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

Backgroundof thestudy

Banking sector is the backbone of any economya n d i t p l a y s a v i t a l r o l e i n the operation and development of a country Nowadays, the banking industry inVietnam is facing competitive pressure as globalization and international integrationare increasing This has made the concept of efficiency become more crucial forboth financial and nonfinancial institutions, and commercial banks are also part ofthe financial institutions Efficiency in banking operations is always a top concernforbankadministratorsbecauseeffectivebankingoperationswillcontributetocreatingsust ainableprofits,increasingstability,promotingdevelopmentandincreasingcompetitiveadvanta geforVietnamesebanksintheenvironmentofinternational integration The competitive environment in the financial market inVietnam is becoming increasingly fierce and fierce, because not only competitionbetween banks but also with financial intermediaries and foreign banks with strongfinancial potential and strong international experience The general determinants ofbank profitability have been thoroughly examined in many previous literatures Inaddition, profitability is an essential factor for a bank to maintain ongoing activitiesanditisoneoftheimportantcriteriatoevaluatetheperformanceofbankingoperations.

Therefore,itisimportanttoassessthefactorsaffectingthefinancialperformanceormores pecificallytheprofitsofthesebanks,therebymakingrecommendationsformanagerstoconduct orientation,andrestructurebusinessactivities.

Those are reasoning why the author chose to conduct a research entitled:“Factors affecting the profitability of commercial banks in Vietnam from 2009-2018”.

Objectivesof the study

Generalobjectives

The study aimed at finding and analyzing the degree of impact of specificbank factors on the profitability of 28 commercial banks in Vietnam, as well asproviding banks’ managers some solutions and recommendations to develop andimprovecommercialbanks’profitability.

Specificobjectives

- Measuringthedegreeofimpactofspecificbankfactorsontheprofitabilit yof28commercialbanksinVietnambasedontheimplementationofmultivariatere gression models

- Giving some appropriate recommendations to improve the profitability ofVietnamesecommercial banksbasedon research results

Researchquestions

This thesis is carried with the expectation to find answers for three mainquestionslisted herein below:

- Basedontheresearchresults, whataretheproposals toimprovetheprofit abilityof commercial banksin Vietnam?

Subjectand scope of the study

Subjectof the study

Thesubjectofthisstudyisbanks’profitabilityforthetimeperiodof2009to2018basedona nnualincomereports.

Scopeof the study

Researchmethodology

ThestudyusesquantitativeresearchwiththehelpofStataeconometricsoftwareto process,analyze andinterpretthe data:

- Descriptivestatistics:describethe basiccharacteristicsof datasuchas mean,minimum,maximum andstandard deviation.

- Regressionanalysis:measurethedegree ofimpactofspecificbankfact orsand external factors on the profitability of 28 commercial banks in Vietnam.ThestudyalsoemploysPooledordinaryleastsquares(PooledOLS)me thod, random effects model (REM), fixed effects model (FEM), feasible generalized leastsquares (FGLS) method to examine factors affecting the profitability of commercialbanksin Vietnamaswell as measuring theimpactof thesefactors onbanks’profit.

Significanceof thestudy

Scientificsignificance

Thethesissynthesizestheoriesandpreviousstudiesinrelationtotheprofitabilityofcom mercialbanksinordertofindfactorsaffectingtheprofitabilityofcommercial banks inVietnamandunderstand theimpactofthosefactors.

Practicalsignificance

This thesis will propose a research model of factors affecting the profitabilityofcommercialbanksinVietnam,aswellasprovidepolicymakersandbankmanagers with empirical evidence on the impact factors and the degree of influenceofeachmicroeconomicandmacroeconomicdeterminantontheprofitabilityofcommerci al banks in Vietnam from 2009 to 2018 Based on the research results,theauthorproposessomerecommendationstoimprovecommercialb a n k s ’ profitability.Following that, this study will help policy makers to easily control andoptimizethe profitability of commercial banks.

Structureof the study

Somecontentswillbementionedsuchasoverviewandproblemso f research,objectives,r esearchquestions,subjectandscopeof thethesis.

Chapter 2 includes some main contents such as the theory of profitability andfactorsaffectingtheprofitabilityofcommercialbanks.Thischapterintroducesbriefly some of the previous studies, in Vietnam as well as in the world in general,making comparisons of different points of view on the topic Following that, thisstudyreviewsandsynthesizespreviousresearchmodelsonprofitabilityofcommercial banksasthebasisfor proposingresearch model.

This chapter presents the method used in research, research design, detaileddescription of the steps taken in the research process, as well as data collectionprocedures and data analysis This section will specify the regression model used tostudy,explainvariables,calculations,formula and expectationofvariables.

Thischapterdealswiththeempiricalresults,includingthedescriptivestatisticsofregressi onvariables,correlationanalysis,modelestimation,modelchoice, model diagnostics, model fix using FGLS to overcome the variance changeandautocorrelation,thepredictionofresidualsandnormalitytestofresiduals,finallydeterm ine the empirical resultsof themodel.

Chapter5presentstheresultsofestimatingthepaneldatamodelinChapter4,summarizes concise key findings and suggests recommendations to improve theprofitability of commercial banks inVietnam Banks can expand non-traditionalactivities to increase their income and adjust their risks This chapter also states thelimitationsof the studyandfuture research directions.

Theoreticalbasis about commercial bank

Commercial banks are credit institutions that perform all banking activitiesand other related business activities for profit purposes (Consolidated documentsNo.20/2018/ VBHN-NHNN,theStateBankof Vietnam).

Commercial bank is a financial institution which are operating under twobusiness scopes: one is tofederallyinsure deposits andtopay interests tothedepositors and the second is to use its charter to issue loans, to check cash balanceand clearing services, and to underwrite securities (Getter, 2016) Commercial bankplays prominent role in modern economy in circulating financial resources (Tariq etal., 2014) Other definition of commercial bank is a financial intermediary whicheffectively channel idle funds in the market to those who need credit to invest intovaluablepr od uc ti on an d b u s i n es s op po rt un it ie san d p e r s o na l p u r p o s e s (T uy is hi me et al., 2015) Commercial bank is further divided into public sector bank (the bankwith major of stake is hold by the government), private sector bank (the bank withmajor of stake is hold by private individuals) and foreign bank (the bank with headofficelocatedinothercountriesoutsideofanation)(Kalpana&Rao,2017).Commercial banks establish maladjustment and impediment and contribute to thedevelopment of the economy (Mongid et al., 2012). The operation of commercialbanks is aligned with monetary policies of a nation and they play the main role ofcontrolling cash flow given to expected rate of returns and emissions (Erina & Lace,2013).

In summary, the term of commercial bank used in the study is defined as afinancialinstitutionwhichoperatesinthewayofholdingdeposit,payinginterestst othedepositors,issuingcredittodifferenteconomicsectorsandfacilitateseconomic developmentof acountry.

