Factors affecting loan loss provision of joint stock commercial banks in vietnam, 2022

MINISTRY OF EDUCATION AND TRAINING THE STATE BANK OF VIETNAM HO CHI MINH UNIVERSITY OF BANKING LAM THI DO HUYEN FACTORS AFFECTING LOAN LOSS PROVISION OF JOINT STOCK COMMERCIAL BANKS IN VIETNAM GRADUAT.

MINISTRY OF EDUCATION AND TRAINING THE STATE BANK OF VIETNAM HO CHI MINH UNIVERSITY OF BANKING LAM THI DO HUYEN FACTORS AFFECTING LOAN LOSS PROVISION OF JOINTSTOCK COMMERCIAL BANKS IN VIETNAM GRADUATION THESIS MAJOR: FINANCE –BANKING CODE: 52340201 HO CHI MINH CITY, 2022 MINISTRY OF EDUCATION AND TRAINING THE STATE BANK OF VIETNAM HO CHI MINH UNIVERSITY OF BANKING LAM THI DO HUYEN FACTORS AFFECTING LOAN LOSS PROVISION OF JOINTSTOCK COMMERCIAL BANKS IN VIETNAM GRADUATION THESIS MAJOR: FINANCE –BANKING CODE: 52340201 SUPERVISOR NGUYEN THI MY HANH, Ph.D HO CHI MINH CITY, 2022 ACKNOWLEDGEMENTS In order to research this topic completely, the author would like to express the sincerest gratitude to the supervisor who has dedicated and worked with the author throughout the research process In addition, the author also would like to express the deepest gratitude to staff, and lecturers for teaching me useful knowledge as well as helping me have better research skills for this study at Ho Chi Minh University of Banking However, with limited knowledge and limited time, the thesis cannot avoid mistakes Hence, I look forward to receiving guidances and comments from lectures to complete and improve my thesis Thank you very much! Ho Chi Minh City, 2022 Author Lam Thi Do Huyen AUTHOR’S DECLARATION I hereby confirm that this thesis entitled “Factors affecting loan loss provision of joint-stock commercial banks in Vietnam”, is my own work, and none of this work has been published before submission Ho Chi Minh City, 2022 Author Lam Thi Do Huyen ABSTRACT This study focuses on the impact of macro and micro factors on loan loss provision of Vietnamese commercial banks between 2011 and 2020 The data used for the study was secondary data, collected from independent audited financial statements of 25 Vietnamese joint-stock commercial banks The study used the Generalized Least Squares model for panel data to identify factors, including internal and external factors, that affect the loan loss provision ratio of Vietnamese joint-stock commercial banks The results showed that the loan loss provision ratio (LLP) was favorably correlated with bank size, net interest margin, non-performing loans, and credit risk coefficient, return on asset ratio harms the provision For macroeconomic factors, the GDP rate has a negative impact on the provision of commercial banks These variables are all statistically significant at the 10% meaning In addition, the study has not found a correlation between loan growth and debt to equity ratio (are not statistically significant for the research model) with LLP dependent variables in the period 2011-2020 Key word: Loan loss provision, Joint-stock commercial banks, Vietnam TABLE OF CONTENTS LIST OF TABLES 10 LIST OF PICTURES, GRAPHS 11 LIST OF ACRONYMS 12 CHAPTER INTRODUCTION 13 1.1 Reasons for choosing the topic 13 1.2 Research objective 14 1.2.1 General objectives 14 1.2.2 Specific objectives 14 1.3 Research questions 14 1.4 Research scope 15 1.5 Research methods 15 1.5.1 Research methods 15 1.5.2 Research process 16 1.6 Structure of the research 17 CHAPTER 2.1 LITERATURE REVIEW 19 Credit risk 19 2.1.1 Definition 19 2.1.2 Classification 20 2.1.3 Causes of credit risk 21 2.1.3.1 Causes from banks 21 2.1.3.2 Causes from customers 21 2.1.3.3 Objective causes 22 2.1.4 Consequences of credit risk 22 2.1.4.1 As for banks' operations 22 2.1.4.2 As for customers 22 2.1.4.3 As for the economy 23 2.1.5 Credit risk measurement 23 2.2 Loan loss provision 24 2.2.1 Definition 24 2.2.2 Objects of provisioning 25 2.2.3 Measure loan loss provision 26 2.2.3.1 Specific provision 26 2.2.3.2 General provision 30 2.2.4 2.3 Meaning of loan loss provision 31 Factors affecting loan loss provision 32 2.3.1 Macro factors - GDP growth 32 2.3.2 Micro factors 33 2.4 2.3.2.1 Bank size 33 2.3.2.2 Net interest margin 34 2.3.2.3 Return on Assets 34 2.3.2.4 Loan growth 35 2.3.2.5 Non-performing loan 35 2.3.2.6 Credit risk coefficient 35 2.3.2.7 Debt to equity ratio 36 Previous studies relating to loan loss provision 36 2.4.1 Foreign studies 36 2.4.2 Domestic studies 40 CHAPTER RESEARCH METHODS AND DATA 43 3.1 Research method 43 3.2 Research model 43 3.3 Research variables 44 3.3.1 