THEORETICAL FRAMEWORK AND RESEARCH
Commercial banks introduction
In a rough definition, a commercial bank is a type of financial institution accepting deposits, making business loan, mortgage loan as well as offer various basic financial products including saving account and certificates of deposit According to Li and Zou (2014), commercial bank should be differentiated from investment bank which has different function, though some commercial bank might assume the dual business Though the commercial bank has core function of accepting deposit and providing bank loan, the specific types of deposit and bank loan might vary significantly from one to another As for deposit, there might be saving account deposits, fixed deposit or recurring account deposits The bank loan could be cash credit, money at call, overdraft facility or bill discount
In Vietnam, the definition of commercial bank is in fact rather generalized, yet remain following the common concept of commercial bank adopted worldwide According to Vietnam Law on Banking in 1997, a commercial bank is defined as a form of credit institution entitled to carry out all banking activities and other activities Herein, the banking activities are instituted to include monetary business and banking services with regular operations as accepting deposits as well as utilizing deposits to provide credit and payment services
At the first glance, the definition of commercial bank in Vietnam does comply with international notion in regards with functions assumed by the bank
However, there is not a close boundary for activities to be conducted by the commercial bank in Vietnam as there is room for extension of operation spectrum For this openness, commercial banks in Vietnam could diversify across various fields of operation and take different roles in the economy
BIDV can be considered as one of hybrid banks which function as investment and commercial bank at the same time On one hand, BIDV accepts deposit from public and turn deposit intending activities as the way other commercial banks do On the other hand, BIDV features the investment bank as it funds many investment projects and key economic areas of the country In this aspect, BIDV has assumed the role of major investor to plenty of enterprise customers, contributing significantly to the growth of Vietnam economy.
General review of Bank profitability
The profitability of commercial bank is critical indicator of bank efficiency in exercising the banking operation The profitability also reflects the bank competitiveness in comparison with other institutions, as well as management quality of board In a rather extensive scope, the profitability could be referred as being driven by both external and internal determinants On one hand, the internal factors or so-called controllable factors relates to internal management which aims to produce expected profit On the other hand, the external factors including macro determinants and bank specific ones are seen as beyond the manipulation capacity of the banks As far as the study concerns about the focus on profitability management at bank level, it would merely include internal determinants into account for better relevancy The internal determinants could be sourced from internal financial statement of the bank for capture of data (Li & Zou, 2014)
For commercial banks, the profit might come from various sources including transfer fee, interest on bank loan and other banking services (Li &Zou,
2014) Of which, the bank loan service often accounts for the vast majority of bank revenue and subsequent profit The revenue reported is normally determined by the spread between interest paid on deposit and interest earned on loan This is also known as net interest income However, there are also cases where bank charge no interest, such as checking account deposit In normal course of business, commercial banks always charge an interest higher than what is paid to depositors Similar to other commercial business, the profit is calculated after deducting the expense paid for bank operation including staffing, renting, utilities from revenue
As far as internal determinants are concerned, the DuPont model is proposed to be examined as this framework reflects best the nature of profitability in firm-level management The model literally sources from the Return on Equity (ROE) as the cornerstone, before expanding to wide number of other profit indicators (Li &Zou, 2014) In particular, ROE is decomposed to Return on Assets (ROA) which is in turn split down to asset turnover and net profit margin Though the further breakdown provides more specific profit measuring methods, the research would adopt Return on Equity and Return on Assets as the 2 major proxies of profitability First of all, these variables are most important variables which stand on top of the DuPont model Second of all, such variables are also widely adopted in previous research papers for representing profitability (Gizaw, Kebede&Selvaraj, 2015; Li &Zou, 2014)
The most common way to measure bank profitability and overcome the limitations of net income is through ROA and Return on Equity (ROE)
(Mishkin & Eakins, 2012) ROA and ROE are convenient methods to measure bank profitability These two factors demonstrate how effective a bank is to use its assets or equity to make a profit The bank's ROA and ROE are calculated as follows:
Return on equity measures the profitability for each dollar of capital equity contributed by shareholders (Gizaw, Kebede and Selvaraj, 2015) In a broad scale, ROE reflects the efficiency of converting capital investment into profit; hence it is preferred by stockholders to be as high as possible However, in aspect of risk control, attempt to maximize return of equity might result in significantly greater risks faced by the bank A particular example is relative reduction of equity against net income, which would eventually induce possible violation to minimal regulatory capital whereas rising risk of insolvency (Misker, 2015) It is therefore required careful setting of ROE to maintain the balance For computation, ROE is calculated through the division of net income by total shareholder‟s equity, multiplied by 100
Return on assets measures the profitability relative to total assets owned by the bank In simple norm, it helps indicating the efficiency of transforming given assets into profit Sharing the same notion as turn on equity, the return on assets is assumed to hold a positive relationship with level of profitability in the course of profit maximization, though this is not always the case The ROA can be retrieved by dividing net income by total assets, multiplied by 100
Overall, the return on assets and return on equity are majorly adopted as the indicators of profitability in most of studies; given the genuine reflection of profit making capacity of the business over certain period However, it is unnecessary for both of them to reflect the same result in testing relationship of profitability with corresponding factors Therefore, it is important for including both of 2 variables in the analysis to bring about more comprehensive view
1.2.3 Internal factors effecting the bank profitability
Non-performing loan, which is commonly referred to as the amount of payment remaining non-performed after maturity (Charles, 2001), is seen a typical h problem in wide range of articles Therefore, non-performing loan ratio which is taken from ratio of non-performing loan to total loan, should be able to indicate status of credit risks Maxwell and Peter (2016) claim that the increasing non-performing loan ratio comes with message of probability that the bank would not be able to recover the payment Consequently, commercial bank encountering higher non-performing loan level would probably see great financial loss and eventually realize lower profit after all
As a result, there should be negative relationship between bank profitability and non-performing loan rate (Messai&Jouni, 2013); giving sense for bank to drastically control such type of bad debt Nevertheless, Pasha and Khemraj
(2009) oppose this relationship as he argues that the complicated definition of non-performing loan might distort the way this indicator to be recorded
Therefore, the measurement of non-performing loan might be inconsistent across the countries with different regimes of bad debt recognition In fact, though calculation of non-performing loan is purely standardized, the complicated definition of overdue term for non-performing loan is the factor of confusion Particularly, while the standard overdue term in International ground set by International Monetary Fund (2005) defines a minimal line of
90 days for credit risks to be recognized, it was found that the term varied significantly across the countries where past studies were conducted