Theoreticalbasis about commercial bank profitability

Definitionof bankprofitability

Profitability is determined as one of indicators that reflect efficient bankingsystem, along with high service quality and sufficient funding resources (Wang &Wang, 2015). When the banks earn high profitability, their operations are safe andsound (Bikker & Vervliet, 2017) It is also the indicator to reflect whether the banksareint h r ea t i n g s i t u a t i o n ( I a c o b e l l i , 2 0 1 7 ) It is d e f i n e d as t he di ff er enc e be tween theprofitextractedfromitsassetsandtheexpensesincurredini t s l i a b i l i t i e s (Yuks el et al., 2018) Profitability reflects the efficiency of the management inmakingbenefitsfromallthebusinessoperationsofanorganization,firmorcompany (Muya & Gathogo, 2016) Profitability refers to amount of money that acompany can produce with the resources it has The goal of most organization is tomaximize profitability (Niresh & Velnampy, 2014) One important precondition forany long-term survival and success of a business is profitability Profitability isgenerally measured using accounting ratios with the commonly used profitabilityratio being ROA ROA determines the amount of the profit earned per shilling ofassets This reflects theefficiencywith whichthe bank’s managers use bank’sinvestment resources or assets in generation of income (Sehrish, Irshad & Khalid,2010) It is also determined as the banks’ ability in compensation of credit losses,capitalretention,andthesupportforfuturedevelopment(Pastory&Marobhe,2015).Behin dofprofitabilitygeneratedfrominterestincome,banksalsoearnsubstantial profitability from non-interest income which is collected from the chargetothecustomerstousefinancialservices(DeYoung&Rice,2004).Somediscussions related to non-interest income of the banks were discussed by otherresearchers and this income sources implied for less reliance of the banks to interestincomewhilepertainingthebanks’businessandoperationals t a b i l i z a t i o n , lever aging risk diversification and the increase of fixed cost to invest into facilitiesto deliverbanking servicesto the customers(Kohler,2013).

Given to the difference understandings of bank profitability, the term of bankprofitability used in the thesis is defined as a relative number (a percentage), whichexpresses the ratio between profit and revenue Commercial bank profitability madeduringtheyearrepresentsthecapabilityofmakingprofit,inwhichprofitisexpressed through the results of business activities of the bank, such as: mobilizingcapital, lending, discounting, guaranteeing, providing financial services and otherrelated activities The time for determining annual profit is made at the end ofDecember3 1 w h e n t h e a n n u a l s e t t l e m e n t , p r e p a r i n g a n n u a l f i n a n c i a l s t a t e m e n t s For the determination of profits to be accurate, the total revenue and expenses of theentiresystemmust be accurately determined duringtheyear.

Theindicators reflect the profitability ofcommercialbanks

Empirical evidence showed that ROA, ROE and NIM were often chosen byotherresearchers.

There are many proposals to measure bank profitability provided by differentresearchers.Tariqetal.(2014)proposedtwoindicatorstomeasurebankprofitability, namely return on equity (ROE) and net-interest margin (NIM) ROEreflects administration capability of the banks in using stakeholders’ investment(Molyneux & Thornton, 1992) and it is measured by an equation in which earningafter tax is divided by total equity (Ichsani & Suhardi, 2015) NIM refers to the netincomed i v i d e d b y t h e b a n k s ’ t o t a l a s s e t s v a l u e s ( M e m m e l & S c h e r t l e r , 2 0 1 1 ) Other indicator which is utilized to measure bank profitability is through return onassets (ROA) It is used to measure the effectiveness of assets utilization (Pastory &Marobhe, 2015) ROA is measured by taking net income divided by the banks’ totalassetsvalues(Saragih, 2018).

According to Fredrick Mwaura Mwangi (2014), to measure the effectivenessofc o m m e r c i a l b a n k s , t h e r e a r e s o m e c o m m o n l y u s e d i n d i c a t o r s s u c h a s R O A , ROE Similarly, Rose (2002) pointed out that a bank's business performance ismeasuredby returnonequity(ROE) and returnon totalassets (ROA).

Murthy and Sree (2003) defined ROE is a financial indicator that shows theprofitabilitycomparedto the totalequity shownon the balance sheet.

Khrawish(2011)definedROAistheratioofincometototalassets.Ittellsushow wellacompany’smanagementisatusingitsassetstogenerateearnings.

Through the above studies, most authors use ROA and ROE to measureprofitability or profitability ratios used to evaluate the business performance ofcommercial banks(Nguyen MinhKieu, 2009).

ROA is an indicator reflecting the management effectiveness, measuring theabilityofthebank'sboardofmanagementtoconvertabank'sassetsinton e t income.

Source:Principals of finance,Scott,B & Eugene,F B (2015)

In which, net income is the earning after-tax, while assets are formed fromequity and loans, so ROA is affected by tax policy and interest expense Earningsafter-tax is taken from the income statement and total assets are taken from thebalance sheet ROA is a measure of how much profit a business is generating fromits capital A high value of ROA shows that the bank is functioning well in makingprofits by utilizing the assets and performance of the bank is good However, it isnecessaryto review the bank’sactivitiesifROA isabove the stable level.

ROA is calculated from financial report of the firms through an equation ofwhichitisequivalenttonetprofitaftertaxesdividedbyaveragetotalassets(Samiloglu et al., 2017) The firms expected that their ROA value to be increasedand higher ROA value means higher performance and increasing value of ROA isattractiveto theinvestors(Saragih,2018).

ROE is an indicator to measure the percentage of income that a shareholderof a bank receives from an investment in a bank In other words, return on equity isanindicatorof theefficiency of the equity investment.

Source:Principals of finance,Scott,B & Eugene,F B (2015)

ROE is defined as the ability of a firm to generate profit upon on every shareof its capital (Rosikah et al., 2018) ROE is calculated through an equation of whichnet profit after taxes divided by average total shareholder equity (Kabajeh et al.,2012) Like ROA, the firms always expect higher ROE to attract the investors in themarket and ROE valued between 15-20% is generally considered good (Faisal et al.,2018) ROE is a measure of profitability that calculates how many dollars of profit abusiness generates with each dollar ofshareholders’ equity(Rose,

2002), soitalways receives great attention from investors If this ratio is positive, the bank isprofitable In contrast, if the ratio is negative, the bank is trading at a loss At thesame time, higher ROE proves that the bank is balanced in the use of shareholdercapital compared to its borrowed capital effectively to generate profits during itsoperation.Therefore,ahighvalueofROEshowsthatthebankisfunctioningwellinma nagingtheshareholders’equityand generatingtorevenuestoshareholders.

NIM is determined as an indicator that reflects how well of the banks asfinancialintermediariesanditismeasuredbythelendinginterestschargedtoborrowers and the deposit interests paid to the depositors (Obeid & Adeinat, 2017).Other way to calculate NIM is to take the gap between interest income and interestexpensebefore it isdivided t ot ot ala sset ( B i k k e r &Ve rv li et , 2 01 7) NI M is also calculated by taking net interest income divided by average earning assets(Soegengetal.,2017).

Factorsaffecting commercial bankprofitability

Internal factors or bank-specific factors affect commercial bank profitability.Key factors that reflect financial soundness such as liquid asset ratio (liquid assetsdivided by total assets), non-performing loanr a t i o ( n o n - p e r f o r m i n g l o a n s d i v i d e d by total loans) and regulatory capital to risk-weighted assets affect bank profitability(Albulescu, 2015) Other indicators such as bank size, operating efficiency, assetmanagementefficiencyandportfoliomanagementalsoaffectbankprofitability(Erina & Lace,

2013) Empirical evidence from different researchers explored moreinternal indicators affecting bank profitability such as management decision andpolicyobjectivesset by the banks(Staikouras& Wood,2004).

Besideinternalfactors,bankprofitabilityisalsoundertheinfluenceofexternal factors or macro-economic factors According to Blerta, B (2014), externalfactors refer to those which are not under the banks’ control such as inflation rate,market share, industry growth and interest rate The contribution of overall bankingsector to national gross domestic product (GDP) is also considered as importantexternal factor to the bank profitability (Bezawada & Ranajee, 2018).Economicgrowthisdeterminedasexternalfactoranditseffectonbankprofitabilityisconfirmed(Gul etal.,2011; Rehmand etal.,2018).

