Factors affecting capital adequacy ratio of joint stock commercial banks in Vietnam 2022

THE STATE BANK OF VIETNAM MINISTRY OF EDUCATION AND TRAINING HO CHI MINH UNIVERSITY OF BANKING BUI THI NGOC KHUYEN FACTORS AFFECTING CAPITAL ADEQUACY RATIO OF JOINT STOCK COMMERCIAL BANKS IN VIETNAM GRADUATION THESIS MAJOR: FINANCE – BANKING CODE: 7340201 HO CHI MINH CITY - 2022 THE STATE BANK OF VIETNAM TRAINING MINISTRY OF EDUCATION HO CHI MINH UNIVERSITY OF BANKING BUI THI NGOC KHUYEN FACTORS AFFECTING CAPITAL ADEQUACY RATIO OF JOINT STOCK COMMERCIAL BANKS IN VIETNAM GRADUATION THESIS MAJOR: FINANCE – BANKING CODE: 7340201 INSTRUCTOR PHD LE THANH NGOC HO CHI MINH CITY - 2022 AND ABSTRACT The capital adequacy ratio is one of the important criteria to assess the operational safety of banks Banks' compliance with the minimum capital adequacy ratio has become more and more stringent in recent years Therefore, this thesis aims to study the factors affecting the capital adequacy ratio of Vietnamese jointstock commercial banks The thesis is made based on panel data collected from financial statements and regular reports of 25 Vietnamese commercial banks in the period 2010-2020 The study studies 10 factors affecting the dependent variable and uses Pooled OLS, FEM, REM models, and finally chooses the REM model The research results show that leverage ratio, loan loss reserves ratio, and economic growth, have a positive impact on the capital adequacy ratio of Vietnamese joint-stock commercial banks In contrast, bank size, return on assets ratio, and liquidity ratio negatively affect the capital adequacy ratio of Vietnamese joint-stock commercial banks While the deposits ratio, loans ratio, inflation rate, and net interest margin are not statistically significant On that basis, the author has proposed solutions to improve the capital adequacy ratio at Vietnamese joint-stock commercial banks Key word: Capital adequacy ratio, Basel, Joint Stock Commercial Banks, Vietnam i DECLARATION OF AUTHENTICITY My name is Bui Thi Ngoc Khuyen, a student in class HQ6–GE11, student number: 050606180168, Ho Chi Minh University of Banking I hereby declare that the topic of this thesis is the author's research work, the research results are truthful, in which there are no previously published contents or contents made by others, except for the fully cited citations in the thesis Ho Chi Minh City, December 26th, 2022 Bui Thi Ngoc Khuyen ii ACKNOWLEGEMENTS Firstly, I would like to express my gratitude towards Ph.D Le Thanh Ngoc for his dedication, patience, and support with me with good advice and guidance in the process of this study Secondly, I would like to thank all Ho Chi Minh University of Banking's lecturers who have provided me with valuable knowledge as well as experience to help me obtain a solid academic foundation for future research, career practice, and workflow Finally, I would like to thank my friends and my family for their sharing and support throughout my Bachelor's program However, due to the limitation of experience and time, the study cannot avoid certain drawbacks All the comments and advice contributed by the examiners are gratefully welcomed and appreciated Ho Chi Minh City, December 26th, 2022 Bui Thi Ngoc Khuyen iii CONTENTS ABSTRACT i DECLARATION OF AUTHENTICITY ii ACKNOWLEGEMENTS iii LIST OF ABBREVIATIONS viii LIST OF TABLES AND CHARTS ix CHAPTER INTRODUCTION 1.1 Reason for choosing the topic .1 1.2 Research objectives .1 1.2.1 Overall objectives 1.2.2 Detailed objectives 1.3 Research questions 1.4 Objects and research scope 1.4.1 Research object 1.4.2 Research scope 1.5 Research methods 1.6 Scientific and practical significance 1.6.1 Scientific significance 1.6.2 Practical significance 1.7 Structure of the thesis 1.8 Research gap CONCLUSION OF CHAPTER .5 iv CHAPTER THEORETICAL STUDIES BASIS AND OVERVIEW OF PRIOR 2.1 theoretical basis of the capital adequacy ratio .6 2.1.1 The concept of the capital adequacy ratio 2.1.2 Basel Accord .7 2.1.3 Measure the capital adequacy ratio .8 2.1.4 Legal documents of the State Bank of Vietnam on CAR 2.1.5 Meaning of the capital adequacy ratio 10 2.2 Previous studies 11 2.2.1 Studies in the world 11 2.2.2 Domestic studies 13 CONSCLUSION OF