Specifically, the due for non-performing loan recognition on Russia is defined as just 30 days, compared to 60 days in Estonia and Lithuania (Iuga&Lazea,
2012) Such difference in deadline may significantly contribute to the actual level of non-performing loan In Vietnam, the standard of non-performing loan is referred as in Decision numbered 493/2005/QĐ-NHNN by Vietnam Central Bank, wherein 90 days overdue is qualified for non-performing loan record Such compliance to international standard would facilitate the comparison with other studies better
The capital adequacy ratio refers to the level of equity held by the bank to secure it from the risks arise from credit transaction For its nature, capital adequacy ratio is considered as the reserve which protects depositors and banks from unexpected loss The capital adequacy ratio originally stems from regulation of Basel Accord, with regulatory minimum of 8% It is assumed that the reserve would enable bank to prevent financial loss; hence in long term the profitability should be guaranteed at certain level This is evidenced in the study of Olalekanand Adeyinka (2013) where it was found quite a positive relationship between the capital adequacy ratio and profitability On the other hand, it is also criticized that the reserve could prevent the bank from fully operating at 100% capital capacity; thus far driving profitability to be lower in short term where higher reserve is required (Gizaw, Kebede&Selvaraj, 2015)
In general term, the inclusion of capital adequacy ratio in batch measuring credit risk is compulsory as long as this variable reflects the true nature of credit risk management practice as well as the regulatory attempt to bring forth more stable operation of commercial banks in long term This is therefore essential to be included in the set of variables of this study
Loan to deposit ratio (LDR)
Loan to deposit ratio is adopted to measure the liquidity of bank in the wake of profit maximization According to Gizaw, Kebede and Selvaraj (2015), the variable indicates whether commercial bank may withstand when depositor withdraw as well as when bank meet market loan demand via cash asset reduction The concept of liquidity in relation to credit risk management implies that a more liquid bank should be less likely insolvent before massive credit risks Especially, it is advocated by Misker (2015) that the systematic credit risks which often derive from financial crises demand would pose real challenge for the bank liquidity On the other hand, the profitability should not be high in case bank remains too secured Accordingly, the nature of risk taking and profit maximization make it difficult to determine a sufficient level of liquidity among commercial banks (Misker, 2015)
Loan Loss Provision ratio (LLPR)
While capital adequacy ratio grants protection to depositors against unexpected loss, the loan loss provision reserve gives protection toward anticipated loss (Gizaw, Kebede and Selvaraj, 2015) Considering the essence of loan loss reserve as the contra income account, it literally enables expected loss to be recognized in profit and loss statement As a result, high loan loss provision ratio should normally indicate lower profit and in report though the inclusion has not certainly reported deduction to the final profit In normal course, the loan loss provision is treated in quite various ways, including earning management or income soothing (Gizaw, Kebede and Selvaraj, 2015) However, its robust implication should reflect the belief of managers for quality of assets
OVERVIEW THE BIDV AND PROFITABILITY OF BIDV16 2.1 Review of BIDV and profitability in 2006-2017 intervals
Introduction to BIDV
Nominated as one of the five largest State-owned commercial banks in Vietnam, BIDV ranks at 351th in the list of 500 largest bank in the Asia, according to ratings published by Asia-week magazine The bank was founded in 1957 under Decision No 177/TTg dated 26th April, 1957 by the Prime Minister as the Bank for Construction of Vietnam, yet the current name was only adopted in 1990
Given the position of the bank, BIDV has expanded its network across Vietnam as well as having commercial presence in various countries around the world The operating field of BIDV has been quite diversified, ranging from finance, banking to insurance, providing a complete range of financial services, regarding currency, credit and other non-banking services
Especially, unlike other commercial banks, BIDV also features agency funding projects those take place domestically or internationally To attain and maintain its competitive edge in an ever fierce competition of the banking sector, BIDV has been initiative in resorting to the comprehensive technological infrastructure of modern banking Especially, the period of
2007 onward witnesses the leading position of BIDV in Vietnam ICT Index, demonstrating the huge advancement and adaptability of the bank in the digital era (Le & Pham, 2017)
Brief of BIDV profit making performance in 2006-2017
The Charts below shows the specific ROA/ROE from 2006 to 2017 In this period, BIDV has remained the leading bank in Vietnam with very positive result The indicators have remarkable changes and shown the efficiency of the bank during this period From the Figure 1 we can see that:
Figure 2.1 – BIDV ROA & ROE from 2006-2017
ROA (Return on Asset) is calculated as net profit divided by total assets
This is a financial ratio that shows the percentage of profit that company earns in relation to its resources This indicator shows the quality of asset management The larger the profit, the greater the ratio ROA of BIDV has been maintained stably at nearly 1% over the years, then has been down from 1.04% in 2009 to 0.63% in 2017 The decline was strongly influenced by business environment While these years of economic crisis, almost businesses were at risk of bankruptcy but the bank's efforts maintained the
ROA ROE stability ratio in the acceptable level of fluctuations This illustrates the ability of banks to operate the business and its ability to manage its assets effectively
In addition, because BIDV‟s Total assets increased rapidly in this period also made ROA ratio decrease
ROE (Return on Equity) is a profitability ratio that measures the ability to generate profits from its shareholder investments in the company This indicator shows the performance of the company.ROE has significant fluctuation in the range of 13-18%, which is more remarkable when compared to ROA fluctuation Of which, there have been 2 distinct periods to be recorded (BIDV, 2017) ROE reached the highest level in 2009 with 18.41% and gradually down to 17.96% in 2010 Notably, the bank profit rocketed despite serious damage from financial crisis in 2008-2009 period By the end of 2011 when the ending joint stock process, the amount of equity increased, especially the rapid increase of chartered capital that led to a sharp decline in ROE to 13.20% and to 12.38% in 2012 (BIDV, 2017)
Despite such backward step, BIDV still stands among the banks having top profitability in Vietnam In fact, Tran (2015) advocates that the poor profitability of BIDV partly refers to domestic recession in 2011-2012 which set the long term effect on economic growth In fact, the downward trend is also the common pattern of all Vietnam commercial bank in this period, as ROE sector averaging at 9.56% in 2012 compared to 14.19% in 2011 (KPMG, 2013) Thus, from ROA and ROE we can see the effectiveness of banking operations in the past period and especially can see the dramatic changes in the size and structure of BIDV
The ROA and ROE ratios have always been improved and reached the normal level The income structure has shifted in positive direction Notably, the bank profit rocketed despite serious damage from the financial crisis in 2008-2009 period From 2011 onwards, the profit of BIDV has been on a declining trend, hitting the bottom of 12.38% ROE in 2012 Despite such backward step, BIDV still stands among the banks having top profitability in Vietnam In fact, Tran (2015) advocates that the profitability of BIDV partly refers to the domestic recession in 2011-2012 which sets the long term effect on economic growth In fact, the downward trend is also the common pattern of all the commercial banks in this period, as a sector at 9.56% in 2012 compared to 14.19% in 2011 (KPMG, 2013) Considering the fact, it is important to see that the performance of BIDV was still above the average line, recording the effort of the board in maintaining competitiveness
