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Factors affecting bank profitability, The case of commercial banks, in Vietnam 2022
MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM HO CHI MINH UNIVERSITY OF BANKING VU THU HA FACTORS AFFECTING BANK PROFITABILITY: THE CASE OF COMMERCIAL BANKS IN VIETNAM GRADUATION THESIS MAJOR: FINANCE AND BANKING CODE: 7340201 HO CHI MINH CITY, 2022 MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM HO CHI MINH UNIVERSITY OF BANKING VU THU HA FACTORS AFFECTING BANK PROFITABILITY: THE CASE OF COMMERCIAL BANKS IN VIETNAM GRADUATION THESIS MAJOR: FINANCE AND BANKING CODE: 7340201 SCIENCE INSTRUCTOR Dr NGUYEN DUY LINH HO CHI MINH CITY, 2022 i ABSTRACT The thesis studies the factors affecting the profitability of Vietnamese commercial banks through data of 14 commercial banks obtained from audited financial statements and macro information from World Bank published in the period from 2008 to 2020 The study selects return on assets (ROA) and return on equity (ROE) as dependent variables Through the results of the multivariable regression model, the Random Effects Model (REM) was considered to be the most suitable However, the REM model has autocorrelation and heteroscedasticity To overcome these defects, the thesis implements regression model using the sum of Feasible Generalized Least Squares (FGLS) Research results show that inflation rate and bank size have a positive effect on bank profitability through both ROA and ROE models, whereas, deposits to total assets ratio, noninterest income to operating income ratio, liquidity creation have negative effects on both models Loan loss provisions to loans and leases ratio has a negative impact on bank returns through ROE model However, loans and leases to total assets ratio only has an inverse influence on ROA Capital positively affects Vietnamese commercial bank profitability through the ROA variable Macroeconomic indicator such as GDP has no impact on profitability of Vietnamese commercial banks through neither ROA nor ROE From the study results, the thesis demonstrates the limitations of this study and suggests future research directions Keywords: Bank profitability, Commercial bank, Financial factors ii DECLARATION I declare that the graduation thesis is the work of my own at the university The survey data are collected from reality Research results, information and data used in the thesis have clear origins, are and have never been published in any research I take full responsibility for the truthfulness of this research thesis The author Vu Thu Ha iii ACKNOWLEGEMENT First of all, I would like to express my deep gratitude to Dr Nguyen Duy Linh the supervisor who directly guides my thesis, who has always spent plenty of time and effort to guide, support and help me during the research process I would also like to express my sincere thanks to the teachers of the Banking University of Ho Chi Minh City, who devotedly imparted knowledge during my study at the school I am also very grateful to my family, friends and relatives who have always been by my side to encourage me throughout the process of completing the thesis Despite many efforts, but in this thesis, it is inevitable that there are shortcomings I hope that the teachers and those who are interested in the topic continue to have comments and suggestions to help