Theoreticalframework

Marketpower theory

Market power theory was proposedbyBain(1951) andi t e x p l a i n e d t h e profitoffirmstobeincreasedfromtheachievementofmoremarketpower( Athanasoglou et al., 2005).When the firms gain market power, they are able tocontrol the price setting for products ands e r v i c e s t h a t a r e n o t a l w a y s f a v o r a b l e t o thec u s t o m e r s ( P u n t & R o o i j , 2 0 0 1 ) M a r k e t p o w e r a n d m a r k e t c o n c e n t r a t i o n a r e two different concepts While market power refers to the possibility to change thefirms’ profits, market concentration refers imperfection side of a market whether thefirms focus on specific market due to internal strategies or legislative barriers fromthe government (Punt & Rooij, 2001) In addition, the firms with high market powerare likely to earn monopolistic profits and therefore they have more chance to winthe market shares from other competitors (Nkegbe & Yazidu, 2015) Market powertheory was applicable to banking industry in which the banks with higher marketpower can earn extra profits from higher market share and more diversification intheirproducts(Mirzaei,2012).Thistheoryemphasizedthatbankprofitabilitydepends on bank size and its financial performance (Macharia, 2016) Market powertheoryrepresentsfortheinfluenceofexternalfactorsonbanksprofitabilitythroughoutindus trystructureandmarketshareofthebanks(Obamuyi,2013;Fisseha,2015).

Efficiencytheory

Efficiency theory was developed by Demsetz (1973) It explains other aspectof bank profitability which can be generated from better management and businessefficiency (Macharia, 2016) This theory implies the fact that when the managementefficiency of the firms is improved, the firms are likely to achieve higher profits andlarger market share (Athanasoglou et al., 2005) Efficiency theory addresses whenthe firms successfully gain production efficiency through better production practicesandhighermanagementefficiency,theycanearnhigherprofitfromlowerproduction and operating cost (Birhanu, 2012) Herein, the core of efficiency theoryise c o n o m y o f s c a l e ( O d u n g a e t a l , 2 0 1 3 ) W h e n t h e f i r m s a c h i e v e e c o n o m y o f scale, their business efficiency will be improved and therefore they gain higherprofitability and market share (Birhanu, 2012; Mirzaei, 2012; Fisseha, 2015).Inbanking industry, efficiency theory can be applied to explain the reason why largecommercialbankearnshigherrateofreturnsintheirinvestmentthansmallercommercialbanksi ncelargerbanksareoftenequippedbybetterproductiontechnologies as well as management expertise (Saona, 2011) In addition, when thebanks achieve better efficiency, they can deliver banking services at lower cost thanothercompetitors,leading tohigherprofits(Onuonga, 2014).

Agency cost theory

AgencycosttheorywasdevelopedbyJensen&Meckling(1976).T h i s theory focuses on the use of financing structure of the firms to drive the managersand the investors to solve free cash flow issues(Macharia, 2016) Agency theoryposits the gap between the professional managers who have low ownership and theinvestors who hold large ownership, and both have different business objectives,leading to agency problem (Gedajlovic & Shapiro, 2002; Alfadhl &Alabdullah,2013) In more detail, agency problem is raised when professional managers use thefirms’ resources to maximize for their owned benefits instead of bringing morevaluesto their owners(Mian etal.,2012).

Signalingtheory

Signaling theory was developed by Arrow (1972) and Spence (1973). Thistheoryemphasizesthatthefirmswithprofitableconditionandhighbusinessperformance can supply the market and the customers with positive information(Binietal.,2011).Signalingtheoryalsoexplainstherelationshipbetweenprofitabili ty and capital structure (Alkhazaleh & Almsafir, 2014) When the firmsachieve optimal capital structure, it is considered as a signal for higher profitability(Adeusi et al., 2014). The application of signaling theory in banking industry isthrough the increase in capital positively affect the future development of the banks(Alkhazaleh&Almsafir,2014).Moreover,whenthemanagersoftheb a n k s perceivet h a t t h e i r b a n k s a r e be t t e r t h a n o t h e r b a n k s i n t h e m a r k e t , t h e y h a v e t h e motivation to persuade additional investment from the investors (Macharia, 2016).Signalingt h e o r y p r e v a i l s t h e i n f o r m a t i o n d i s c l o s u r e r e l a t e d t o b a n k p e r f o r m a n c e and it helps to increase the value of the firms, to get more investment fund intobankingoperationandtherefore earning moreprofit(Muzahem, 2011).

Literaturereview

Foreignstudies

The effect of internal and external factors on commercial bank profitabilitywas explored in foreign studies In this section, foreign studies are collected in ordertoexplore how previous researchers studiedabout this topic Keyresults, datacollection and data methodology and the limitation of foreign researchers will behighlighted.

(2018)conductedaresearchaboutthedeterminantsofprofitabilityofIndiancommercialbanks. Quantitativeresearchmethodwasemployed with the data of 69 Indian commercial banks during the period of 2007-

2017.PooledOLS,fixedeffectandrandomeffectwereusedasdataanalysistechniques ROA was considered as dependent variables and it depended on bank-specific factors (bank size, capital adequacy, asset quality, liquidity, deposit, assetmanagement, operating efficiency, leverage and number of banks’ branches) andmacro- economicf a c t o r s ( a n n u a l r e a l G D P , i n f l a t i o n r a t e , i n t e r e s t r a t e , e x c h a n g e rate, financial crisis and demonetization) Obtained result showed that ROA wassignificantlyaffectedbyoperationalefficiency,numberofbranches,assetmanagement,bank size, andleverage.

Yao et al (2018) conducted a research about profitability determinants offinancial institutions in Pakistan The data was collected from 28 commercial banksover the period of 2007-2016 Yao et al utilized quantitative research method withtwo-step generalized method of movement to be selected A research model wasdeveloped in which dependent variables consisted of ROA, ROE and NIM whileindependent variables included bank- specific factors(bank size, banksolvency,creditq u a l i t y , l i q u i d i t y , o p e r a t i o n a l e f f i c i e n c y , f i n a n c i a l s t r u c t u r e , d i v e r s i f i c a t i o n , fundingcost,operatingexpenses,laborproductivity,andbanktype),industryspecific factors (industry concentration, banking sector development, and marketpower),andmacro- economicfactors(GDPgrowthrate,inflationrateandgovernment change) Obtained result showed that bank size and bank profitabilitywere related under u-shape curve Yao et al. identified that the government changeaffected bank profitability Moreover, bank profitability was negatively influencedby inflation rate, industry concentration, banking sector development, credit qualityandoperationalefficiency.

Yuksel et al (2018) conducted a study about the determinants of profitabilityin banking sector of post-Soviet countries The data was collected from 13 countrieswhichhadbeeninfluencedbySovietUnionintheperiodof1 9 9 6 - 2 0 1 6 Quantitative data analysis with fixed effect and generalized method of movementwerebothemployed.AresearchmodelwasdevelopedinwhichROEw a s dependent variableandtherewere8independentvariables,includingcapitaladequacy ratio, total loans to total deposit, total loans to GDP, bank size, non- interesttointerestincome,interestrate,GDPgrowthrateandinflationrate.Obtained result showed that both GDP growth rate and non-interest to interestincomeaffectedpositivelybankprofitability.Moreover,Yukseletal.

(2018)identifiednegativeeffectofloanstoGDPonbankprofitabilityinexaminedcountriesbutst rongerGDPgrowth ratesupported higherbank profitability.