As a result of the implementation of strategic objectives and restructuring in the period 2012-2017, BIDV's growth over the past five years is impressive and comprehensive in all indicators with high growth rates (average 17% / year), compared with a number of specific targets: total assets increased more than 2.1 times, capital mobilization increased 2.5 times, outstanding loans increased 2.6 times, outstanding retail sales increased about 4 times, profit before tax increased 1.7 times On the networking, BIDV has 182 first-level branches and nearly 800 transaction offices across the country, increasing 63 branches and 284 transaction offices as compared to 2011 (Cong An, 2016)
In the past five years, BIDV has strengthened cooperation with domestic and foreign organizations, "paving the way" in investment activities abroad, strengthening international economic integration and comprehensive
Be proactive, actively integrate into regional and international financial market; secure, sustainable and effective credit growth, focusing on priority areas of rural agriculture, export, supporting industries, SMEs, high tech enterprises; dealing with bad debts with integrated solutions and measures; develop and diversify the list of products and services; establishing and effectively implementing the international economic integration strategy of
BIDV are the key factors help BIDV becomes the leading in banking industry and earn more profit every year
After reviewed the ROA and ROE through 10 years, we can see the high quality in BIDV operation ability and especially the positive changes in structure of the bank
Table 2.1 - Quality Criteria of BIDV
BIDV CAR NPL LDR LLPR DR
As we have known that, the bank's operations always have risks There have major risk factors in every credit, deposit or payment transactions so the ability to accept and control risk or bad debt presents the credit quality, quality of the bank‟s operation
From the table above we also see that the NPL ratio is always under control at 3%, slightly increase to 3.03% % in 2012 However, the control under 3% is still a positive point of BIDV in the quality of controlling non-performing loan
According to the statistic in Table above, we can see that the equity of BIDV increased sharply in this period due to many reasons such as increasing chartered capital, the bank's funds increased sharply, the results of annual contributed profits led to the CAR of BIDV is always over 8% From 2009 to
2017, CAR has always been above 9%, ensuring the minimum requirements of the State Bank CAR was not increased but remained stable because BIDV used capital to increase its assets and expand its business activities to increase profit
LDR from 2014 to 2017 around 90%, nearly ensuring the minimum ratio prescribed by the State Bank of Viet Nam
LLDR well controlled, proving that bad debt is strictly controlled
This ratios shows the bank's ability to operate and its credit quality is extremely effective
The main purpose of the bank's operation is trying to create profit, so the efficiency of the bank is reflected in its profit after each financial year This also means that the bank must find ways to maximize total revenue from operations and minimize costs, but still ensure the safety and fulfillment of other criteria
In the period of 2006- 2017, BIDV has continuously increased in value of income from financial activities Although minimizing costs is one of the essential purposes, banks always have to increase their reserves and operating expenses to secure their assets and credits that can help them handle the difficult conditions By doing so, BIDV can affirm the prestige of the bank with their customers and investors In particular, the cost of credit loss provision increased sharply from 1,437 billion VND in 2006 to 5,293 billion VND in 2010 and11,349 billion VND in 2017 Moreover, the most important is the profit before and after tax should be always guaranteed to increase stably every year In 2006, pretax profit was 1,112 billion VND and increased to 8,665 billion in 2017 Similarly, the net profit of owners reached a peak of 1,001 billion in 2006 and increased to 6,786 billion VND in 2017
Figure 2.2 – BIDV Profit before and after tax from 2006-2017
Moreover, the asset size growth with reasonable structure Total assets of BIDV have continuously increased from 161,223 billion VND in 2006 to 1,202,284 billion VND in 2017 BIDV is always the top among banks with the largest total assets in Vietnam The largest proportion of total assets is credit activity This is the main income generating activity for the bank
Although the impact of the global recession leading to the financial situation of customers as well as banking business is negatively affected, BIDV's credit quality has been improved remarkably After all the efforts during the financial crisis before 2010, BIDV has reached their goals as increasing in the profit from 2010 to 2017 as the numbers given from the figure 3
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Profit before Tax 1.112 2.028 2.369 3.605 4.625 4.220 4.325 5.290 6.297 7.473 7709 8665 Profit after Tax 1.001 1.529 1.997 2.818 3.758 3.209 3.265 4.030 4.948 5.882 6229 6786
Profit before Tax and Profit after Tax of BIDV (Bil VND)
Profit before Tax Profit after Tax
Figure 2.3 – BIDV Total assets and Owner’s equity
Comparative review of profitability in BIDV and Vietinbank in the
Comparing with Vietinbank, a bank having 26.74% ROE in 2011, it is easy to point out how much effective Vietinbank has been in generating profitability
Despite capturing a higher profitability than BIDV in 2011, the following period saw quite poor performance in Vietinbank with ROE dropped to as low as 10% since 2015
Figure 2.4 – Comparison of BIDV and Vietinbank profitability
(Source: BIDV and Vietinbank annual report)
While the aforementioned quantitative analysis helps revealing the most important variables to Vietnam commercial banks to consider when attempting to maximize profitability This section will provide an insight into the profit making operation of BIDV over the period to examine the efficiency of profit making in BIDV For practical implications, the comparison with Vietinbank will be made where relevant to judge the efficiency of financial performance conducted by BIDV A quick glance at the figure show that profit of Vietinbank and BIDV tended to oppose to each
Comparison of Vietinbankv.s BIDV profitability
BIDV ROA Vietinbank ROA BIDV ROE Vietinbank ROE other, though the pattern of change in certain periods could somewhat resembled each other Over a course of 15 years, it was seen that BIDV outran Vietinbank in most of the time, except before 2007 and after 2013 In particular, the period from 2007 to 2013 marked the sustainable growth of BIDV as the bank did not only develop new credit products and services to meet the changing demand of the market but also implement changes in credit management model This immediately brought about positive improvement in the financial performance of BIDV but also leverage the bank position to be the leading bank in Vietnam Notably, the sharp growth of BIDV profit indicators was mostly captured between 2008 and 2011 as the boom of stock market stimulated demand for investment fund
Despite capturing a higher profitability than BIDV prior to 2007, the following period saw quite poor performance in Vietinbank with ROE dropped to as low as 10% since 2014
Figure 2.5 – Comparison of BIDV and Vietinbank CAR
(Source: BIDV and Vietinbank annual report)
In fact, the focus on keeping high capital adequacy reflects attempt of Vietinbank in securing better risk coverage, yet it is not sufficient to cover the shortcomings of this bank in credit risk evaluation In a close comparison to BIDV, Vietinbank still exercise decentralized appraisal mechanism, which give too much jurisdiction to branch in granting and appraising credit (Nguyen, 2016) Consequently, a vast majority of profit has been gone to reserve or deduction for non-performing loss According to Kagoyire and Shukla (2016), decentralized appraisal has the advantages in keeping high flexibility for banking operation as a greater frequency of assessment can be made, enabling bank to conduct more lending transaction than the counterpart This partly explains why Vietinbank could maximize the lending volume in the boom stage of economic cycle between 2008 and 2011 This is also evident in the fact that Vietinbank maintained very high loan to deposit ratio, despite the higher underlying risk The bank appears to follow an intensive lending strategy which deliberately pursued profit when the market demand went up However, Vietinbank had also to assume greater risk with this approach (Nguyen, 2015) According to Le and Pham (2017), the problem with strategy of Vietinbank was revealed in the period when the hype of market was over It was turned out that a lot of loan became non- performing after 2011; thus the profit of Vietinbank was severely affected On the contrary, BIDV implemented a rather sustainable strategy with more careful lending operation (Nguyen, 2016) In fact, the lending strategy also granted BIDV a better performance with not only less risk but also higher profit on average The heart of strategy implemented by BIDV was the centralized appraisal which safeguarded the bank from credit risk In fact, the centralized appraisal has been the key factor which allows BIDV to outperform Vietinbank in profit making Thanks to this mechanism, BIDV has successfully maintained relatively low credit risk; hence the loss from non-performing could be minimized, contributing majorly to higher profitability Apart from that, loan loss provision of BIDV was also significantly lower than that of Vietinbank in the period The below figure demonstrates that BIDV needed to set fairly lower reserved amount for covering credit loss than Vietinbank in most of the period between 2008 and