Dependent variables 44 3.3.2 Independent variables 45 3.3.2.1 3.4 Bank-specific variables 45 Research data 52 3.4.1 Panel data regression methods 54 3.4.1.1 Fixed effects model 54 3.4.1.2 Random effects model 55 3.4.1.3 Statistical Description 56 3.4.1.4 Estimation and selection of the appropriate model 57 3.4.1.5 Defect analysis 57 CHAPTER RESEARCH RESULTS AND DISCUSSION 59 4.1 Current status of operations and provisioning of Vietnamese joint-stock commercial banks from 2011 to 2020 59 4.1.1 Current status of business activities of Vietnamese joint-stock commercial banks 59 4.1.2 Situation of provisioning for loan losses in Vietnamese joint-stock commercial banks 61 4.2 Research results 63 4.2.1 Descriptive statistics 63 4.2.2 Correlation analysis 65 4.2.3 Regression results 67 4.2.3.1 Pooled OLS model 67 4.2.3.2 Fixed Effects Model 68 4.2.3.3 Random Effects Model 69 4.2.4 Model selection test 69 4.2.4.1 (FEM) Selection test between the Pooled OLS model and Fixed effects model 69 4.2.4.2 Selection test between Fixed effects model (FEM) and Random effects model (REM) 70 4.2.5 Test defect model 71 4.2.5.1 Testing for the heteroskedasticity phenomenon 71 4.2.5.2 Testing for the chain correlations 72 4.2.6 Estimation results by FGLS 72 4.2.7 Discussion 74 CHAPTER CONCLUSIONS AND RECOMMENDATIONS 79 5.1 Conclusions 79 5.2 Recommendations 80 5.3 Limitations of the research 82 REFERENCES 83 APPENDIX 88 10 LIST OF TABLES Table 3.1: Signs of expectation of variables in the model 51 Table 3.2: List of joint-stock commercial banks in the study 52 Table 4.1: Some indicators of the current status of business activities of Vietnamese joint-stock commercial banks 59 Table 4.2: Descriptive statistics of the variables in the model 63 Table 4.3: Check for multicollinearity of the independent variables in the model 65 Table 4.4: Correlation matrix of independent variable in model 66 Table 4.5: Regression results according to the Pooled OLS model 67 Table 4.6: Regression results according to the FEM model 68 Table 4.7: Regression results according to the REM model 69 Table 4.8: Testing FEM and REM models using Hausman 70 Table 4.9: Test results for the heteroskedasticity phenomenon 71 Table 4.10: Test results for the chain correlations 72 Table 4.11: Generalized Least Squares remediation model 73 Table 4.12: Research results compared to expectations 74 79 CHAPTER CONCLUSIONS AND RECOMMENDATIONS 5.1 Conclusions The thesis entitled "Factors affecting loan loss provision of joint-stock commercial banks in Vietnam" focused on analyzing and assessing the impact of factors affecting the loan loss provision of commercial banks in Vietnam Based on quantitative analysis, the study hopes to help banks consider their direction shortly so that they can limit the impact of losses caused by credit risks on business operations in order to ensure the safety of the bank's operations and to bring profits to the bank Using a system of methods from traditional assessment to the application of quantitative analysis techniques, together with data collected from consolidated financial statements of 25 Vietnamese commercial banks, the author conducted a study on loan loss provision and factors affecting loan loss provision of Vietnamese jointstock commercial banks between 2011 and 2020 With table regression analysis, FEM regression model, and FGLS remediation model, the model's estimation results show variables related to bank size, net interest margin, return on asset, credit risk coefficient, non-performing loan, and GDP rate to the loan loss provision of Vietnamese joint-stock commercial banks in the 10-year period from 2011 to 2020 The study did not find out the impact of loan growth, and debt to equity ratio on the loan loss provision of Vietnamese joint-stock commercial banks during this period Analyzing the impact of factors inside the bank and macroeconomic factors on the loan loss provision of joint-stock commercial banks today will help managers have an overview of the state of the banking industry to make plans to come up with an appropriate risk management plan through credit risk provision for the bank, as well as improve profitability and the competitiveness of the commercial banking system in the international economic integration 80 5.2 Recommendations Firstly, based on the regression results, the research shows that bank size and loan loss provision have a positive relationship Nevertheless, in the context of the current developing economy, the increase in