379 factors affecting the profitability of commercial banks in vietnam from 2009 2018 bachelor thesis of banking and finance 2023

MINISTRYOFEDUCATIONANDTRAINING STATEBANKOFVIETNAM BANKINGUNIVERSITYHOCHIMINHCITY NGUYENTHIMINHTHU FACTORS AFFECTING THE PROFITABILITY OFCOMMERCIALBANKSINVIETNAM FROM 2009– 2018 GRADUATE THESISMAJOR:FINANCEBANKING CODE:52340201 SUPERVISORMSC VUTHIHAIMINH HOCHIMINHCITY,2020 MINISTRYOFEDUCATIONANDTRAINING STATEBANKOFVIETNAM BANKINGUNIVERSITYHOCHIMINHCITY NGUYENTHIMINHTHU FACTORS AFFECTING THE PROFITABILITY OFCOMMERCIALBANKSINVIETNAM FROM 2009– 2018 GRADUATE THESISMAJOR:FINANCEBANKING CODE:52340201 SUPERVISORMSC VUTHIHAIMINH HOCHIMINHCITY,2020 ABSTRACT The purpose of this thesis is to provide an analysis of factors affecting theprofitability of 28 commercial banks in Vietnam from 2009 to 2018 using PooledOLS, FEM, REM, FGLS methods The scope of the study is to aim at finding andanalyzing the degree ofimpactofs p e c i f i c bankfactors, industry-specific f a c t o r s andmacroeconomicfactorsontheprofitabilityof28commercialbanksi n Vietnam The study cannot avoid the limitations because of the selection may notfully reflect the content and the meaning of all factors affect profitability or may notfullyrepresent all commercial banksin Vietnam Understanding the factors influencing the performance of the bank not onlyreceives much attention from scholars, but also from shareholders, administratorsand authorities, because it assists policy makers and administrators in formulatingstrategies and policies to ensure the stability and sustainability of banking system'soperation, as well as to avoidthe risk of banking system crisis Assessing theprofitabilityofacommercialbankalwaysraisesquestions,becauseoftheirdiversity Many researchers consider that profitability can provide a picture of thebank'sbusinessresults Obtained result showed that ROA of commercial banks in Vietnam wasaffected positively and statistically significant by bank size, equity ratio, loan ratio,deposit ratio, income diversification ratio, credit growth rate and GDP; while non-performing loan, operating cost and exchange rate have negative impact on ROA Incontrast,liquidity,credittoGDPand inflationdonotaffectROAandarenotstatistically significant Keywords:commercialbanks,profitability,ROA,banksize,nonperformingloan,equityratio,liquidityratio,loanratio,depositratio,incomediversificationratio ,operatingcost,credittoGDP,creditgrowthrate,GDP,inflation,exchange rate SUMMARY International economic integration is an indispensable trend and an objectiverequirementforanycountryinthecurrentdevelopmentstage.However,thisprocess, in addition to creating certain advantages and opportunities for the countryparticipatingintheintegration,alsoputthesecountriesbefores i g n i f i c a n t difficulties andchallenges.Theroadmapofinternationaleconomicintegrationputsenterprises of developing countries in general, the commercial banking system inparticular and the new business environment with fierce competitionpressures,unbalanced competitors Currently, Vietnam is a member of the United Nations, theWorldTradeOrganization,theInternationalMonetaryFund,theWorldBankGroup, the Asian Development Bank and the Joint Forum Economic CooperationAsia-Pacific, ASEAN Vietnam participates in multilateral free trade agreementswith ASEAN countries, South Korea, Japan and China Vietnam has also signedwith Japan a bilateral economic partnership agreement For banking and monetarysystem,theintegrationprocessisassociatedwiththeprocessofl i b e r a l i z i n g fina ncial market, bringing many opportunities, but also many challenges From thatpractice, this thesis will analyze and introduce factors affecting the efficiency in theoperationofVietnam’scommercialbankingsysteminthecurrenti n t e g r a t i o n period, especially the factors affecting the profitability of commercial banks inVietnam, from which to give practical recommendations to improve the operationalefficiencyofcommercialbanking system,is anurgent issue Thisthesisanalysesfactorsaffectingtheprofitabilityof28c o m m e r c i a l banks Vietnam from 2009 to 2018 using regression methods such as in Pooled OLS,FEM,REM,FGLS;therebyprovidesomerecommendationstoimprovetheprofitabilityof commercial banksin Vietnam In order to further analyze the impact of Vietnam's macro environment andbanking industry on the profitability of Vietnamese commercial banks, the authordecidedtoconsiderthreemoreindependentvariables,namelyexchangerate,credit toG D P a n d c r e d i t g r o w t h r a t e a l o n g w i t h t w o f a m i l i a r m a c r o f a c t o r s w h i c h a r e inflationandGDPgrowth Thet a b l e b e l o w s u m m a r i z e s r e l a t e d p r e v i o u s s t u d i e s a n d t h e o r e t i c a l frameworkof thisthesis Table0.0.1:Relatedpreviousstudiesandtheoreticalframework