2014 The situation was only better for Vietinbank when it implemented the centralized appraisal system since 2014, followed by better credit management For this, not only loan loss provision but the non-performing loan rate of Vietinbank saw significant drop
Figure 2.6 – Comparison of BIDV and Vietinbank NPL & LLR
(Source: BIDV and Vietinbank annual report)
By contrast to the improvement in Vietinbank, BIDV tends to experience higher non-performing loan in 2014 onward, followed by the rising loan loss provision in the later year In 2014, BIDV non-performing loan rose significantly compared to 2013, causing the upsurge in loan loss provision to approximately in the following years to cover up the loss The major problem for BIDV derives from ineffective market diversification which put too much
Comparison of Vietinbank and BIDV : NPL & LLR
BIDV NPL Vietinbank NPL BIDV LLR Vietinbank LLR pressure on the centralized appraisal system of BIDV (Nguyen, 2015) As a result, it appears that the centralized appraisal is good practice to a certain extent; yet the long term growth requires bank more sophisticated strategies and practices of credit management to improve stability in bank performance
According to Kagoyire and Shukla (2016), the centralized appraisal provides good security to the bank in short term, especially during crisis but it somehow deters the expansion of commercial bank in the long run Indeed, the credit performance of BIDV worked fairly well in both global and domestic crisis in 2008-2009 and 2011-2012, but it struggled to remain competitive when Vietnam economy recovered in 2013-2014 Furthermore, the diversification strategy of BIDV faced challenges when the decision making right was kept in the Headquarter According to Nguyen (2016), the heavy reliance on the headquarter decision made BIDV fail to meet the market demand which has changed at a faster pace than it was in the past
Additionally, the centralized authorization made the implementation of diversification in bank branches far less flexible than the competitors
Provided that each local branch also requires different approach to customer in line with regional culture and behavior, the absence of jurisdiction in local level made it hard for BIDV to run the relevant marketing campaign tailored to specific subset of customers For the aforementioned analysis, it is apparent that the actual performance of BIDV itself supported the findings of quantitative analysis Accordingly, it supports that bad debt and the loss loan provision indeed played the crucial role in determining the profit making performance in BIDV, whereas the other indicators merely casted random effect on the bank Especially, it was also confirmed that capital adequacy ratio merely secure the bank stability rather than adjust bank profitability in a direct basis All in all, a practical solution which is necessary for BIDV to address the existing low profit performance should be developed upon solving bad debt in the bank Once this can be done, the profit of the bank can be assured to meet its objective The practical measures will be discussed in detail in the later section.
Potential determinants of profitability of BIDV
Based on the above analysis, we can again summarize the factors and their effect on determinants of profit in BIDV as shown in the table below:
Table 2.2 - Dependent variables on profit in BIDV
Non-performing loan rate NPL -
Loan to deposit ration LDR +
Loan Loss Provision ration LLPR -
Bank size (Total assets) TA +
METHODOLOGY AND DATA ANALYSIS
Chapter introduction
In this chapter, the specific method to be employed by the research to fulfill the mentioned objectives will be discussed in detail It would commence at presenting the relevant research paradigm and the overall research strategies before going over the planned tactics for data and sample selection Following this, the data analysis methods will also be specified to demonstrate how collected data is processed for interpretation The last section of this chapter is dedicated on ethical issues related to the study The different aspects of research ethics will be considered to make the study in line with ethical principle
Research paradigm & strategies
Two academic research approaches are quantitative and qualitative research, with the former one accounting to statistical approach of numeric data representation and the later one employing non-statistical measurement Due to such nature, each approach is developed on different perspective On one hand, the qualitative research is referred as reflecting interpretive view point, having knowledge acquired via experiences or event interpretation By contrast, quantitative approach complies with positivist, wherein social phenomenon should be quantified for learning (Krauss, 2005)
As far as the profitability is concerned, the vast majority of past research papers employ positivist paradigm under quantitative research Batten andVo
(2013) argues that the matter of profitability should be objective in nature as the profitability itself is heavily reliant on external impacts Hence, the research would employ positivism perspective, assuming that the event of job satisfaction is objective to be studied
Under quantitative approach driven by positivism, the deductive reasoning would be adopted, meaning that theories will be developed beforehand, followed by confirmation of theory using the data fetched from reality In the other words, the research employs a top down approach However, for a comprehensive understanding, the qualitative analysis will also be employed to provide confirmation on the findings of quantitative It is believed that the mix-method would help depicting a big picture of Vietnam banking sector while providing sufficient level of details about BIDV
Data collection & sample selection strategies
Given the objectivity of input information for the research, it is suggested that the research would mainly rely on secondary data In fact, most of past research papers relied on secondary data to develop understanding of relationship between profitability and the drivers; hence it would be easier to compare and contrast the research results based on a similar data collecting mode
As the research requires data related to various bank-specific factors to review impact, it should extract the financial report of BIDV for raw data establishment To test the hypotheses of variable relationship, the research would resort to longitudinal data collection, meaning that data will be examined over a certain period to draw conclusion upon changes According to Zeng (2015), longitudinal research should allow researcher to maintain focus on variation of a single research object over time so it work better in case study demanding high detail level As a result, this is ideal approach to gain sufficient understanding on how factors in BIDV has driven bank profitability in response to various events in timeline Accordingly, data will be fetched from annual report of the bank
Sampling strategy
The selection of sample size is crucial to produce research quality in general
It is argued by Scheurich (2014) that the technique of sampling selection and size determination would influence the reliability and feasibility of study In particular, on purpose of conducting quantitative research in case of BIDV, the research examines the data of this bank in longitudinal scope, ranging from 2006 to 2015 Apart from BIDV, the dataset structured in over 10 years would also include the data from 7 rival commercial banks in Vietnam, including Vietinbank, Vietcombank, Eximbank, Saigon-HanoiBank, AChaubank, BIDV, Sacombank and Militarybank to generate a sample size of
80 observations, which is consistent to the assumption of Central Limit Theorem For qualitative part, the study will take account into comparative analysis of BIDV and Vietinbank.