bank size is an inevitable trend to improve the competitiveness of commercial banks Therefore, to fall the provision ratio, jointstock commercial banks require a reasonable calculation to increase asset size and balance as well as a plan to ensure the most effective risk control Besides, the State bank needs to control and supervise the process of expanding the scale as well as giving specific criteria and roadmap to require commercial banks to follow Secondly, the research results show that the bank's net-interest margin has a positive impact on the loan loss provision In the process of operation and development, most banks have pursued the aim of increasing profits by measures boosting lending, it can be said that net interest income is one of the main income sources of the bank However, this increases the provision ratio of banks To limit the increase of this ratio, banks need to have measures to manage lending in the most effective way Banks consider granting credit to customers who meet all the conditions in the loan process and credit appraisal should be conducted in a transparent manner, not for the benefit of individuals The State Bank should also tighten regulations on lending, as well as have regular inspection teams visit bank branches to ensure that these bank branches comply with the regulations of the State bank Thirdly, the research results show that the bank's rate of return on assets has a negative effect on the provision ratio In order to reduce the provisioning rate, banks need to have specific measures to increase the rate of return on assets, namely increasing profit after tax To achieve this goal, banks need to come up with effective operating policies and make good use of the above policies to rising their assets and bring profits to the bank In addition, banks also need to maximize their profits by focusing resources on effective investment and business resources such as foreign 81 exchange trading, shares or capital contribution, and buying shares of companies Besides, it is also necessary to minimize unnecessary costs Fourthly, research results show that non-performing loan has a positive impact on loan loss provision Up to now, non-performing loan has always been one of the main leading causes of increasing provision and affects bank profits To limit the increase of non-performing loans, banks must strengthen credit quality control to minimize non-performing loans It is necessary for commercial banks to make a reasonable credit policy depending on the capacity, and credit growth to the extent that the banks themselves can control and still ensure credit quality assurance Besides, it is necessary to properly implement the lending process and improve the quality of credit appraisal and analysis Proper implementation of the lending process and credit analysis is a necessary step to ensure credit risk reduction because, on the basis of that analysis, the customer's ability to take preventive and control measures is assessed to limit and minimize damage when risks occur Moreover, it is also necessary to promote the direct debit collection and regularly review debts, classify, and assess the recovery ability to implement appropriate measures for debt recovery Finally, the research results show that gross domestic product growth rate has a negative relationship with loan loss provision The macroeconomic environment has a great influence on the provisioning rate of the commercial banking system, especially with the negative impact of the Covid-19 pandemic In the current context, in order to make the reserve ratio, the Prime Minister and the State bank need to take appropriate measures to control and adjust the investment structure so that the economy can grow at a high level but still maintain a high growth rate stable and sustainable In addition, the State Bank also needs to control inflation and stabilize the currency through the coordination of many policies such as fiscal policy, monetary policy, and foreign policy 82 5.3 Limitations of the research Although the research objective is achieved, the thesis also has some limitations on research subjects: the research only focuses on domestic commercial banks, in addition to joint venture banks, banks that have 100% foreign capital and foreign bank branches have not been included in the study; the selection of independent variables is also limited due to research conditions, so the factors have not completely explained the change of the dependent variable There are some commercial banks in Vietnam not fully disclose data in their financial statements for several years, which may cause the estimation results to be misleading, leading to the assessment may be inaccurate compared to the actual economic results REFERENCES Abdullah, H., Ahmad, I., & Bujang, I (2014) Loan Loss Provisions And Macroeconomic Factors: The Case Of Malaysian GlobalIlluminators, 73-86 Abu-Serdaneh, J., Jamal, A.