Kawshala & Panditharathna (2017) conducted a research about the factorseffecting on bank profitability Quantitative research method was employed from 12commercial banks in Sri

Lanka Ordinary least square was selected as data analysistechnique.AresearchmodelwasdevelopedinwhichROAreflectedbankprofitability and there were four independent variables, namely bank size, capitalratio,depositratioandliquidityratio.Obtainedresultshowedthat28.6%o f variance of ROA was significant explained by independent variables. Moreover,Kawshala& P a n d i t h a r a t h n a i d e n t i f i e d t h a t l i q u i d i t y r a t i o a f f e c t e d n e g a t i v e l y b u t insignificantly ROA Positive and significant effects of bank size, capital ratio, anddepositratio wereconfirmed afterthe analysis.

Nuhiu et al (2017) conducted a study about the determinants of commercialbank profitability through different financial performance indicators in Kosovo. Aresearchmodel wasdevelopedinwhich ROA, ROE and NIM werecommercialbank profitability indicators and the determinants were capital adequacy ratio, assetquality, management efficiency and liquidity Two other macro-economic indicatorswere accounted, namely inflation rate and yearly GDP growth rate The data wascollected during 2010-2015 and quantitative research method was employed.

UsingOrdinaryLeastSquaremethod,Nuhiuetal.identifiedthatthesedeterminantsexplained for 71.15% of variance of ROE, 71.50% of variance of ROA and 51.01%of variance of NIM They also identified that liquidity ratio affected negativelyROA,ROEand NIM.

Pastory & Marobhe (2015) conducted a research to explore the determinantsof commercial banks profitability in Tanzania Quantitative research method wasselected and the data was collected during the period of 2000-2011 There were 18commercial banks data to be collected Quantitative research method was employedwith ordinary least square, fixed effect and cross-selection random effect method.Dependent variables were ROE, NIM and non-interest expenses to average totalassets(NOVX).Independentvariablesreflectedbank-specificaspectsthroughcapital adequacy, liquidity, asset quality, expenditures as well as macro-economicaspects through inflation rate and interest rate Market share ofthe banks wasaccounted in the research model Obtained result showed that expenditures were notsignificantly influencing on NIM, ROE and NOVX Pastory & Marobhe confirmedthat bank profitability was strongly responded to capital adequacy, asset quality,liquidityand selected macro-economic factors.

Sehrish Gul, Faiza Irshad and Khalid Zaman (2011) analyzed the relationshipbetween bank specific and macro-economic characteristics over bank profitability.ThestudywasconductedonapaneldatasetconsistingtopfifteenPakistani commercialbanksovertheperiod2005-2009.PooledOrdinaryLeastSquare(Pooled OLS) method was employed to measure the relationship that exists amongassets, loans, equity, deposits, economic growth, inflation and market capitalization,which were the independent variables and return on asset (ROA), return on capitalemployed(ROCE),netinterestmargin(NIM),whichrepresentedbanks’profitability( d e p e n d e n t v a r i a b l e s ) T h e s t u d y f i n d i n g s r e p o r t e d t h a t b o t h i n t e r n a l andextern al factorshave astrongimpactonbanksprofitability.

Abuzar (2013) conducted a study on the determinants ofprofitabilityofIslamic banks in Sudan The study used return on assets (ROA) and net financingmargin( M AR G ) a s ban ks ’p ro fi ta bi li ty i n d i c a t o r s T h e r es u l t s i n d i c a t e d t h a t o n l y the internal factors have important effects on banks' profitability Cost, liquidity andthe size of the banks show positive relationship and significant impact with the bankprofitability, while external macroeconomic factors have no substantial effects onprofitability.

Usman,D.(2014)examinedtheprofitabilityof23commercialbanksoperating in Pakistan from 2009 to 2012 The study used management policies,capitalratios,riskmanagementasinternalfactorsormanagementfactorsandinflation, government policies as external factors The paper used the ordinary leastsquare(OLS)methodtochecktheimpactofcostefficiency,liquidity,capitaladequacy,deposits andsizeofthebankontheprofitability(ROA)ofthecommercial banks The author used the descriptive statistics which include mean,median,minimum,maximumandstandarddeviation.Othermethodsincludescorrelation analysis,regressionanalysisandnaturallogarithmoftotalassetstechnique.T h e r e s u l t s s h o w e d t h a t c o s t e f f i c i e n c y , l i q u i d i t y a n d c a p i t a l a d e q u a c y are those variables in the check of management that decide the profitability ofcommercial banks operating in Pakistan Other statistically significant variables likedepositsand size of the bankhaveno influenceon profitability.

Khaled, M et.al (2016) identified the bank specific variables that impact theprofitabilityo f commercialbanks of Bangladesh Ther e s e a r c h u s e d d a t a from financial reports of 15 commercial banks for the period 2003-2013 to look into thehitof return onassetas the dependent variable(ROA)and parameterssucha s capital adequacy ratio, gearing ratio (risk), liquidity, non-performing loan ratio,operating expense ratio and bank size Prais-Winsten correlated panels correctedstandarderrors(PCSEs)modelwasusedtoremoveanyautocorrelationandheterosked asticity problem automatically for the panel data The findings reportedthat size, operating expense, gearing ratio and capital were found to be importantvariables that affect the bank profitability of Bangladesh More specific, the authorsfound capital to be positively related to profitability while size, operating expense,gearing ratio were found to be inversely related Other variables like liquidity andnon-performing loan ratio did not demonstrate any impact on profitability.

Theauthorsc o n c l u d e d t h a t a d e q u a t e c a p i t a l , l o w r i s k , e f f i c i e n t e x p e n s e m a n a g e m e n t and rightsizing lead to greater performance and profitability for Bangladeshi bankindustry.

Sufian,F.&Noor-Mohamad-Noor,A.(2012)examinedtherelationshipbetween internal and external factors over Indian bank profitability over the period2000 – 2008 The empirical results have found strong evidence that credit risk,networkembeddedness,operatingexpenses,liquidityandsize havestatisticallysignificant impact on the profitability of Indian banks However, the impact is notuniform across banks of different nations of origin The same results was observedby Sufian (2011) in the study about factors affecting profitability of Korean bankingsector from 1992 to 2003 Using unbalanced bank level panel data, the resultsindicated that liquidity level, diversification, credit risk, business cycle, and industryconcentrationsignificantly affect banks’ profitability.

Al-Omar, H & Al-Mutairi, A (2008) found a direct relationship betweenequity, total assets and return on assets (ROA) The research aimed at investigatinginto the effect of bank-specific characteristics on profitability in Kuwaiti bankingsector over the period

1993 – 2005 from the collected seven national commercialbanks.T h e i r f i n d i n g s s h o w e d t h a t e q u i t y r a t i o , l o a n‐ assetsr a t i o , o p e r a t i n g expensesr a t i o , a n d t o t a l a s s e t s e x p l a i n a b o u t 6 7 % o f t h e v a r i a t i o n i n r e t u r n o n assets (ROA) However, the effect of loan‐assets ratio and operating expenses ratioon profitability are statistically insignificant Accordingly, the results emphasize theneedforimprovingcapitaladequacyandreducingtheratioofnon‐interestassetsas a solution to increase profitability Also, the study revealed that bank size ispositive related to bank profitability, which means banks have potential for higherprofitsasthe size of thesebanks increases.