CHAPTER 18 CHAPTER RESEARCH METHODS 19 3.1 Research process 19 3.2 Research model 20 3.3 Variable measurement and research hypothesis 22 3.3.1 Bank size (SIZE) .22 3.3.2 Return on assets (ROA) .22 3.3.3 Liquidity ratio (LIQ) 23 3.3.4 Loan loss reserves (LLR) 23 3.3.5 Deposits (DEP) 24 3.3.6 Loans (LOA) .24 3.3.7 Leverage (LEV) 25 3.3.8 Net interest margin (NIM) 25 v 3.3.9 GDP growth (GDP) 25 3.3.10 Inflation (INF) 26 3.4 Research data .28 3.5 Regression methods and tests 29 3.5.1 Ordinary least s quare method (OLS) .29 3.5.2 Fixed Effect Model (FEM) 30 3.5.3 Random Effect Model (REM) 30 3.6 Model selection test .30 3.6.1 Testing the appropriateness between the Pooled OLS and FEM 30 3.6.2 Testing the appropriateness between the FEM and REM 30 3.6.3 Testing the appropriateness between the Pooled OLS and REM .31 CONCLUSION OF CHAPTER .32 CHAPTER RESEARCH RESULTS AND DISCUSSION 33 4.1 Descriptive statistics 33 4.2 Correlation analysis .35 4.3 Check for multicollinearity 36 4.4 Regression results 36 4.4.1 Pooled OLS regression model 36 4.4.2 Fixed effects model 37 4.4.3 Random effects model .38 4.5 Choose the suitable model 38 4.5.1 Testing the appropriateness between the Pooled OLS and FEM 38 4.5.2 Testing the appropriateness between the FEM and REM 39 4.5.3 Testing the appropriateness between the Pooled OLS and REM .39 vi 4.6 Discussion 40 4.6.1 Bank size (SIZE) .41 4.6.2 Return on Assets (ROA) 42 4.6.3 Liquidity ratio (LIQ) 43 4.6.4 Leverage (LEV) 44 4.6.5 Loan loss reserves (LLR) 45 4.6.6 GDP growth (GDP) 46 CONCLUSION OF CHAPTER .48 CHAPTER CONCLUSIONS AND RECOMMENDATIONS 49 5.1 Conclusion 49 5.2 Recommendations .50 5.3 Limitations of the research and further research directions 52 5.3.1 Limitations of the research 52 5.3.2 Further research directions 52 CONCLUSION OF CHAPTER .54 REFERENCES 55 APPENDIX .57 vii LIST OF ABBREVIATIONS CAR Capital Adequacy Ratio SIZE Bank size ROA Return on Assets ROE Return on equity LLR Loan Loss Reserves LIQ Liquidity ratio DEP Deposits ratio LOA Loans ratio LEV Leverage NIM Net interest margin NPL Non Performing Loan INF Inflation Rate GDP Gross domestic product OLS Ordinary Least Squares FEM Fixed Effect Model REM Random Effect Mode VIF Variance Inflation Factors FGLS Feasible Generalized Least Square GMM Generalized method of moments CPI Consumer Price Index viii CONCLUSION OF CHAPTER In chapter 4, the author analyzed the data and presented the research results, assessing the impact of each factor on the capital adequacy ratio of Vietnamese commercial banks Through regression results and testing of the previous hypotheses, this is the basis for the author to make conclusions and recommendations in Chapter 48 CHAPTER 5.1 CONCLUSIONS AND RECOMMENDATIONS Conclusion CAR is an important measure to measure the safety of a bank's operations Therefore, the thesis studies "Factors affecting capital adequacy ratio of Vietnamese joint-stock commercial banks" Specifically, the research topic uses panel data of 25 joint-stock commercial banks representing the sample of Vietnamese joint-stock commercial banks in the period from 2010 to 2020 with 10 factors affecting the capital adequacy ratio including bank size, deposit ratio, loans ratio, loan loss reserves ratio, liquidity ratio, return on assets ratio, net interest margin, leverage ratio, inflation rate and GDP growth From the regression results, the REM model is selected as the most suitable model to analyze the impact of factors on the CAR ratio The research results are as follows: Firstly, the thesis has identified the factors affecting the capital adequacy ratio of Vietnamese joint-stock commercial banks In particular, the research results show that leverage ratio, loan loss reserves ratio, and economic growth have a positive impact on the capital adequacy ratio of Vietnamese joint-stock commercial banks In contrast, bank size, return on assets ratio, and liquidity ratio negatively affect the capital adequacy ratio of Vietnamese joint-stock commercial banks While the deposits ratio, loans ratio, inflation rate, and NIM are not statistically significant Secondly, this study has determined the level of impact of factors on the capital adequacy ratio of Vietnamese joint-stock commercial