Data analysis methods
In order to analyze quantitative data in response to hypotheses testing, the research proposes to process data via 3 major approaches, including descriptive statistics, correlation analysis and regression study The following section will present the justification for selection of each aforementioned measure
Descriptive statistics: The descriptive analysis is defined by Jaggi (2006) as the simple technique to study the pattern of data set Jaggi (2006) maintains that the advantage of descriptive statistics is that the simplicity of this technique makes research quickly approach the initial understanding of data set Thus, it can be used as the tool for not only bring for researcher a comprehensive view of data collected from the research but also be able to serve as a foundation for other analysis technique to reference
Correlation analysis: According to Sharma (2005), the correlation analysis is technique which helps researcher to solicit an insight into the relationship between variables, with intensive focus on the magnitude of interaction and the direction of movement produced by interactive impacts Of which, the magnitude is measure by the absolute value of Pearson indicator with the rule of thumb is: relationship is significant if magnitude is larger or equal 0.5 and vice versa (on the scale of 0-1) Meanwhile, sign of value indicates if the relationship is negative or positive, respectively In brief, with the domain of correlation value ranges from -1 to +1, there would be 4 possible cases including significantly negative correlation, insignificantly negative correlation, significantly positive correlation, insignificantly positive correlation
Regression analysis: In order to examine the relationship between the dependent and independent variables systematically, the research will employ both Fixed Effect Method and Random Effect Method On the ground that each measure comes with advantages and disadvantages, the combination of 2 methods on a side-by-side basis should provide fair and accurate results which are otherwise unavailable Should there be any inconsistency or conflict between the 2 methods, the Hausman test will be run to determine which model should be more relevant Theoretically, the Random Effect method is assumed to hold advantages over Fixed Effect Method in regards to possibility of predicting shrunken residuals and possibility of accounting for differential effectiveness with presence of random coefficients models (Borrego, Douglas &Amelink, 2009)
Descriptive statistics
CAR NPL LDR LLPR LNTA DR ROA ROE
Overall, the descriptive analysis on 80 observations (data of 8 banks in over
10 years in appendix) reports that the capital adequacy ratio of Vietnam banks has been likely to fluctuate in such a large range, with the minimal value being captured at 5% compared to 35% of the maximum With standard deviation of just 4% and mean of 12%, it appears that the data of capital adequacy is left skewed Also, it can be seen that the average of capital adequacy ratio of 12% is somewhat higher than the minimal requirement of 8%; demonstrating the high compliance of Vietnam Banks in the sample to risk management policy
Non-Performance Loan or NPL is also the variable varying significantly in a large range of data as the minimum and maximum was recorded at 0.2% and
7.8% respectively On average the non-performing loan figures of the banks averaged at just 1.7%, a generally low level of bad debt The standard deviation is also controlled at an acceptable range of 1% The figure also demonstrates the stable operation of Vietnam banking sector in the mentioned period of time
However, it is predicted that there existed some outliners on the high band Loan to debt ratio of Vietnam banks saw the mean anchored at 85% which is quite a safe rate of loan out The figure demonstrates the careful manner of Vietnam banks in covering up the risks with respect to reserved capital
However, the mean of just above 50% indicates the effective lending operation of the bank whereas the availability of cases where loan to debt ratio exceed indicate the alarming low liquidity as bank lent out more than what they had
For a low bad debt in general, the loan loss provision ratio is not too high, at just 2% on average to sufficiently cover the bad debt Following this, the highest LLPR is 5.3% which is 10 times greater than the minimum
Total assets of the banks included in the research in general followed an upward trend in most of the case, mostly due to favorable economic condition in the period being examined by the research The gap between the minimum and maximum is relatively large due to presence of banks in different size, regardless of the annual growth of each bank itself
Dividend payment ratio of the firm ranges between 1% and 16%, with the average achieved at 7% The values of dividend payment ratio however varied insignificantly within a small standard deviation of only 3%
The dataset for ROA bears remarkable resemblance to dividend payment, provided the low fluctuation of merely 0.6% around a mean of roughly 1.3%
The range of ROA is also in small range between the maximum and minimum
Last but not least, ROE is captured at an average of 16.7%, followed by an acceptable data fluctuation around the average value – 7% The highest ROE recognized in the interval is at 38% as the smallest figure is just as low as 1%
Correlation analysis
CAR NPL LDR LLPR TA DR ROA ROE
According to the correlation analysis, Capital Adequacy, Non-performing loan, Lost loan reserve provision and total assets all held the negative correlation with the proxies of profitability Notably, there was consistency in the sign of relations between these factors and either ROA or ROE
Meanwhile, loan to deposit and dividend payout ratio were found to form positive relations with the profit of banks Based on this result, it is put forth that a highly profitable bank should maintain a low level of capital adequacy, non-performing loan and loss loan reserve provision, Interestingly, the banks with lower level of assets should see greater profit than the large one Besides, it is also shown that the high loan to deposit and dividend ration should encourage greater profit
However, considering the magnitude of the correlation, it appears that only non-performing loan and loss loan provision forge considerable relationship with the profit, given Pearson Correlation coefficients greater than 0.5 on average Also, the two dependent variables also seemingly carry significantly positive correlation.