Nationalstudies

In Vietnam, there were numerous empirical evidences which were developedbyVietnameseresearcherstoexplorethedeterminantsofcommercialbankprofitabilit y In this section, national studies are collected in order to explore howprevious researchers studied about this topic Key results, data collection and datamethodology andthelimitationoftheseresearcherswillbehighlighted.

Nguyen (2018) conducted a study about factors affecting Vietnamese banks’profitability.Nguyenusedquantitativeresearchmethodtoanalyzedataof25commercial banksduring2005-

2013.ROAwasusedasbankp r o f i t a b i l i t y indicators.Explanatoryvariableswerecombi nedbetweeninternalandexternalfactors.Obtainedresultshowedthatbankprofitabilitywassignific antlyandpositively explained by the diversification of the banks’ income and total liabilitiesratio Otherwise, banks’ profitability was significantly and negatively affected bynon-performing loan ratio and total equity to total asset Nguyen, however, did notfindsignificanteffectofmacro-economicfactorsonVietnameseb a n k s ’ profitability In addition, Nguyen confirmed that the banks with higherincomediversificationlevelearnedmoreprofitthatthebankswithlowerincomediversific ation.Themainlimitationofthisstudyisthatitdidnotcoverallcommercial banksin Vietnam.

2015andquantitativeresearchmethod was employed with pooled ordinary least square, fixed effect and random effect. Aresearch model was developed in which bank profitability was measured throughROA, ROE and NIM and these indicators were affected by several internal factors,including bank size, capital ratio, credit risk, ownership structure, liquidity, bankingefficiency These indicators were also affected by economic cycle and inflation rateas two external indicators Empirical evidence showed that bank profitability wassignificantly and negatively influenced by foreign ownership, credit risk and capitalratio They also identified that bank profitability was not statistically influenced bybank size, state ownership, GDP and inflation rate Other factors had different ormixedeffectsonbankprofitability.Themainlimitationofthisstudyisthatitdidn otcoverall commercialbanksinVietnam.

(2017)conductedaresearchaboutthedeterminantsofbankprofitabilityamonglistedbanksinVi etnam’sStockExchange.Thedatawascollected for the period of 2007-2013 with 9 listed commercial banks Dependentvariables were ROA, ROE and NIM Independent variables consisted of internalvariables (bank size, total asset growth rate, management expenses, capital, creditrisk and other risks) and external variables (GDP growth rate, inflation, populationgrowth rate and interest rate) Fixed effect and random effect were data analysistechniquesandobtainedresultshowedthatcreditriskwasnots i g n i f i c a n t l y affec ting ROA in fixed effect and NIM in random effect Management expenseinsignificantly affected ROE in fixed effect Inflation rate insignificantly affectedROA in random effect and ROE in fixed effect Interest rate insignificantly affectedNIM in fixed effect GDP growth rate insignificantly affected ROA and NIM underfixed effect Population growth insignificantly affected ROE and NIM under fixedeffect Otherwise, chosen variables affected significantly ROA, ROE and NIM andthesignofeffectwasmixedindifferentmodels.Themainlimitationoft h i s researchreferredt othechoiceoflistedbanks,leadingtothefindingsmightnotbein unlisted banks.

Nguyen, D (2017) conducted a study about the determinants of profitabilityin commercial banks in Vietnam The data was collected for 16 largest commercialbanks during 2007-2016 and quantitative method was employed with fixed effect. Aresearchmodelwasdevelopedinwhichinternalfactors(assetstructure,assetquality,capitalizatio n,financingstructure,operatingefficiency,banksizeandincome diversification) and external factors (annual GDP growth rate, inflation rateandmarketconcentration)affectedbankprofitability(ROA).Obtainedresultshowedthatba nkprofitabilitywassignificantlyaffectedbyassetquality,capitalization, financing structure, operating efficiency and inflation rate Overall R-square was 64% for the model The main limitation of this study is that it did notcoverall commercialbanksinVietnam.

Phan&Phan(2014)conductedastudytoanalyzethefactorsaffectingperformanceofVietnam esecommercialbanks.Theycollectedthedataduring2005-

2012from28Vietnamesecommercialbanks.Aresearchmodelw a s developed in which ROA was dependent variable Independent and other variableswere market concentration, total deposit of top four largest banks to total deposit inbanking system, market share, bank size, liquidity risk, bank loans to total assets,ownershiptype,andinflationrate.Obtainedresultshowedthatmarketconcentration, ownership and inflation rate affected significantly ROA Bank sizehave no impact on ROA while liquidity risk affected ROA significantly The mainlimitation of the study was that Phan & Phan (2014) only took into account inflationrateassinglemacro- economicfactors.Infact,therearemanyothermacro-economicindicators,but theywerenot used by theseresearchers.

Vo & Batten (2014) conducted a research about the determinants of bankprofitabilityinVietnam.Theycollectedthedataduring2006-2014for35commercial banks and performed quantitative data analysis with fixed effect andgeneralized method of movement Dependent variables were ROA, ROE and NIM.Independent variables were bank size, capital adequacy, bank risk, bank operationalcost,bankproductivity,Herfindahl-

Hirschmanconcentrationindex,inflationrate and GDP growth rate Under fixed effect, NIM was significantly affected by allfactors, except GDP growth rate while bank risk, GDP growth rate and inflation ratedid not affect significantly ROA In addition, bank risk, concentration index andinflation rate were not significantly explained for ROE under fixed effect Similarly,a mixed estimation result was found when generalized method of movement wasapplied In more detail, bank size, bank operational cost and bank productivitysignificantly affected ROA, ROE and NIM Concentration index and inflation ratesignificantly affected ROE while only concentration index affected significantlyROE NIM was significantly affected by concentration index and GDP growth rate.A major limitation of this research was that it did not explore the effect of crisissince Vietnam banking system faced up with a downturn cycle in the period of2008- 2012.

Vu & Nahm (2013) used data of Vietnamese commercial banks during 1998-2004. The results of this study are similar to Gardener et al (2011) on the impact ofbankc a p i t a l , b u t d i f f e r e n c e i n t h e i m p a c t o f b a n k s i z e a n d i n f l a t i o n i n d e x I n addition, Vu & Nahm (2013) also found that bank management ability and theaverage growth rate of total product per capita have a positive impact, but bad debthasanegativeimpactontheperformance of Vietnamcommercial banks.

Nguyen Thanh Phong (2015) used panel data and regression model with thedependent variable was profit (ROA) and independent variables were bank size,loans, equity, credit risk, liquidity, operating costs, economic growth and inflation.The study indicated that factors such as loans, credit risk, liquidity and operatingexpenses had a negative impact on bank profitability, while inflation had a positiveimpact on the economy The results also showed that bank size, equity ratio andeconomic growth do not really affect the profitability of joint stock commercialbanks on Vietnam's stock market. This result was similar to the results of LieuThanhTruc and VoThanhDanh (2012).

Phan Thi Hang Nga (2011) studied the determinants of the profitability oflistedbanksduring2005-2010.TheauthorusedROAtorepresentthebank profitability.Thestudyuseddataof6bankslistedoncentralizede x c h a n g e s between 2005-

2010 The research results show that the factor of deposit size has apositiveeffect on bankprofitability, whilecreditrisk hasanegative impact.