banks Specifically, the factor that has the strongest impact on the capital adequacy ratio is the ratio of return on assets with an impact coefficient of -1.2024 Whereas, the weakest impact on the capital adequacy ratio is the size of the bank with an impact coefficient of -0.0119 Thirdly, based on achieving the first and second objectives, the study proposes some recommendations to improve the capital adequacy ratio at Vietnamese joint-stock commercial banks effectively Thereby, commercial banks 49 can both ensure the maintenance of an appropriate capital adequacy ratio while ensuring compliance with regulations and at the same time realizing the objectives 5.2 Recommendations Firstly, based on the regression results, the research shows that bank size and the capital adequacy ratio have a negative relationship However, 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, the increase in asset size requires a valid calculation and balance as well as a plan to ensure the most effective risk control, banks can increase equity consistently with the growth rate of total assets In addition, the State bank needs to control and supervise the process of expanding the scale of commercial banks State banks also need to have specific criteria and roadmap to require commercial banks to achieve after restructuring (transparency, quality management, information technology, ) to meet the capital adequacy ratio requirements Secondly, the research results show that the bank's rate of return on assets has a negative effect on the capital adequacy ratio In the process of operation and development, most banks have pursued the goal of increasing profits by measures such as boosting lending and increasing net profit margin However, this has reduced the capital adequacy ratio of banks Therefore, commercial banks need to take measures to ensure their profit to improve the capital adequacy ratio Commercial banks should focus on increasing income from products and services other than credit because credit activities are the main activities and account for a large source of the total income of the bank, however now activities contain many risks for the bank Besides that, joint-stock commercial banks must control costs reasonably and cut costs that are not highly effective For example, it is necessary to regularly evaluate the performance of the network system, cut down on poor performance points, and focus on investing in the remaining points that operate more efficiently; focus on training and professional skills 50 Thirdly, the results show that the financial leverage ratio has a positive impact on the capital adequacy ratio Therefore, to raise this ratio joint-stock commercial banks need to take measures to increase equity Possible options such as raising capital from existing shareholders, issuing shares, or selling shares to strategic shareholders, namely foreign banks All options can help the bank improve its financial capacity, as well as absorb advances in management and administration methods, technology application, improve services if receiving investment from large corporations and banks from abroad Even if banks have complied with Basel standards, it will also help Vietnamese commercial banks learn from experience, creating advantages in meeting the bank's capital adequacy ratio However, it is necessary to have the right attention and orientation of the State Bank to be able to both meet the capital increase and effectively manage and use capital Fourthly, research results show that the LLR ratio has a positive impact on the capital adequacy ratio Reality shows that the reserves held by the bank act as a buffer against delinquent advances Therefore, to improve the capital adequacy ratio, banks need to take measures to reduce delinquent advances Joint-stock commercial banks need to accurately assess the status of delinquent advances and bad debts Banks now publish data on bad debts that are much lower than reality, not reflecting the quality of credits Therefore, managers not properly assess the situation of bad debt at the bank as well as the entire banking system, which leads to incorrect management decisions So that it is necessary to accurately determine the level of