-R., Hussainey, K., & Abdul Rasit, Z (2018) Bank loanloss accounts, income smoothing, capital management, signaling and procyclicality: Evidence from Jordan Journal of Financial Reporting and Accounting Adzis, A A., Anuar, H., & Hishamuddin, N S (2015) Malaysian Commercial Banks: Do Income Smoothing, Capital Management, Signaling, and Pro-Cyclicality Exist Through Loan Loss Provisions? International Journal of Economics, Finance and Management Ahmed, R., Riaz , H., & Muhammad , U (2012) Does the loan loss provision affect the banking profitability in the case of Paskitan Asian Economic and Financial Review Anandarajan, A., Hasan, I., & McCarthy, C (2007) Use of loan loss provisions for capital, earnings management and signalling by Australian banks Accounting and Finance, 357–379 Anwer , S., Takeda, C., & Thomas, S (1999) Bank loan loss provisions: a reexamination of capital management, earnings management and signaling effects Journal of Accounting and Economics, 1-25 Ashour, M (2011) Banks Loan Loss Provisions Role in Earnings and Capital Management: Evidence from Palestine Islamic University Asokan , A., Iftekhar, H., & Cornelia , M (2007) Use of loan loss provisions for capital, earnings management and signalling by Australian banks Accounting and Finance, 357-379 Associate, & Hafsa Orhan Astrom, Z (2013) Credit risk management pertaining to profit and loss sharing instruments in Islamic banking Journal of Financial Reporting and Accounting, 80-91 Azira, A., Herman, A., Noor Shahieda, S., Ariza, & Mohd , H (2015) Malaysian Commercial Banks: Do Income Smoothing, Capital Management, Signaling, and Pro-Cyclicality Exist Through Loan Loss Provisions? Balboa, M., López-Espinosa, G., & Rubia, A (2013) Nonlinear dynamics in discretionary accruals: An analysis of bank loan-loss provisions Journal of Banking & Finance, 5186–5207 Beatty, A., & Liao, S (2009) Regulatory Capital Ratios, Loan Loss Provisioning and Pro-cyclicality Bouvatier, V., & Lepetit, L (2014) Effects of loan loss provisions on growth in bank HAL open science Brown, K., & Moles , P (2014) Credit Risk Management Edinburgh Business School Bryce, C., Dadoukis, A., Hall, M., Nguyen, L., & Simper, R (2015) An Analysis of loan loss provisioning behaviour in Vietnamese banking Finance Research Letters Cho, M., & Chung, H K (2016) The effect of commercial banks' internal control weaknesses on loan loss reserves and provisions Journal of Contemporary Accounting & Economics, 61-72 Circular 11/2021/TT-NHNN on asset classification and use of provisions to handle risks in credit activities Circular 22/2019/TT-NHNN stipulating safety limits and ratios in operations of banks and foreign bank branches promulgated by the Governor of the State Bank of Vietnam Consolidation document 22/VBHN-NHNN promulgating regulations on debt classification, setting up and use of provisions to handle credit risks in banking activities of credit institutions Curcio, D., & Hasan, I (2015) Earnings and capital management and signaling: the use of loan-loss provisions by European banks The European Journal of Finance, 26-50 Data on the GDP growth rate of Vietnam from the World Bank between 2011 and 2020 Delis, S F., Pagés, J., & Saurina, J (2000) Credit growth, problem loans and credit risk provisioning in Spain Banco de Espana Working Papers, Directive No 11/CT-TTg dated March 4, 2020, of the Prime Minister on urgent tasks and solutions to remove difficulties for production and business, ensure social security to cope with the Covid-19 epidemic Fernando , G., André , M D., & Robson , F (2021) Loan loss provision models in Brazilian banks Meditari Accountancy Research Financial statements from 25 Vietnamese joint-stock commercial banks between 2011 and 2020 Floro, D (2010) Loan Loss Provisioning and the Business Cycle: Does Capital Matter? Evidence from Philippine Banks BIS Working Paper Foos, D., Norden, L., & Weber, M (2010) Loan growth and riskiness of banks Loan growth and riskiness of banks, 0–2940 Garza-García, J (2010) What influences net interest rate margins? Developed versus developing Banks and Bank Systems Germán , L.