1570 the impact of credit risk management on profitability of commercial banks a study of vietnam masters thesis (FILE WORD)

Dissertation submitted in partial fulfillment of the UWE Bristol Requirement for the MSc in Finance FINANCE DISSERTATION ON The impact of credit risk management on profitability of commercial banks: a study of Vietnam NGUYEN HOANG LINH ID No: 17970734 Intake Supervisor: Prof Dr Nguyen Thanh Nhan September 2018 EXECUTIVE SUMMARY University Ofthe West of England The reputation of the banking system and the management capacity perceptions of SBV have been negatively impacted when Vietnamese banking system has confronted with some remarkable events In general, even though banks are exposed to many types of risks, credit risk is considered to have the most influence on financial performance by far The main purpose of the research is to examine the impact of credit risk management on profitability of selected commercial banks in Vietnam In the research model, ROE and ROA are defined as proxies of profitability while NPLR and CAR are defined as proxies of credit risk management The research collects data from 2006 to 2015 and formulates two hypotheses which are related to the research question The results obtained reveal that the NPL ratio (consequent weakness in the control of credit risk) has a significant effect on the both ROA and ROE The research also emphasize the lack of control in term of credit growth booming in the period 2006-2010 with the enormous consequences for upcoming years when the NPL ratio rising and declining performance, which will need more sync solutions from The State Bank of Vietnam and the seriously observance of commercial banks ACKNOWLEDGEMENTS Firstly, I would like to express my humble appreciation to my supervisor, Dr Nguyen Thanh Nhan for her guidance, direction and constructive suggestions through the course of this dissertation I would also like to express my deep gratitude to my parents who always believe in me and encourage me in my life as well as my studying I would like to express my gratitude to all my lecturers who have retransmitted a lot of their knowledge and experience to me during the period of one year studying at UWE Program Finally, I express my thanks to all the authors of the books and journal articles to which I have made references, and also all of my friends who help me resolve some of my confusions Nguyen Hoang Linh Hanoi - September, 2018 TABLE OF CONTENTS EXECUTIVE SUMMARY ACKNOWLEDGEMENTS LIST OF TABLES LIST OF FIGURES ABBREVIATIONS CHAPTER INTRODUCTION 1.1 BACKGROUND OF THE STUDY 1.1.1 CREDIT MANAGEMENT IN THE VIETNAM BANKING SECTOR 1.1.2 CREDIT AND PROFITABILITY IN THE VIETNAM BANKING SECTOR 16 1.2 RESEARCH OBJECTIVES 18 1.3 METHODS AND AREA OF THE STUDY 19 1.4 SIGNIFICANCE OF THE STUDY 19 1.5 STRUCTURE OF THE STUDY 20 CHAPTER LITERATURE REVIEW 22 2.1 CREDIT RISK MANAGEMENT INBANKS 22 2.1.1 CREDIT RISK MANAGEMENT 22 2.1.2 CREDIT RISK MANAGEMENT RATIOS 25 2.2 PROFITABILITY OF COMMERCIAL BANKS 32 2.2.1 ROE 34 2.2.2 ROA 35 2.3 THE EFFECT OF CREDIT RISK MANAGEMENT ON BANK PROFITABILITY 36 2.4 REVIEW OF LITERATURE BY VIETNAM AUTHORS 39 CHAPTER RESEARCH METHODOLOGY 41 3.1 RESEARCH APPROACH 41 3.2 DATA 41 3.3 TIME HORIZON 42 3.4 RESEARCH MODEL 43 3.4.1 PROXIES FOR CREDIT RISK MANAGEMENT 43 3.4.2 PROXIES FOR PROFITABILITY 44 3.4.3 HYPOTHESES 45 3.4.4 CONTROL VARIABLES 45 3.4.5 MODEL 48 CHAPTER FINDINGS 49 4.1 DESCRIPTIVE STATISTICS 49 4.2 REGRESSION MODELS .53 CHAPTER CONCLUSIONS 61 5.1 CONCLUDING NOTES 61 5.2 SUGGESTIONS FOR FURTHER RESEARCH 62 5.3 PRACTICAL IMPLICATIONS 63 5.4 SUGGESTIONS TO STATE BANK OF VIETNAM 66 5.5 LIMITATIONS 69 REFERENCES 70 LIST OF TABLES Table 2-1 Loan classification under Vietnamregulations 31 Table 3-1 List of Banks Included in the Research Sample 42 Table 4-1 Descriptive Statistics 49 Table 4-2 Descriptive Statistics by Banks 49 Table 4-3 Descriptive Statistics by Years 50 Table 4-4 Correlations Matrix .52 Table 4-5 Regression Result Model ROA 53 Table 4-6 Regression Result Model DROA .56 Table 4-7 Regression Result Model DROE .58 LIST OF FIGURES Figure 1- Vietnam Loans to GDP Chart 2008 - 2017 17 Figure 2- Calculation of capital ratio under Basell II 28 Figure 4- Variable Trends of NPLR, CAR, ROA, ROE across years 51 ACB BIDV Asia Commercial Joint-Stock Bank Joint-Stock Bank for Investment and Development of Vietnam CAR Capital Adequacy Ratio CRM Credit Risk Management CTG Vietnam Bank for Industry and Trade EIB Vietnam Export Import Commercial Joint-Stock Bank IRB Internal ratings-based approach LTD Loan to Deposit ratio MBB Military Joint-Stock Commercial Bank MSB Maritime Joint-Stock Commercial Bank NPL Non-performing Loan NPLR Non-performing Loan Ratio ROA Return on Assets ROE Return on Equity RWA Risk Weighted Assets SA Standardized approach SBV State Bank of Vietnam SHB Saigon Hanoi Commercial Joint-Stock Bank VCB Joint-Stock Commercial Bank for Foreign Trade of Vietnam ABBREVIATIONS CHAPTER INTRODUCTION 1.1 Background of the study Despite the increasing diversification of products and services in the banking industry, credit remains to contribute greatly to bank revenues and credit risk is considered to have the most influence on financial performance by far Banks lend out business loans as financial solutions for clients and expect to receive both interest payments and the principal over a specific period However, high return is associated with high risk such as bad debts since customers cannot afford to full fill their loan obligations, which cause negative impacts on bank performance, profits as well as reputation The recent years' global financial crisis 2008-2009 as well as European bad debt crisis 2010 underlined the increasingly considerable concerns related to adverse credit activities that technology innovation and systematic credit risk management also could not halt Charles (2013) states that the problems of non-performing loans led to the risk controlling in credit activities become a vital concern in the banking system, which forces bank managers and experts to strike balance between risk and return and then allocate appropriate resources to risk-generated items 1.1.1 Credit Management in The Vietnam Banking Sector The period between 2001 and 2010 experienced a dramatic jump in term of deposit and credit of banking system in Vietnam with average rates of 28% and 3l% respectively; particularly, the expansionary monetary policy and high investment demand throughout the time led credit grow much higher (around 22%) than GDP (Ha, 2014) Nevertheless, these indicators swiftly decreased from ... Discuss credit risk management theory and practice in banks ii Analyze the impact of credit risk management on profitability of selected commercial banks in Vietnam iii Discuss the practice of CRM... research aims at providing an insight into the theoretical framework and practice of credit risk management in the banking business and analyze how the credit risk management will impact the profitability. .. to the Monetary and Financial Market Review by the Vietnam Banking Association (2013), the Article published on Vietnam Asset Management Company website sbvamc.vn on 17 nua/ 13 qualitative approach