bad debt, from which to have an appropriate solution Moreover, banks need to move towards debt classification and risk provisioning according to international standards At the same time, the bank may consider holding more liquid assets including cash, gold, silver, gems, deposits at the State Bank; money and gold deposited at other credit institutions, and lending to other credit institutions; securities trading however the bank should have strategic management and business policies 51 Finally, the research results show that economic growth has a positive impact on the capital adequacy ratio The macroeconomic environment has a great influence on the capital adequacy of the commercial banking system Especially with the negative impact of the Covid-19 pandemic on all industries, one of the important things to is to control and adjust the investment structure so that the economy has high growth but is still stable and sustainable At the same time, the State Bank needs to control inflation and stabilize the currency through the coordination of many policies such as fiscal policy, monetary policy, and foreign policy 5.3 Limitations of the research and further research directions 5.3.1 Limitations of the research Firstly, the data only includes 25 joint-stock commercial banks including 275 observations, so the sample size is not large enough to fully represent the entire Vietnamese commercial banking system The reason is that a number of joint-stock commercial banks not fully have information about the CAR ratio and some other indicators Secondly, the main data source in this study is the annual reports and the financial statements of each commercial bank Therefore, the model's estimation results may be affected if the bank's statistics are not reliable Thirdly, the research model is incomplete The independent variables that the author includes in the research model are not all variables affecting the capital adequacy ratio There are still many other factors affecting the capital adequacy ratio that the author has not mentioned as effective management of expenditure on income, sensitivity to risk 5.3.2 Further research directions Firstly, the research direction needs to expand the sample size, add more banks, increase the research period to reduce the errors in the estimated results 52 Secondly, adding more independent variables related to risks such as interest rate risk, exchange rate risk, political risk, and other macro factors such as money supply, exchange rate to the more comprehensive assessment of the capital adequacy ratio with internal and external fluctuations of the bank Thirdly, apply other regression models such as GMM to choose the optimal model, test the data's latency to help the research be effective and highly reliable 53 CONCLUSION OF CHAPTER Chapter of the study summarizes the results obtained from the research objectives and research questions Therefore, the study has given some policy implications to help improve the capital adequacy ratio for joint-stock commercial banks in the next period In addition, chapter of the study also points out the limitations that need to be overcome and some measures to better serve the next research 54 REFERENCES List of English 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Appendix 01 Descriptive statistics Appendix 02 Correlation matrix between variables 57 Appendix 03 VIF Appendix 04 Pooled OLS regression results 58 Appendix 05 FEM regression results 59 Appendix 06 FEM regression results 60 Appendix 07 Hausmna test Appendix 07 Breusch and Pagan tetst 61 Appendix 08 Summary of research results 62 ... commercial banks in Vietnam in the coming time 1.2.2 Detailed objectives Determining factors affecting capital adequacy ratio of joint- stock commercial banks in Vietnam Evaluating the influence of these... STATE BANK OF VIETNAM TRAINING MINISTRY OF EDUCATION HO CHI MINH UNIVERSITY OF BANKING BUI THI NGOC KHUYEN FACTORS AFFECTING CAPITAL ADEQUACY RATIO OF JOINT STOCK COMMERCIAL BANKS IN VIETNAM GRADUATION... answering the main research questions: What factors affect the capital adequacy ratio of of joint- stock commercial banks in Vietnam? How influential are the factors affecting the capital adequacy ratio