Regression analysis
Number of obs = 80 R-sq: within = 0.6984 between = 0.3337 overall = 0.6246
Obs per group: min = 10 avg = 10.0 max = 10
Obs per group: min = 10 avg = 10.0 max = 10
Table 3.5 - Hausman Test - ROE Hausman Test : ROE
(b) (B) (b-B) sqrt(diag(V_b-V_B)) fe re Difference S.E
DR -.0534235 -.0534235 0 0 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(0) = (b-B)'[(V_bV_B)^(-1)](b-B) = 0.00
Number of obs = 80 R-sq: within =0.6372 between = 0.1286 overall = 0.5452
Obs per group: min = 10 avg = 10.0 max = 10
Number of obs = 80 R-sq: within = 0.6372 between = 0.1286
Obs per group: min = 10 avg = 10.0 overall = 0.5452 max = 10
Table 3.8 - Hausman Test - ROA Hausman Test: ROA
(b) (B) (b-B) sqrt(diag(V_b-V_B)) fe re Difference S.E
DR -.0203757 -.0107971 -.0095786 0054994 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(0) = (b-B)'[(V_bV_B)^(-1)](b-B) = 12.79 Prob>chi2 = 0.0254
A quick glance at the R-squared index grant the clear understanding on the extent to which the model help reasoning the validity of the model
Accordingly, the R-squared values of the model tested with both ROE and ROA show quite a high value, regardless the method of data analysis implemented Accordingly, the R-square values measured under either Fixed Effect or Random Effect analysis range between 0.6 to approximately 0.7 In the aftermath, this result indicates that the set of predictors adopted for this study has quite high goodness of fit as the model is possible to reason up to 70% of the total variances related to the regression Therefore, the variables employed for the analysis is generally good though there remains room for improvement so that the relevancy can be better In fact, the studies of Sufian&Habibullah (2010) and Menicucci Paolucci (2016) which concerned with the same set of variables return in R-square of 0.8 on average Given that these studies were conducted in Europe, it is possible that some variables in the dataset could be more relevant to reflect the pattern of profit in the European business context, yet less effective in the case of Vietnam
Therefore, should the researcher be able to identify the weakly correlated variables, it is possible to filter out these factors so that the future study may attain better accuracy
Following the results as demonstrated in the above table, it appears that there have been high consistencies between FEM and REM, especially in regards with the relationship between each dependent variable and the independent ones Accordingly, the 2 approaches agreed on the validity of relationship between NPL ratio and Loan Loss Provision ratio on the firm performance, regardless ROE or ROA In both case, NPL and Loan Loss Provision however assumes similar position in affecting the profitability indicators On one hand, FEM and REM reached to the common ground that the Non-performing Loan should be negatively correlated to both ROA and ROE Accordingly, lower NPL promises high profit and vice versa; thus far highlighting the role of credit management to protect banks from the likeliness of bad debt Likewise, a strong negative relationship is also confirmed on loan loss provision ratio and the two proxies of bank profit, since coefficient is negative while P value approaches zero The result hence suggests Loan Loss Provision as barrier against the profitability of firm Notably, the above correlation has demonstrated a consistent correlation between NPL and Loan Loss Provision
Therefore, NPL can be seen to not only directly cut off firm profit from business operation but also indirectly lower profit via increasing Loan Loss Provision For this moderating effect, the importance of controlling NPL has increased significantly
Likewise, Loan Loss Provision itself is also found to bear direct significant effects on the profit of firm, for the P-value fell below critical point of 0.05 in all testing methods The negative coefficients indicate that the relationship between Loan Loss Provision is likely an inverse connection; hence the firm those setting a high level of reserve to cover its potential loan loss should eventually witness a lower profit With this impact is evaluated to be rather significant, the Loan Loss Provision is no doubt a serious issue that the bank those having low profit but consider This result, henceforth, rejects the null hypothesis H0 for Loan Loss Provision
The last significant factors identified among the variables in model is Loan to Deposit ratio, with P-value fluctuating between 0.01 and 0.02 in both REM and FEM Despite the slight inconsistency, the P-values remain far below 0.05 to validate a significant impact between Loan to Deposit and the dependent variables There was also no conflict at all when the measurement is made with ROE or ROA; showing the valid role of Loan to Deposit in determining the level of bank profit Differing from NPL and Loan Loss
Provision, however, the coefficients for this relationship remains positive so it is expected to see a higher profit when the bank attempts to rise up the rate lending out in comparison with the deposit
As opposed to the validity of impacts caused by the two mentioned factors, the other variables show insignificant connection with ROE and ROA First of all, capital adequacy ratio is shown to hold negative impacts on bank profit, yet the P-value of just 0.3 which remains way higher than the critical threshold of 0.05 As a result, the impact that capital adequacy leaves on profit is seen to be statistically insignificant as what being assumed in the null hypothesis Interestingly, the variable assets, meanwhile show negative influence the extent to which Vietnam banks made profit, since the coefficient was captured at 0.08respectively These figures show that greater bank even make less profit than the smaller one However, the p-value of this relation is too large to confirm a valid connection between the asset and profit It therefore accept the null hypothesis for variable assets Interestingly, there has been inconsistency in the impacts of dividend ration and the profit set between the 2 analytic techniques, with Fixed Effect Regression rejecting the significant relation which is in turn accepted by the Random Effect measure
In specific, while the former test produced a P-value greater than 0.05, the latter provides the result slightly below the threshold For this inconsistency, it should be referred to the Hausman test as mentioned below for a proper validation
Additionally, since the analysis was performed with both Fixed Effect and Random Effect mode, the Hausman test was conducted to identify if there is any conflict between these approaches and if there is any, whether one of them is more reliable than the remainder
The rule of thumb is that the null hypothesis will support an unsystematic difference between the measures; thus both measures can be accepted By contrast, should there be a large and significant Hausman statistic, it accepts the alternative hypothesis that there is only one measure (Fixed Effect model) is retained while the other (Random Effect Model) should be rejected The testing outcomes supply that the results in regression test for ROE was almost identical between the 2 measures performed Nevertheless, there was a certain difference in the result between FEM and REM Accordingly, the major difference can be referred to the disparity between in the impact that dividend paying ration could have on the profit
However, the result of Hausman test reject the null hypothesis with a relatively large Chi-square of 12.97 and a significance of 0.02 which is way below the mark 0.05 Accordingly, the results with Random Effect Analysis for ROA should be rejected for its inconsistency; instead the Fixed Effect Analysis should be accepted In the other words, the dividend pay-out ratio should hold no significant impact on the profit of the bank
Multicollinearity occurs when predictors in a regression model are moderately or highly correlated, wreaking havoc on our analysis and thereby limit the research conclusions The collinearity statistics shows that Multicollinearity does not exist in the dataset as tolerance is high, ranging between 0.525 and 0.849 Meanwhile, VIF figures of all predictors are all smaller than 2, which is far lower than the threshold of 10.
