and patent filings, capturing both strategic orientation and innovation activities. Using a panel of 430 Chinese commercial banks from 2007 to 2022, we find that AI adoption enhances bank profitability. Mechanism tests reveal that AI adoption drives profitability by reducing operational costs, diversifying income sources, and promoting mobile banking development. Moreover, the profitability gains from AI adoption are more pronounced for systemically important banks, banks with concentrated ownership structures, and banks located in regions with mature FinTech ecosystems. Our findings provide novel insights into the value creation of AI in emerging banking markets.

Suggested Citation

  • Li, Zhen, 2026. "Does artificial intelligence enhance bank profitability? Evidence from China," Finance Research Letters, Elsevier, vol. 90(C).
    • Handle: RePEc:eee:finlet:v:90:y:2026:i:c:s1544612325026157
    DOI: 10.1016/j.frl.2025.109366
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    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis

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