Previousstudies’gap and summary

In summary, based on the relevant studies about the factors affecting theprofitability of commercial banks, the author found that there is a number of keymacro and micro factors affecting the profitability used in most studies Table 2.1willshow thesemaininfluencingfactorsand theresults ofpreviousstudies:

Table 2.1: Summary of studies on the impact of factors affecting bankprofitability

Authors Objectives Dependent variables Independentvariables Research method Empiricalresults

Thedetermin antsofprofita bilityof Indiancomm ercialbanks ROA

Bank size, capitaladequacy, asset quality,liquidity, deposit, assetmanagement, operatingefficiency, leverage,number of banks’branches, annual realGDP, inflation rate,interest rate, exchangerate, financialcrisis, demonetization

Pooledordin aryleast square,Fixed effect,Randomeff ect

ROA was significantlyaffected by operationalefficiency, number ofbranches, assetmanagement, bank size, andleverage Macro- economicfactors hads i g n i f i c a n t effect on ROA.Demonetization affectedsignificantlyROA.

Profitabilityd eterminantso f financialinsti tutions inPakistan

ROA, ROE,N IM bank size, bank solvency,credit quality, liquidity,operational efficiency,financial structure,diversification, fundingcost, operating expenses,labor productivity, banktype, industryconcentration, bankingsector development,marketpow er,GDP growth rate, inflation rateandgovernment change

Government changeaffected bank profitability.Inflation rate, industryconcentration, bankingsector development, creditquality and operationalefficiency negativelyaffectedbankprof itability.

Thedetermin antsofprofita bilityin bankingsect orof post- Sovietcountries

Capital adequacy ratio,total loans to totaldeposit, total loans toGDP, bank size, non-interest to interestincome,interest rate, GDPgrowthrate,inflation rate

GDP growth rate and non- interest to interest incomeaffected positively bankprofitability.

Negative effect of loans toGDPonbankprofitability.Kawshala,H., Identification ROA Banksize,capitalratio, Ordinary Positiveandsignificant

,K (2017) of the factorseffecting on bankprofita bility deposit ratio and liquidityratio leastsquare effects of bank size, capitalratio, and deposit ratio onbankprofitability.

Determinants ofcommercial bankprofitab ilitythroughd ifferentfinan cialperforma nceindicators Kosovo in

Capital adequacy ratio,asset quality,management efficiency,liquidity, inflation rate,GDPgrowth rate

Other factors affectedpositively ROA, ROE andNIM.

Thedetermin antsofcomme rcialbankspr ofitabilityin Tanzania

Capital adequacy,liquidity, asset quality,expenditures, inflationrate,interest rate

Ordinarylea st square,Fixed effect,Cross- selectionran domeffectm ethod

Expenditures was notsignificantly influencing onROA,ROEandNOVX Bank profitability wasstrongly responded tocapital adequacy, assetquality, liquidity andselectedmacro- economic factors

Therelations hipbetweenb ank specificand macro- economiccha racteristic s over bankprofitability

ROA, ROCE, NIM assets, loans, equity,deposits, economicgrowth, inflation andmarketcapitalizati on

PooledOLS Both internal and externalfactors have a strong impactonbanksprofitability.

Thedetermin antsofprofita bilityofIslam ic banks inSudan

Cost, liquidity and thesize of the banks,macroeconomic factors

The results indicated thatonly the internal factorshave important effects onbanks'profitability

Theprofitabi lityof 23commercia lbanksoperatin g inPakistan

Management policies,capital ratios, riskmanagement as internalfactors or managementfactors and the andinflation, governmentpolicies as externalfactors

The results showed that costefficiency, liquidity andcapital adequacy are thosevariables in the check ofmanagement that decide theprofitability of commercialbanks operating in Pakistan.Otherstatisticallysi gnificant variables likedepositsand size of the bank have no influence onprofitability

ROA capital adequacy ratio,gearingratio(risk), liquidity, non- performingloanratio,operat ing

The findings reported thatsize,operatingexpense,gearing ratio and capitalwerefoundtobeimpor tant profitabilityo fcommercial banksof Bangladesh expense ratio and banksize variables that affect thebank profitability ofBangladesh

Therelation shipbetweeni nternal andexternalfac tors overIndian profitability bank credit risk, networkembeddedness, operatingexpenses, liquidity andsize the results indicated thatliquidity level,diversification, credit risk,business cycle, and industryconcentration significantlyaffectbanks’profitabi lity.

The effect ofbank- specificcharacte ristics onprofitabilit yin Kuwaitibank ingsector

ROA equity ratio, loan‐ assetsratio, operating expensesratio, and totalassets the results emphasize theneed for improving capitaladequacy and reducing theratio of non‐ interest assetsas a solution to increaseprofitability Bank size ispositive related to bankprofitability, which meansbanks have potential forhigherprofits as the sizeof thesebanks’ increases.

Factorsaffe ctingVietna mesebanks’pr ofitability

Bank liabilities ratio,non-performing loanratio, total equity to totalasset, diversificationincome

Bank profitability wassignificantly and positivelyexplained by thediversification of the banks’income and total liabilitiesratio. Banks’ profitability wassignificantly and negativelyaffected by non- performingloanratioandtotalequi tyto totalasset.

Thedetermin antsofprofita bilityof Vietnamcom mercialbank s

Bank size, capital ratio,credit risk, ownershipstructure, liquidity,banking efficiency,economic cycle, inflationrate

Pooledordin aryleast square,Fixed effect,Randomeff ect

Bank profitability wassignificantly and negativelyinfluenced by foreignownership, credit risk andcapitalratio.

Other factors had differentormixed effectson bank profitability.

Thedetermin antsof bankprofitabil ityamong listedbanks inVietnam’s StockExchan ge

Bank size, total assetgrowth rate, managementexpenses, capital, creditrisk, other risks, GDPgrowth rate, inflation,population growth rate,interestrate

The effects of factors onbank profitability wasvaried depended on choiceoffixed or randomeffect.

Asset structure, assetquality,capitalizatio n, financing structure,operatingeffic iency,

Bank profitability wassignificantlyaffectedby asset quality, capitalization,financingstructur e, incommerc ialbanks inVietnam bank size, incomediversification , annualGDP growth rate,inflationrate,market concentration operating efficiency andinflation rate.

The factorsaffect ingperforma nceofVietna mesecomme rcialbanks

Market concentration,total deposit of top fourlargest banks to totaldeposit in bankingsystem, market share,bank size, liquidity risk,bankloanstototalasset s, ownership type, inflationrate.

Pooledordin aryleast square,Fixed effect,Randomeff ect

Market concentration,ownership and inflation rateaffected significantly ROA.Bank size have no impacton ROA while liquidity riskaffectedsignificantlyROA.

Thedetermin antsof bankprofitabil ityin Vietnam

Bank size, capitaladequacy, bank risk,bank operational cost,bank productivity,Herfindah l- Hirschmanconcentration index,inflation rate, GDPgrowthrate

Fixed effect,Generaliz edmethod ofmovement

NIM was significantlyaffected by concentrationindex and GDP growth rate.Concentration index andinflation rate significantlyaffected ROE while onlyconcentration index affectedsignificantlyROE. Bank risk, concentrationindex and inflation ratewere not significantlyexplainedfor ROEunder fixedeffect.

Analysis offactorsaffe cting theprofitabilityofc ommercialba nks listedon Vietnam'sstoc kmarket

ROA bank size, loans, equity,credit risk, liquidity,operating costs,economic growth andinflation loans, credit risk, liquidityand operating expenseshave a negative impact onbank profitability, whileinflation has a positiveimpact on the economy.Bank size, equity ratio,economic growth do notaffect the profitability ofcommercialbankson Vietnam'sstockmarket.

Indian banking marketsuffered global financialcrisisin 2008- 2012.

The author did notexplore the effect ofcrisisduringtheperiod.

Pakistan banking marketsuffered global financialcrisisin 2008-2012.