improve the topic I sincerely thank you! iv CONTENTS ABSTRACT .i DECLARATION ii ACKNOWLEGEMENT iii CONTENTS iv LIST OF ABBREVIATIONS viii LIST OF TABLES ix LIST OF FIGURES x CHAPTER 1: INTRODUCTION 1.1 INTRODUCTION 1.2 RESEARCH OBJECTIVE 1.3 RESEARCH QUESTION 1.4 RESEARCH SUBJECT AND SCOPE 1.5 RESEARCH METHODOLOGY 1.5.1 Regression method 1.5.2 Data collecting method 1.6 EXPECTED CONTRIBUTION 1.7 THE STRUCTURE OF RESEARCH CHAPTER 2: LITERATURE REVIEW 2.1 THEORETICAL BASIS OF BANK PROFITABILITY 2.2 FACTORS AFFECTING BANK PROFITABILITY v 2.2.1 Bank-specific factors 2.2.1.1 Liquidity creation 2.2.1.2 Bank size 10 2.2.1.3 Capital 11 2.2.1.4 Loans and leases 12 2.2.1.5 Deposits 13 2.2.1.6 Noninterest income 13 2.2.1.7 Loan loss provisions 14 2.2.2 Macroeconomic factors 15 2.2.2.1 Gross Dometic Product (GDP) 15 2.2.2.2 Inflation 16 2.4 RESEARCH GAP 18 CHAPTER 3: METHODOLOGY 20 3.1 RESEARCH PROCESS 20 3.2 RESEARCH DATA 22 3.3 RESEARCH METHODOLOGY 24 3.3.1 Descriptive statistics 24 3.3.2 Correlation analysis 24 3.3.3 Regression analysis 25 3.4 RESEARCH MODEL 25 3.5 VARIABLE DEFINITION 26 vi 3.5.1 Dependent variables 26 3.5.2 Independent variables 27 CHAPTER 4: RESULT 34 4.1 DESCRIPTIVE STATISTICS 34 4.2 CORRELATION ANALYSIS 37 4.3 MULTICOLLINEARITY TESTING 39 4.4 REGRESSION RESULT OF ROA 40 4.4.1 Regression analysis result summary 40 4.4.2 Choosing suitable regression model 42 4.4.2.1 Pooled OLS and REM regression 42 4.4.2.2 FEM and REM 42 4.4.3 Regression defect testing 43 4.4.3.1 Heteroscedasticity 43 4.4.3.2 Autocorrelation testing 44 4.5 REGRESSION RESULT OF ROE 46 4.5.1 Regression analysis of ROE result summary 46 4.5.2 Choosing suitable regression model 48 4.5.2.1 Pooled OLS and FEM 48 4.5.2.2 FEM and REM 48 4.5.3 Regression defect testing 49 4.5.3.1 Heteroscedasticity 49 vii 4.5.3.2 Autocorrelation testing 50 4.5.4 Fixing regression model defect 50 4.6 RESEARCH DISSCUSION 51 CHAPTER 5: CONCLUSION AND RECOMMENDATION 58 5.1 CONCLUSION 58 5.2 RECOMMENDATION 59 5.2.1 Recommendation for liquidity creation 59 5.2.2 Recommendation for bank scale 60 5.2.3 Recommendation for deposit controlling 60 5.2.4 Recommendation for lending activity credit risk managing 61 5.2.5 Recommendation for capital strengthening 61 5.2.6 Recommendation for targets following inflation control 62 5.3 LIMITATION OF THE TOPIC AND FUTURE RESEARCH DIRECTION 63 5.3.1 Limitation 63 5.3.2 Future research direction 64 REFERENCES 65 APPENDIX 74 viii LIST OF ABBREVIATIONS Abbreviation Meaning GDP Gross Domestic Product FEM Fixed Effect Model REM Random Effect Model OLS Ordinary Least Square GLS Generalized Least Squares FGLS Feasible Generalized Least Squares ROA Return on Assets ROE Return on Equity 67 Bogale, Y W (2019) Factors Affecting Profitability of Banks: Empirical Evidence from Ethiopian Private Commercial Banks Journal of Investment and Management, 8(1), 8-15 Bouchekoua, A., Matoussi, H., & Trabelsi, S (2010) Monolithic versus Differential Impacts of Sox Regulation on Market Valuation of Banks’ Loan Loss Provision CAAA Annual Conference 2012 doi http://dx.doi.org/10.2139/ssrn.1762810 Bourke, P (1989) Concentration and other determinants of bank profitability in Europe, North America and Australia Journal of Banking & Finance, 13(1), 65- 79 Bryant, J (1980) A Model of Reserves, Bank Runs, and Deposit Insurance Journal of Banking & Finance, 4(3), 35–44 Chiorazzo V., Milani, C., & Salvini, F (2008), Income Diversification and Bank Performance: Evidence from Italian Banks Journal of Financial Services Research, 33, 181-203 Deep, A., & Schaefer, G (2005) Are Banks Liquidity Transformers? 