-E., Antonio , M., & Fernando , P (2011) Banks‟ Net Interest Margin in the 2000s: A Macro-Accounting international perspective Pérez de Gracia, 1214-1233 Hasan, I., & Wall, L (2004) Determinants of the Loan Loss Allowance: Some CrossCountry Comparisons Financial review, 129-152 Hennie, v., & Sonja, B B (2020) Analyzing Bank Risk (Fourth Edition) The World Bbank Hess, K., Grimes, A., & Holmes, M (2008) Credit Losses in Australasian Banking SSRN Electronic Journal IMF (2006) IMF annual report Jamal , A.-S (2018) Bank loan-loss accounts, income smoothing, capital management, signaling and procyclicality: Evidence from Jordan Journal of Financial Reporting and Accounting Jose, A., & Marc, R (2000) Evaluating credit risk models Evaluating credit risk models, 151-165 Karimiyan, A., Nasserinia, A., & Shafiee, H (2013) Relationship between Loan Loss Provision and Future Earning, Return and Cash flow in Commercial Banks of Malaysia Misman, F N., & Ahmad, W (2011) Loan Loss Provisions: Evidence from Malaysian Islamic and Conventional Banks Mohd Isa, M., Voon Choong, Y., Yong Gun Fie, D., Abdul Rashid, M., Zain, M., & Johari, R (2018) Determinants of loan loss provisions of commercial banks in Malaysia Journal of Financial Reporting and Accounting Ngô, T H (2020) Các yếu tố tác động đến dự phịng rủi ro tín dụng ngân hàng thương mại Việt Nam Tp Hồ Chí Minh Nguyễn, C T (2019) Các nhân tố ảnh hưởng đến dự phòng rủi ro tín dụng ngân hàng thương mại Việt Nam Tp Hồ Chí Minh Nguyễn, H T (2015) Các yếu tố ảnh hưởng đến dự phịng rủi ro tín dụng ngân hàng thương mại cổ phần Việt Nam Trường Đại học Kinh tế TP Hồ Chí Minh Nguyễn, H T (2017) Các yêu tố ảnh hưởng đến dự phịng rủi ro tín dụng ngân hàng thương mại cổ phần Việt Nam EUH University Nguyễn, H T., & Phạm, T Đ (2014) Các nhân tố tác động đến dự phịng rủi ro tín dụng Tạp chí Phát triển kinh tế, 63-80 Nguyễn, K T (2013) Các nhân tố ảnh hưởng đến dự phòng rủi ro tín dụng ngân hàng thươn mại cổ phần Việt Nam UEH University Nguyễn, T D (2018) Các yếu tố tác động đến dự phịng rủi ro tín dụng ngân hàng thương mại cổ phần Việt Nam Tp Hồ Chí Minh Nguyễn, T V., & Dương, N H (2015) Phân tích yếu tố tác động đến dự phịng rủi ro tín dụng ngân hàng thương mại Việt Nam Tạp chí Khoa học trường Đại học Mở TP.HCM, 15-27 Olszak, M., Roszkowska, S., & Kowalska, I (2018) Macroprudential policy instruments and procyclicality of loan-loss provisions – cross-country evidence Journal of International Financial Markets, Institutions & Money Packer, F., & Zhu, H (2012) Loan Loss Provisioning Practices of Asian Banks SSRN Electronic Journal Phan, T V (2015) Các nhân tố tác động đến dự phòng rủi ro tín dụng hệ thống ngân hàng thương mại Việt Nam UEH University Resolution No 11/NQ-CP on key solutions to control inflation, stabilize the macroeconomy, and ensure social security, dated February 24, 2011 Resolution 42/2017/QH14 of the National Assembly on piloting non-performing loan settlement of credit institutions and Decision 1058/QD-TTg of the Prime Minister on approving the Scheme on restructuring credit institutions attached to credit institutions with non-performing loans settlement for the period 20162020 Taktak, N B., Boudriga, A., & Ajmi, D (2010) Loan loss reserves of weakly provisioned banks: Evidence from major Tunisian banks Afro-Asian J of Finance and Accounting , 1-21 Wahyoe , S., Eko, P S., & Amine, T (2016) The procyclicality of loan loss provisions in Islamic Research in International Business and Finance APPENDIX Appendix 01 Descriptive statistics Appendix 02 Correlation matrix between variables Appendix 03 VIF Appendix 04 Pooled OLS regression results Appendix 05 FEM regression results Appendix 06 REM regression results Appendix 07 Hausman test Appendix 08 Summary of research results Appendix 09 Wald test Appendix 10 Wooldridge test Appendix 11 FGLS regression results ...MINISTRY OF EDUCATION AND TRAINING THE STATE BANK OF VIETNAM HO CHI MINH UNIVERSITY OF BANKING LAM THI DO HUYEN FACTORS AFFECTING LOAN LOSS PROVISION OF JOINTSTOCK COMMERCIAL BANKS IN VIETNAM... objective of this thesis is to study factors affecting loan loss provision of Vietnamese joint-stock commercial banks 1.2.2 Specific objectives The thesis determines factors affecting loan loss provision. .. What factors affect to loan loss provision of joint-stock commercial banks in Vietnam? To what extent the factors affect loan loss provision of joint-stock commercial banks in Vietnam? 15 What solutions