IMPLICATIONS AND RECOMMENDATIONS FOR BIDV
Development strategy of BIDV in the near future
2017 was a successful year for Vietnamese economy For the first time in many years, the socio-economic indexes of Vietnam have achieved and exceeded the objectives: economic growth reached 6.81%; income per capita rose by USD 170 compared to the figure of 2016; foreign direct investments reached the highest peak of the last ten years; import-export turnover also set a record with a trade surplus of USD 2.67 billion The finance & banking sector in particular also witnessed essential achievements: successful control over inflation; lower interest rates in the context of rapidly increased total outstanding loans; high reserves of foreign currencies, helping the State Bank of Vietnam to flexibly monitor the exchange rates, setting the ground for Vietnam to achieve a higher credit rating in the future; improvements in resolving bad debts, enhancing the credit flows within the economy
Against that backdrop, BIDV achieved positive business results, continuing to affirm its role and position as Vietnam‟s leading financial institution About the development plan in the future, BIDV already set some priority objectives for the period from 2016 – 2020:
- Promoting the role of Joint Stock Commercial Bank which has major State ownership, maintaining its position as the bank with leading scale, quality, efficiency, and prestige in Vietnam; as the major bank, with national responsibility, actively contributing to macroeconomic stability and promoting the economic growth of the country
-Becoming the most modern Commercial Bank in Viet Nam in term of market share in fund mobilization, loans, and retail services and in the Top 3 market leaders in customer satisfaction as evaluated by an independent and reputable organization
- Developing insurance business (life and non-life) as the 2nd main activity beside banking business, with the connection between insurance and banking products; increasing insurance business‟s contribution to the total income of BIDV
-Developing and diversifying product and service portfolio, maximizing cross-selling banking and insurance products, creating and developing closed insurance services, developing high-technology products which are differentiated from those of competitors being preferred in the market
- Proactively, aggressively and deeply integrating into banking and financial market in the region Applying and operating international standards and practices in the modern banking business; maintaining CAR under international rules and regulations of the State Bank of Vietnam; enhancing the capacity to manage risks; fully applying the provisions of Basel 2 as requested by the State Bank of Viet Nam (2018)
- Becoming the leading bank in both Vietnam and Southeast Asia in application of information technology to bring convenience, the best service and satisfaction to domestic and international customers
Completing a model of governance complying with the law, routine activities, transparency, openness and efficiency Changing organization model into centralized management at the Head Office and operating business activities under vertical application of modern and advanced banking model Improving business efficiency and productivity
-Improving the quality, efficiency of traditional distribution channels including branches, transaction offices, subsidiaries, affiliated companies, and promoting the development of modern distribution channels such as Internet
Banking, Mobile Banking, Contact Center, ATM, POS Actively developing and expanding distribution channels as well as commercial presence in the regional and international markets
- Training and developing high quality human resources to meet the international standards and practices This helps to improve the quality and effectiveness of banking operations in integration and globalization
Continuing to improve the working environment with professional and friendly organization, development opportunities and benefits for all employees, per capita income higher than the market
- Spreading BIDV‟s brand awareness extensively throughout domestic and international markets as the leading bank in Vietnam, whose banking and financial services are chosen by individuals and economic organizations
Key targets for the Period from 2016 to 2020
Total assets increase 17%/per year Fund mobilization increase 20%/ per year Outstanding loans increase 20%/ per year Profit before tax increase 19%/ per year NPLs ratio ≤ 3%
Recommendations for BIDV to improve the profitability in the future
Considering the result analysis, it is important to highlight the role of debt management as the crucial determinant of profit maximization or loss minimization in the context of bank business Provided that Non-performing loan caused significant impact on the profitability, it is important for BIDV to develop a tight policy in debt management, especially in collateral and bank loan appraisal so as to keep the bad debt level at the minimal line (BIDV,
2016) Otherwise, the rising non-performing loan which is treated as the direct loss to the bank would significantly cut off the bank profit; resulting in poor profit making performance What is more, the finding that loan loss provision affects profitability in a highly significant relation further highlights the importance of debt management in firm Accordingly, it is evident that firm bearing high bad debt would eventually set larger provision to cover the debt; thus having less resources to pursue the investment opportunities those would be able to return higher profit (Li &Zou, 2014) In the other words, the bank must add up opportunity cost involving the trade-off between building provision for curbing the existing credit risk and making new investments to heighten the future profit Considering either case, the bank can never secure an optimal profit Menicucci&Paolucci (2016) Therefore, having lower provision should diminish such economic opportunity cost; hence sponsoring a greater profit for the bank The confirmation of significant impacts from Non-performing loan and loan loss provision is in line with the arguments of Gizaw, Kebede&Selvaraj (2015) and Sufian&Habibullah (2010), highlighting the role of managing bad debt in the practice of commercial bank
For the fact that non-performing loans or so-called bad debts play crucial role in controlling the bank profitability, it is a matter of fact that the measure of minimizing bad debts would help bringing forth higher profit in an effective way At the same time, it must also raise a plain question that “what should banks do with loans those are marked non-performing”? According to Maxwelland Peter (2016), the proper treatment to non-performing loan could make it effective to improve the performance of bank in the subsequent period; hence the profitability in long run can be secured Murthy (2017) argues that there are 4 possible ways for a commercial bank to treat non- performing loan, including write-off, foreclosure, bad bank and restructure troubles loan First of all, write-off can be referred as the deduction of non- performing loan from bank assets The practice aims to remove the non- performing loan from the balance sheet, yet is often considered as a normal accounting exercise which severely affects the profit of bank It is because the equal amount will be recorded in the liability; thus the nature of write-off is just about capturing non-performing loan as a loss or expense (Murthy, 2017)
The second approach to non-performing loan is foreclosure, in which the bank does not only write-off but also take the recovery rate of the non-performing loan into account The basis for consideration of recovery rate of non- performing loan is calculated upon collaterals used for securing the loans
According to Maxwelland Peter (2016), there might be 2 major cases: bank with recourse and that without recourse The former will call for addition of collaterals since the present value of collaterals is insufficient to cover up the potential loss in the wake of loan default By contrast, the latter indicates that the quality of collaterals in present time is adequate already Comparing with the pure write-off, foreclosure, especially for bank with recourse, involves with less loss to the bank for the additional value in compensation However, the case of successful call under foreclosure is quite rare and would be unlikely to be exercised Another option is to coordinate with bad bank or so- called Asset Management Company This type of firm often buy weakly secured assets or non-performing loan from bank and resells to other investors as bonds Literally, this is considered as an effective way to get rid of non- performing loan from balance sheet, though non-performing loan remains existed However, major Asset Management Companies are often referred to as a temporary solution for bad debt, considering the limited capacity of these firms in absorbing the bad debt Most of Asset Management Companies are founded and funded by the State for handling high proportion of bad debt in the national banking sector The last solution proposed by Murthy (2017) is to restructure the troubled loan, changing terms of loan agreement for facilitating the debtor Certainly, the restructure of loan term must be conducted with careful assessment of the condition of debtor as well as nature of the loans This is also referred as the common practice to treat the big loans which often come with too high value for writing off