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http://dx.doi.org/10.1016/j.intfin.2013.07.009 72 Tran, V T., Lin, C T., & Nguyen, H (2016) Liquidity creation, regulatory capital, and bank profitability International Review of Financial Analysis, 48, 98-109 VIETNAMESE SOURCE Chu Thị Thanh Trang, Phạm Thị Thanh Xuân, Nguyễn Thị Mỹ Linh & Nguyễn Thị Bảo Ngọc (2021) Mối quan hệ mục tiêu tang vốn với khả tạo khoản ngân hàng Tạp chí Ngân Hàng, 2, 35-41 Hoàng Trọng Nguyễn Mộng Ngọc Chu (2008) Phân tích liệu nghiên cứu với SPSS T Dùng với SPSS phiên 11.5, 13, 14, 15, 16 Place of publication: Nhà xuất Hồng Đức Lê Đồng Duy Trung (2020) Các nhân tố tác động tới khả sinh lời ngân hàng thương mại Việt Nam: Tiếp cận theo mơ hình thực nghiệm động Tạp chí Ngân hàng, 12 Retrieved from https://tapchinganhang.gov.vn/cac-nhan-to-tac-dongtoi-kha-nang-sinh-loi-cua-ngan-hang-thuong-mai-tai-viet-nam-tiep-can-theomo-hi.htm Nguyễn Thị Ngọc Trang Nguyễn Thị Liên Hoa (2007) Phân tích báo cáo tài Place of publication: Nhà xuất Lao động - Xã hội Nguyễn Minh Kiều (2009) Nghiệp vụ ngân hàng thương mại Place of publication: Nhà xuất Thống Kê Nguyễn Việt Hùng (2008) Phân tích nhân tố ảnh hưởng đến hiệu hoạt động ngân hàng thương mại Việt Nam (Doctoral dissertation, National Economics University) Phạm Thị Tuyết Trinh (2016) Kinh tế lượng ứng dụng kinh tế tài Place of publication: Nhà Xuất Bản Kinh Tế TP Hồ Chí Minh 73 Trịnh Quốc Trung & Nguyễn Văn Sang (2013) Các yếu tố ảnh hưởng đến hiệu hoạt động ngân hàng thương mại Việt Nam Tạp chí Công Nghệ Ngân Hàng, 85(04), 11-15 Vũ Đức Thành, Nguyễn Thị Ánh Như Phạm Thu Hương (2016) Vốn ngân hàng, tạo khoản hiệu ngân hàng Tạp chí Khoa học Đại học Mở TP.HCM, 11(3), 3-14 74 APPENDIX Appendix 1: Descriptive statistics Variable Obs Mean ROA ROE LC SIZE CAP 182 182 182 182 182 0093395 1185999 -.0698497 32.80267 0823231 LOAN DEP NII LLP GDP 182 182 182 182 182 INF 182 Std Dev Min Max 0059267 0679437 1020199 1.03983 0305601 0000135 0002843 -.337682 29.88839 0382283 0286223 2846444 5161387 34.9553 2662934 5538748 7642835 0839516 012963 05929 1281458 0870997 0607389 0054132 0105826 2252535 507262 0018576 02906 8006246 9165904 2961561 0326584 07076 0722046 0639548 00631 23115 Appendix 2: Correlation analysis ROA ROE LC SIZE CAP LOAN DEP NII LLP GDP INF NII LLP GDP INF ROA ROE LC SIZE CAP LOAN DEP 1.0000 0.8270 -0.3039 0.1932 0.2883 0.1042 -0.3281 -0.1054 -0.0561 -0.0899 0.0864 1.0000 -0.1674 0.3860 -0.2053 0.1646 -0.2041 -0.2058 -0.0808 -0.0176 0.0655 1.0000 0.1126 -0.2229 -0.3331 0.2310 0.1618 0.3639 0.0397 0.0309 1.0000 -0.4025 0.5605 0.1080 0.1742 0.1676 0.0180 -0.4384 1.0000 -0.1593 -0.3397 0.1062 0.0494 -0.1050 0.1905 1.0000 0.3477 -0.0809 -0.1589 -0.0043 -0.3360 1.0000 -0.1027 -0.0348 0.0156 -0.1143 NII LLP GDP INF 1.0000 0.1167 0.1408 -0.2354 1.0000 -0.0414 -0.0581 1.0000 -0.0800 1.0000 75 Appendix 3: Multicollinearity testing Variable VIF 1/VIF LOAN SIZE LC DEP CAP INF LLP NII GDP 2.90 2.72 1.84 1.69 1.58 1.34 1.28 1.24 1.05 0.345213 0.367319 0.542412 0.590892 0.632292 0.746301 0.782880 0.804299 0.955980 Mean VIF 1.74 Appendix 4: Summarizing regression models of ROA (1) ROA LC SIZE CAP LOAN DEP NII LLP GDP INF _cons N R-sq (2) ROA -0.0153*** [-3.22] 0.00360*** [6.39] 0.0776*** [5.30] -0.00946** [-2.00] -0.00909* [-1.71] -0.0191*** [-2.93] -0.100 [-1.35] -0.00620 [-0.18] 0.0147** [2.29] -0.102*** [-5.24] -0.0202*** [-3.42] 0.00239*** [3.22] 0.0578*** [3.78] -0.00334 [-0.61] -0.0129** [-2.58] -0.0135** [-2.24] -0.234*** [-3.21] -0.0160 [-0.55] 0.0122* [1.73] -0.0594** [-2.30] 182 0.380 182 0.397 (3) ROA -0.0181*** [-3.38] 0.00273*** [4.09] 0.0621*** [4.22] -0.00400 [-0.78] -0.0122** [-2.50] -0.0142** [-2.41] -0.215*** [-3.03] -0.0145 [-0.51] 0.0137** [2.13] -0.0713*** [-3.07] 182 76 Appendix 5: Lagrange test on ROA Breusch-Pagan / Cook-Weisberg test for heteroskedasticity Ho: Constant variance Variables: fitted values of ROA chi2(1) Prob > chi2 = = 7.88 0.0050 Appendix 6: Hausman test on ROA Coefficients (b) (B) fe re LC SIZE CAP LOAN DEP NII LLP GDP INF -.0201562 0023932 0577616 -.0033406 -.0128739 -.0134813 -.2341814 -.0160434 0121674 -.018058 0027337 0620529 -.0039996 -.0121789 -.0142293 -.2147516 -.0145081 0137137 (b-B) Difference sqrt(diag(V_b-V_B)) S.E -.0020982 -.0003405 -.0042913 0006591 -.0006949 000748 -.0194297 -.0015352 -.0015463 002492 0003211 0041962 0019386 00107 0012107 0167332 0041092 002859 b = consistent under Ho and Ha; obtained from xtreg B = inconsistent under Ha, efficient under Ho; obtained from xtreg Test: Ho: difference in coefficients not systematic chi2(9) = (b-B)'[(V_b-V_B)^(-1)](b-B) = 3.27 Prob>chi2 = 0.9525 Appendix 7: Heteroscedasticity testing on ROA Breusch and Pagan Lagrangian multiplier test for random effects ROA[Firm1,t] = Xb + u[Firm1] + e[Firm1,t] Estimated results: Var ROA e u Test: sd = sqrt(Var) 0000351 0000159 0000124 0059267 0039896 0035148 Var(u) = chibar2(01) = Prob > chibar2 = 72.67 0.0000 77 Appendix 8: Autocorrelation testing on ROA Wooldridge test for autocorrelation in panel data H0: no first-order autocorrelation F( 1, 13) = 179.049 Prob > F = 0.0000 Appendix 9: FGLS regression analysis of ROA Cross-sectional time-series FGLS regression Coefficients: Panels: Correlation: generalized least squares heteroskedastic no autocorrelation Estimated covariances = Estimated autocorrelations = Estimated coefficients = ROA Coef LC SIZE CAP LOAN DEP NII LLP GDP INF _cons -.015877 0031031 0629314 -.009267 -.0096022 -.0200273 -.0960677 -.0106885 0151886 -.0843618 14 10 Std Err .0041133 000493 0145751 0040227 0045624 0057944 0599634 029332 0054653 016954 Number of obs Number of groups Time periods Wald chi2(9) Prob > chi2 z -3.86 6.29 4.32 -2.30 -2.10 -3.46 -1.60 -0.36 2.78 -4.98 P>|z| 0.000 0.000 0.000 0.021 0.035 0.001 0.109 0.716 0.005 0.000 = = = = = 182 14 13 103.00 0.0000 [95% Conf Interval] -.0239388 0021369 0343648 -.0171514 -.0185444 -.031384 -.2135938 -.0681782 0044768 -.117591 -.0078151 0040693 0914981 -.0013826 -.0006601 -.0086705 0214584 0468013 0259003 -.0511325 78 Appendix 10: Summarizing regression models of ROE LC SIZE CAP LOAN DEP NII LLP GDP INF _cons N R-sq (1) ROE (2) ROE (3) ROE -0.134** [-2.49] 0.0423*** [6.59] -0.215 [-1.30] -0.0887 [-1.65] -0.160*** [-2.65] -0.276*** [-3.72] -1.278 [-1.51] 0.129 [0.33] 0.246*** [3.37] -1.074*** [-4.86] -0.236*** [-3.43] 0.0207** [2.39] -0.425** [-2.38] -0.0386 [-0.61] -0.194*** [-3.33] -0.211*** [-3.00] -2.708*** [-3.18] 0.0214 [0.06] 0.151* [1.84] -0.333 [-1.11] -0.184*** [-3.00] 