Theory/Related previousstudies Commercialbanks Subjectsarementioned Definitionofcommercialb anks Definition of bankprofitability Profitability Measurement Marketpowertheory Efficiencytheory Agencycosttheory It explains the profit offirms to be increased fromtheachievement ofmore marketpower It explains other aspect ofbankprofitabilitywhichcan be generated frombettermanagement and businessefficiency This theory focuses on theuseoffinancing Previous studies andrelatedlaw, decree - Law: Consolidateddocument sNo 20/2018/VBHN-NHNN, theStateBankofVietnam - Previous studies: Getter, (2016), Tariq et al (2014),Tuyishimeetal (2015),Kalpana& Rao(2017), Mongid et al (2012),Erina&Lace (2013) Wang & Wang (2015),Bikker & Vervliet (2017),Iacobelli(2017),Yuk selet al (2018), Muya &Gathogo (2016), Niresh &Velnampy(2014),Sehrish, Irshad & Khalid(2010),Pastory & Marobhe(2015),Kohler (2013) Book:Principalsof finance, Scott, B &Eugene,F.B.(2015) Bain(1951) Demsetz(1973) Jensen&Meckling structure of the firms to drive themanagersand the investors to solve freecashflowissues This theory emphasizesthatthefirms withprofitable condition Arrow (1972) and andhigh Spence(1973) businessperformance can supplythemarketand the customers with positiveinformation Almaqtari et al (2018), Yao et al (2018), Yuksel et al (2018),Kawshala&Panditharathna(2017),Nuhiuetal (2017), Pastory & Marobhe (2015), Sehrish Gul,Faiza Irshad and Khalid Zaman (2011), Abuzar (2013),Usman,D.(2014),Khaled,M.et.al (2016),Sufian,F.&Noor-Mohamad-Noor,A.(2012),AlOmar,H.& Al-Mutairi,A.(2008) Nguyen (2018), Nguyen et al (2018), Le et al (2017),Nguyen,D.(2017),Phan&Phan(2014),Vo& Batten(2014),Vu&Nahm(2013), NguyenThanhPhong (2015),PhanThiHangNga(2011) Source:Author’ssynthesis Signalingtheory Foreignstudies Nationalstudies Theresearchmodelproposedspecificallyasfollows: ROAit= 𝛽 O+𝛽 1SIZEit+𝛽 2NPLit+𝛽 3LIQit+𝛽 4EQRit+𝛽 5LOANit +𝛽 6DEPit+𝛽 7IDRit+𝛽 8OPRit+𝛽 9CRDt+𝛽 1OCGRt +𝛽 11GDPt+𝛽 12INFt+𝛽13ERt+µi Where:βo: constant termo: constant term βo: constant term1, , βo: constant term14: Regression coefficients for the independent variablesi:bank;t:year of observation;μi: errorterm/ residualterm Dependentvariables: ROA:return on assets (%) Independentvariables(bank-specificfactors): SIZE: bank VND)NPL: size (billion non-performing (%)LIQ:liquidity ratio(%) loan EQR: equity ratio (%)LOAN: loan ratio (%)DEP:depositsratio(%) IDR: income diversification ratio (%)OPR:operating costratio(%) Independentvariables(industry-specificfactors): CRD: credit to GDPCGR:creditgrowthrat e Independentvariables(macro-economicspecificfactors): INF:inflation GDP:grossdomestic product ER:exchangeratebetweenVNDandUSD The thesis performs: (1) Descriptive statistics; (2) Correlation analysis; (3)Model estimation (Pooled OLS, FEM, REM); (4) Model choice (Between PooledOLS and FEM, between FEM and REM); (5) Model diagnostics (Autocorrelationdiagnostics, multicollinearity diagnostics, heteroskedasticity diagnostics); (6) Modelfix;(7) Thepredictionof residuals; (8) Normalitytest of residuals The result of model choice analysis showed that both FEM and REM weremoreappropriatethanPooledOLS.Furthermore,FEMwasprovenasmoreappropriatethan REM.However,theauthoridentifiedthatt h e r e w a s autocorrelation issue in the dataset The result of heteroskedasticity check revealedthat FEM model did face up with this issue To fix the model problems, the authorconductedFGLS regressiontechnique andhere is the result: ROAit=O.2977677+O.O512939SIZEit−O.O578244NPLit +O.OO76355EQR it+ O.OOO3152LOAN it+O.O233O87DEP it +O 167O282IDR it− O.OO38O13OPR it+ O.O1O235CGR t +O.OO96277GDP t−O.O31288ER t However, while some independent variables are in line with the expectationsof the author, there are some independent variables that contrary to the author'sinitialexpectations.Detailed isshown asbelow: Table0.0.2:Expectationsandresearchresultsofindependentvariables Code SIZE NPL LIQ EQR LOAN DEP IDR OPR CRD CGR GDP INF ER Expected Results signs Banksize + + Non-performingloan Liquidityratio Noimpact Equityratio + + Loanratio + + Depositratio + + Incomediversificationratio + + Operatingcostratio Creditto GDP + Noimpact Creditgrowth rate + + Grossdomesticproductgrowth + + Inflation rate Noimpact ExchangeratebetweenVNDandUSD (Source:Author’ssynthesis) Description Based on the research results, the author will provide some recommendationsinchapter to improve commercial banks’ profitability, thereby helping policymakersto easily controland optimize theprofitability of commercialbanks DECLARATION I hereby declare that the graduate thesis is my original work, written by meunder the guidance of Ms Vu Thi Hai Minh and it has not been presented forexamination in anywhere else The data and sources cited in the thesis have beenduly acknowledged Itake full responsibilityfor my pledge Author NguyenThiMinhThu