The author did notexplore the effect ofcrisisduringtheperiod.

Soviet countries bankingmarket suffered globalfinancial crisis in 2008-2012 and Asian financialcrisisin 1997.

The research focusedon the countries underSoviet- Union.

Kosovo banking marketsuffered global financialcrisisin 2008-2012.

Only explored theeffect of factors onbankprofitabilityi n veryshortperiod.

ROA was not used inthe research.

Pakistan banking marketsuffered global financialcrisis in 2008-

2012 Theloss in economicopportunity wascompounded byexogenous oil andcommodity price stock,which led to a significantdeterioration of themacroeconomicindicat ors ofPakistanin2007-2008

Using four dependentvariables to evaluatethe effectiveness is notnecessary due to thefactors interactingamongthe variables

The macroeconomicfactors are notmentionedin the research

Vietnamese bankingmarket was affected byeconomic downturn cyclewhich was happenedduring2008-2012.

Average GDP growth rateduring 2005-2015 was6.24% and it wasfluctuated Average GDPgrowth rate during 2005-2007 was 7.22%, then itwas dropped to 5.79%during 2008-2012

Then, itcontinued increasingduring2013- 2015with average of6.02%. commercial banks inVietnam so that thefindings may not betruefor all other commercial banks.

Did not explore allcommercial banks inVietnam so that thefindings may not betruefor all other commercial banks.

Only focused on listedbanks so that thefindings may not betruefor all other commercial banks.

Did not explore allcommercial banks inVietnam so that thefindings may not betruefor all other commercial banks. Phan,T.H.,

Did not explore theeffect of crisis sinceVietnam bankingsystem faced up with adownturn cyclein the periodof2008-2012.

The first limitation in previous studies referred to the choice of variables intothe research model It is identified that previous researchers were very limited inselecting more macro-economic factors into their research models Most of previousstudies focusedon GDPgrowthrate andinflationratebuttheydidnotexploreother factors such as exchange rate, credit to GDP and credit growth rate The secondlimitation is that local researchers did not explore all commercial banks in Vietnam.It can be explained by the fact that it is hard to collect all financial data of allcommercial banksdue to limited datasources.

In general, most empirical studies (foreign studies and national studies) useROA,R O E a n d N I M t o m e a s u r e c o m m e r c i a l b a n k p r o f i t a b i l i t y , a s w e l l a s p a n e l data and regression models to determine the impact of factors on the profitability ofbanks Bank profitability is affected by internal factors and related macro variables.Previous studies mostly use micro indicators such as bank size, liquidity, equity,creditrisk, operating costsand macrovariablessuchasGDPgrowth rate,inflation.

A number of studies were conducted to investigate the factors affecting bankprofitability.H o w e v e r , t h e i m p a c t o f f a c t o r s o n t h e p r o f i t a b i l i t y o f c o m m e r c i a l banks is not entirely consistent between the studies Empirical evidences and resultsof various studies show a mixed trend on the effect of factors on bank profitability.This may be because these studies were conducted in different countries, differenttimeperiods and useddifferentresearch methods.

Tostudythefactorsaffectingtheprofitabilityoffinancialinstitutions,especiallyc o m m e r c i a l b a n k s , i n t e r n a l f a c t o r s a n d m a c r o f a c t o r s a l l n e e d t o b e includ edintheresearch.Somestudiesonlyanalyzetheinternalfactorsofanorganization, not the impact of external factors on performance Or some researchpapersput out internalfactorsthat arenot really comprehensiveyet.

This paper tries to synthesize both groups of internal and external factors,analyzing the degree of opposite or opposite effect of factors on the profitability ofcommercial banks, thereby, providing solutions based on internal factor analysis,andpropose policy changesbased on macroeconomicanalysis.

In view of inheritance and continue to develop the prior studies, the authorexplores the impact of bank characteristics: bank size, non-performing loan, equityratio,l i q u i d i t y r a t i o , l o a n r a t i o , d e p o s i t s r a t i o , i n c o m e d i v e r s i f i c a t i o n r a t i o , operating cost ratio; Industry-specific factors such as credit to GDP, credit growthrateandmacro-economicspecificfactorsrepresentedbyGDP,inflationandexchange rate between VND and USD on profitability of commercial banks inVietnamovertheperiod of2009-2018.

In this chapter, the concept related to commercial bank and bank profitabilityhave been examined In which, the term of commercial bank used in the thesis isdefined as a financial institution which operates in the way of holding deposit,paying interests to the depositors, issuing credit to different economic sectors andfacilitates economic development of a country In other spectrum,the term of bankprofitability used in the thesis is defined as a relative number (a percentage), whichexpresses the ratio between profit and revenue Commercial bank profitability madeduring the year represents the capability of making profit Key indicators to measurebankprofitabilityhasbeenhighlighted,includingROA,ROE,NIM.Empiricalevidencesarecol lectedinbothforeignandnationstudiestogetadequateunderstandingsofhowotherresearchersst udiedaboutthedeterminantsofcommercial bank profitability.

Datacollection

Inthis thesis, secondarydata will becollected It isretrievedfrom twodifferent sources The first data sources is from audited financial statements andannual reports of

28 commercial banks in Vietnam for the period of analysis 2009 –2018, whichwill be collected from commercial banks’ websites The second datasource is retrieved from the website of international organizations, including theWorld Bank’s Open Data and Investing.com to ensure the reliability of the thesis.While World Bank provides the data related to credit development of a country,GDP and inflation rate, Investing.com provides data related to the fluctuation offoreign currency exchange.

The observation sample was taken for the period 2009 - 2018 The authordecided to choose this period because the author wants to study commercial banksafterthecrisisperiodin 2008untilthelatesttime.

Besides, the author intended to collect studied variables from reviewing theexistingsourcessuchasacademicjournalsandarticles.Collectingthestudiedvariables from reviewing literature is a great helpfor the author as it allowedcreating a theoretical framework and gain a more comprehensive picture of all theissuesrelated to the research topics(Trzesniewski et al, 2011).

Researchprocess

In order to give direction to this study, figure 3.1 gives the path followed inthisresearch process:

Conduct F-test to choose Pooled OLS or FEM

Check autocorrelation: Wooldridge test Check multicollinearity: Collinearity diagnostics (remove variables which have VIF more than 10.0) Check heteroscedasticity: Modified Breusch and Pagan Lagrangian multiplier test

Model fix using FGLS (if there are issues related to auto correlation and heteroscedasticity)

Check multicollinearity: Collinearity diagnostics (remove variables which have VIF more than 10.0)

Check heteroscedasticity: Modified Wald test

Conduct Hausmantest to chooseFEMor REM

Researchmodel

Dependentvariables

Asm e n t i o n e d i n t h e s e c t i o n n o 2 2 2 , t h e r e a r e 3 i n d i c a t o r s r e f l e c t t h e profitability of commercial banks, which are ROA, ROE and NIM In this study, theauthor would like to choose ROA to be the dependent variable instead of ROE andNIM.The main reason is that ROA reflects the ratio of net profit to total assets, thisindex measures the profitability of each of the company's assets On the other hand,the author would like to focus on how returns of the banks have impact on theirassets since most of the banks in Vietnam are conducting the strategy of rapidlyincreasing their total assets.

From there, suppliers can get an idea of the interestgeneratedbytheamountofinvestedcapitalortheamountofassets.Theeffectiveness ofconvertinginvestmentcapitalintoprofitsisexpressedthroughROA A higher ROA indicates that the company is making more money on lessinvestment In addition, many researchers believe that ROA is a basic indicator toevaluate banking performance because ROA is not affected by financial impact,while ROE has potential risksdepending on thetotalassetsoncapital share.T h e factalsoshowsthatveryfewstudieschoosethesingleROEandNIMasanindependent variable to study bank profitability Therefore, it can be considered thatROAisan indicator ofprofitabilityof companies,or commercialbanks.