0.0288*** [3.75] -0.360** [-2.10] -0.0373 [-0.63] -0.185*** [-3.23] -0.222*** [-3.21] -2.419*** [-2.91] 0.0456 [0.14] 0.202*** [2.72] -0.615** [-2.31] 182 0.391 182 0.356 182 79 Appendix 11: Hausman test on ROE Coefficients (b) (B) fe re LC SIZE CAP LOAN DEP NII LLP GDP INF -.2362451 020729 -.4246302 -.0385602 -.1938646 -.210864 -2.707561 0214058 1513293 (b-B) Difference sqrt(diag(V_b-V_B)) S.E -.0519921 -.0080827 -.0650471 -.0012478 -.008834 0113791 -.2881871 -.0241741 -.0505389 0309669 0040041 0491696 0237687 0111579 0120245 182617 0133998 0351282 -.1842529 0288117 -.3595831 -.0373124 -.1850305 -.2222432 -2.419374 04558 2018682 b = consistent under Ho and Ha; obtained from xtreg B = inconsistent under Ha, efficient under Ho; obtained from xtreg Test: Ho: difference in coefficients not systematic chi2(9) = (b-B)'[(V_b-V_B)^(-1)](b-B) = 7.40 Prob>chi2 = 0.5960 Appendix 12: Heteroscedasticity testing on ROE Breusch and Pagan Lagrangian multiplier test for random effects ROE[Firm1,t] = Xb + u[Firm1] + e[Firm1,t] Estimated results: Var ROE e u Test: sd = sqrt(Var) 0046163 0021673 001187 0679437 0465543 0344525 Var(u) = chibar2(01) = Prob > chibar2 = 43.97 0.0000 Appendix 13: Autocorrelation testing on ROE Wooldridge test for autocorrelation in panel data H0: no first-order autocorrelation F( 1, 13) = 129.273 Prob > F = 0.0000 80 Appendix 14: FGLS regression analysis of ROE Cross-sectional time-series FGLS regression Coefficients: Panels: Correlation: generalized least squares heteroskedastic no autocorrelation Estimated covariances = Estimated autocorrelations = Estimated coefficients = ROE Coef LC SIZE CAP LOAN DEP NII LLP GDP INF _cons -.1202013 0366391 -.298209 -.066231 -.2038071 -.2873324 -1.34573 1362403 212231 -.8620922 14 10 Std Err .0467897 0059323 1575431 0457542 0537803 0672156 7350443 339148 0638417 2029429 Number of obs Number of groups Time periods Wald chi2(9) Prob > chi2 z -2.57 6.18 -1.89 -1.45 -3.79 -4.27 -1.83 0.40 3.32 -4.25 P>|z| 0.010 0.000 0.058 0.148 0.000 0.000 0.067 0.688 0.001 0.000 = = = = = 182 14 13 130.18 0.0000 [95% Conf Interval] -.2119073 025012 -.6069878 -.1559075 -.3092145 -.4190726 -2.78639 -.5284776 0871035 -1.259853 -.0284952 0482662 0105698 0234455 -.0983996 -.1555922 0949302 8009582 3373585 -.4643315 81 Appendix 15: Summarizing suitable regression models for ROA and ROE (1) ROA LC SIZE CAP LOAN DEP NII LLP GDP INF _cons N R-sq -0.0159*** [-3.86] 0.00310*** [6.29] 0.0629*** [4.32] -0.00927** [-2.30] -0.00960** [-2.10] -0.0200*** [-3.46] -0.0961 [-1.60] -0.0107 [-0.36] 0.0152*** [2.78] -0.0844*** [-4.98] 182 (2) ROE -0.120** [-2.57] 0.0366*** [6.18] -0.298* [-1.89] -0.0662 [-1.45] -0.204*** [-3.79] -0.287*** [-4.27] -1.346* [-1.83] 0.136 [0.40] 0.212*** [3.32] -0.862*** [-4.25] 182 ...MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM HO CHI MINH UNIVERSITY OF BANKING VU THU HA FACTORS AFFECTING BANK PROFITABILITY: THE CASE OF COMMERCIAL BANKS IN VIETNAM GRADUATION THESIS... topic "Factors affecting the bank profitability: The case of commercial banks in Vietnam? ?? The research results will clarify the impact of determinants on the financial situation of Vietnamese commercial. .. data of 14 Vietnamese commercial banks in the system, helping readers have a better overview of financial indicators influencing profitability of the system of commercial banks in Vietnam, thereby