Reflecting on the case of BIDV the high profit figure of BIDV in the past few years mainly derived from the tight control set on loan management In order to combat non-performing loan, BIDV also actively sold the debt to Vietnam Asset Management Company (VAMC) to effectively maintain bad debt below 2% which was fairly lower than the average line of Vietnam Banking sector (Vietnamnet, 2015) Thanks to this engagement with VAMC, BIDV could get rid of the burden from handling non-performing loan Instead, the bank was possible to spend spare resources on minimizing credit risk exposure right at operational level Furthermore, the credit management system of BIDV also operated effectively to keep the loss from non- performing loan at a relatively low point From the result confirmed by the study, it is put forth that BIDV could attain higher profit by having an even more effective bad debt management system In fact, it is argued by Nguyen
(2015) that selling bad debt to VAMC is just a temporary solution to improve bank performance via credit management In a common sense, the heavy reliance on VAMC is not a long term resolution yet just a temporary storage of debt for increasing bank liquidity and performance in short run Should BIDV and other commercial banks keep selling the debt to VAMC, it would eventually reach to a point of saturation where VAMC can no longer withstand more debt and the dead-end will be set for the related banks
Instead, it is suggested that the commercial banks as BIDV must actively engage in flexibly adjusting interest rate for clients involving the bad debts which were handed to VAMC It is because VAMC in its defined function is unable to give out adjustment itself without bank‟s approval Meanwhile, bank remains exposed to high risk as long as VAMC has not resolved the bad debt From this point of view, it is important to see that VAMC is definitely not an optimal choice; yet BIDV should seek for better credit management approach so that higher profit level can be secured The bad debt restructure can be seen as an effective approach for dealing with non-performing loan, though its complicated procedure and associated expense in practice make it more likely relevant for large debt
Practically, it is possible for BIDV to follow the effective credit management system which has been implemented in Vietinbank, which is well-known as the most effective Vietnam commercial bank in regard with credit management According to Nguyen (2015), Vietinbank could attain the lowest non-performing loan majorly thanks to the drastic transformation into centralized appraisal system and internal rating system under consultation of KPMG Currently, the credit appraisal system of BIDV also follows centralized model which helps tightening the loan quality to a certain extent; yet the credit rating system of the bank by far has only complied with domestic regulations issued by the Central Bank rather than any international standard It is therefore suggested that BIDV should incorporate with a consulting firm to develop an internationally standardized credit rating system so as to improve the credit quality
Interestingly, one crucial finding of the study is that capital adequacy does not help securing a better profit in bank; yet even lowering the bank profit in some particular cases The refusal of the role of capital adequacy in fact goes against several former researches such as those of Olalekan&Adeyinka (2013) and Li &Zou (2014) However, it is supported by Gizaw, Kebede and Selvaraj
(2015) that capital adequacy just helps securing the liquidity of bank rather than shaping how much profit should be The negative relationship is also reasonable, considering that bank with high capital adequacy tends to retain a high proportion of capital instead of circulating more into the loan market; thus the route to profit maximization would be narrowed (Gizaw, Kebede&Selvaraj, 2015) It is also reasoned that capital adequacy only matters in the tough period of economic environment where banks face higher exogenous threats; whilst the economic performance of Vietnam in the last decade generally witnessed favorable conditions to grow up Even the global financial crisis in 2008 could not leave much damage to Vietnam economy for its high resilience while the domestic recession in 2011 did not last long enough to result in substantial impacts on the domestic banking system
Consequently, rather loose pressure on the banks in general made banks to generally maintain capital adequacy at around the minimal line required by the local regulation For this reason, it is not surprising why capital adequacy came with rather weak relationship with the level of profit Based on this finding, it is therefore suggested that the commercial banks of Vietnam in general and BIDV in particular should not set capital adequacy at a too high level Ideally, it should keep the adequacy at approximately 9% as being required by the central bank This level of capital adequacy in fact is still above the minimal requirement proposed by BASEL I; hence the liquidity of the bank could be still safeguarded
4.2.2 Maintaining other ratios that affect bank profitability
Total asset, dividend ratio and loan to deposit ratio are ineffective predictors of bank profitability Apart from capital adequacy ratio, the study also found out that other factors including total asset, dividend and loan to deposit ratio are ineffective predictors of profitability in Vietnamese banks For BIDV itself, the ambiguous influence of these factors on bank profit suggest that the strategies adopted by BIDV do not need to concern about either of those factors In fact, the size of bank measured by total assets only indicates the capacity of banks; thus this is more likely relevant to investment bank rather than commercial bank Meanwhile, though loan to deposit is shown as an ineffective indicators of profit in general, the qualitative research has found out that the Vietnamese banks tended to heighten lending rate during the economic boom such as between 2008 and 2009 to support activities of the economy; yet control over loans became loosen As a result, the subsequent periods such as in 2011-2012 saw a huge slump in non-performing loan when the long term loans came to maturity From this point, it could be seen that the loan to deposit is not a significant factor but it demonstrates the strategy of bank in credit market Therefore, the indicator should not be drop in decision making process for its indirect influence Another lesson for BIDV can be drawn from Vietinbank is that the individual credit objective could lead to unnecessary pressure on the credit officers, who might omit certain principles in credit risk evaluation for mission accomplishment Therefore, BIDV should not assess the credit officers upon the number of loan he could make, yet the level of security attached with the loan he proceeds This measure could allow BIDV manager to bind responsibility of its credit officers into the overall non- performing loan of the bank
For BIDV, asset quality, among the most important factors that have influence on profitability, should be carefully reviewed The increase of NPLs will have resulted in the erosion of profitability Despite the fact the national banking sector authority has been actively following Basel Accord, and international regulatory framework for banks, there is still a lot of efforts needed to improve from within the banking sector Poor assets quality is mostly coming from the risky business of the banks Some banks do not hesitate to put money in risky projects such as real estate properties or gambling stock investment Competition to acquire bigger customer bases also leads to unhealthy business of the banks More important, the poor asset quality reported in the documents of the banks may not reflect the actual situation due to the little transparency in operation of Vietnamese banks and the gap in reporting standards which can be manipulated by the banks Therefore, it is highly suggested that the authority should review the reporting standard to help better reflect the actual situation while strictly enforcing policies to control the non-performing loans level For example, credit expansion can only be done if the banks can maintain a certain safety level of Non-performing loans Besides, requirement for higher capitalization is also a result from the fact that NPLs is becoming a real issue in Vietnam Higher invested capital to ensure the controlled solvency risk can result in lower profitability However, it is understandable and acceptable especially in the period of economic difficulty Banking authority should consider a trade-off between profitability and safety of financial system A low but sustainable profitability is more appreciated than a high but risky profitability
4.2.3 Diversify other sources of income beyond lending
Regarding diversification which is indicated by percent of net interest income over total asset, the lower the percentage is, the higher the level of diversification is Surprisingly, the effect is negative It is considered as the most important factor in determining profitability of the bank Although borrowing and lending activity still the driver to bring the major part of income to the bank, they are not steady and stable source as proved in previous studies Non-interest income such as payment service, investment, fee -based services can bring better and more stable profit for the banks in long term As result, similar to capitalization, despite the fact the result is not as expected, the bank management level should be always aware of the need for a diversified business