Many previous studies stated that ROA is the best index for profitability.Golin

(2001) claimed that ROA is the best measure for bank profitability as it is notmisrepresentedb y h i g h e q u i t y m u l t i p l i e r s R i v a r d a n d T h o m a s ( 1 9 9 7 ) a l s o f o u n d the same results Al-Omar, H & Al-Mutairi, A (2008), Omar, S O.(2017) … usedROA as the dependent variable to evaluate the effectiveness to profit of commercialbanks.

ROAtrendsofVietnamese commercial banksduring2009-2018

FigureaboveshowstheaverageROAofVietnam’scommercialb a n k s during the period of 2009-2018 In fact, ROA decreased continuously from 2008 to2015, from0.0134 in 2009 to 0.0045 in 2015 From 2016 to 2018, ROA increasedcontinuously from0.0050 in 2016 to 0.0086 in 2018 The main reason is that thebanksfocusedonincreasingitstotalassetsthroughouthighercredittot h e customers and more investment into infrastructure to open new branches or physicalassets In fact, this investment will not bring immediate results and it took time togetdesired returns.

Independentvariable

In this thesis, some independent variables are proposed to use and they arecategorizedintothreegroups,namelybank-specificvariables,industry- specificvariablesand macro-economicvariables.

Bank-specificvariablesincludebanksize,non-performingloanratio,liquidity ratio, equity ratio, loan ratio, deposit ratio, income diversification ratio,operatingcostratio.Eachvariableofbank-specificvariablesisdiscussedasbelow:

Bank size is calculated by taking natural logarithm of total assets (Nguyen,2019).AccordingtoAlly(2014),banksizewhichwasmeasuredbynaturallogarithmof totalassetaffectedthebanks’profitabilitymeasuredbyROAinpositive way Similarly, Hussain & Sajjad (2017) obtained empirical evidence inwhich bank size had positive effect on ROA of the banks Terraza (2015) identifiedthat bank size affected positively and significantly ROA of small banks but thisfactordid not have significant effecton ROA of mediumandlarge banks.

Non-performingloanratioiscalculatedbytakingthevaluesofnon-performing loans divided by total loans in which non-performing loans are loans tobe categorized from Debt Group 3 to Debt Group 5 as regulated by State Bank ofVietnam (Nguyen, 2015). Non-performing loans ratio reflects asset quality of thebanks and it represents for financial stability of the banks (Ranjan & Dhal, 2003;Panta, 2018) According to Ozgur

& Gorus (2016), non-performing loans ratioaffectednegativelyandsignificantlythebanks’ROAinTurkey.Similarly,Ozurumba(201 6)statedthatnon-performingloansratiohadnegativea n d significanteffect on ROAof commercial bank in Nigeria.

(Source:Decision No.18/2007/QD-NHNNdated onApril22 nd ,2015) 3.3.3.3 Liquidityratio(LIQ)

Liquidity ratio is calculated by taking cash and cash equivalents divided bytotal assets (Doina & Mircea, 2008) This ratio reflects the ability of firms to repaytheirdebtobligationsinshort-term(Costea&Hostiuc,2009).Bwacha&Xi(2018) examinedtheimpactofliquidityonprofitabilityinbankingsectorandtheyidentifiedthatcashand cashequivalentstototal assets ratioaffectedp o s i t i v e l y ROA of the banks Lipunga (2014) examined the effect of liquidity on profitabilityof commercial banks and this ratio was measured by cash and cash equivalentsdivided by total asset Obtained result showed that liquidity ratio affected positivelyand significantly ROA of commercial banks Similarly, Karani (2014) also reachedthesame conclusion.

Equity ratio is a financial ratio which is measured by taking owners’ equitydivided by total assets (Chan & Karim, 2010) Empirical evidence confirmed theeffectofequityratiotoROAofcommercialbanks.Wang&Wang( 2 0 1 5 ) examined commercial banks in US and confirmed that equity ratio had significantand positively effect on ROA Meero (2015) identified that equity ratio significantlyaffected ROA of the banks in Gulf countries Nguyen (2019) explored the effect ofequity ratio to ROA of Vietnam’s commercial banks and this researcher obtainedempirical evidence in which this ratio had significant and positive effect on ROA inPooledOLSandfixedeffectmodel.Kinguetal.

Loan ratio is measured by taking total loans divided by total assets of thebanks and the lower value means the lower financial risks to the banks (Mengistu,2015) Empirical evidence from Hakimi et al (2015) indicated negative effect ofloan ratio to ROA of the banks Similarly, Kohler (2013) also obtained the result ofwhich loan ratio affected negatively ROA of the banks with retail-oriented strategy.WhenKassem&Sakr(2018)exploredtheeffectofbank- specificfactorsonROAofbanksinEgypt,theyconfirmed thatROAwasnegatively impacted by loan ratio.

Deposit ratio refers to the portion of deposits taken from the customers whohaves p a r e m o n e y a n d t o t a l a s s e t s o f t h e b a n k s ( S a e e d , 2 0 1 4 ) T o o h i g h d e p o s i t ratio may push the banks into insufficient liquidity situation to cover unexpectedfunding requirements (Islam &

Rana, 2017) According to Hapsari (2018), depositratioisconsideredaseitherfailureandsuccessfactortothebanksandthisresearcher identified positive and significant effect of this ratio to ROA of banks inIndonesia.Positiveandsignificant effectofdeposit ratiotoROAwascapturedin the study of Okun (2012) developed for commercial banks in Kenya Singh &Sharma (2016) found that ROA and deposit ratio was negative among commercialbanks in India.

Income diversification ratio is calculated by taking non-interest income tointerest income ratio (Kohler, 2013) Cetin (2018) confirmed the significant andpositive effect on income diversification ratio in the banks on their ROA However,Andrzejuk (2017) found that income diversification ratio had negative effect onROA of banks in Liechtenstein.

Yang & Wu (2011) obtained empirical evidences ofwhichR O A w a s s i g n i f i c a n t l y a n d p o s i t i v e l y a f f e c t e d b y i n c o m e d i v e r s i f i c a t i o n ratio Bapat & Sagar (2016) found a mixed effect of income diversification ratio onROAof thebanksthatwerevariedoverthe time.

Operating cost ratio is measured by taking total operating cost divided bytotal assets and the higher ratio leads to lower profitability of the banks (Yao et al.,2018). According to Agustin et al (2018), operating cost ratio had negative andsignificanteffectonROAofthebanks.However,Kidane(2019)obtainedcontradictedempir icalevidenceinwhichROAwaspositivelyinfluencedbyoperatingc o s t r a t i o O t h e r e m p i r i c a l e v i d e n c e s p r o v i d e d b y M i r z a e i e t a l ( 2 0 1 1 ) andDavydenko (2010) also found thesimilarfindings.

Industry-specific variables include credit to GDP ratio, credit growth rate ofVietnam.Each variable and itsimpactonROA of thebank is discussed asbelow:

Credit to GDP ratio is provided by World Bank in annual basis Kok et al. (2015)e x p l o r e d t h e e f f e c t o f c r e d i t t o G D P r a t i o t o b a n k p r o f i t a b i l i t y i n E U a n d they confirmed that when credit to GDP ratio increased, ROA of the banks alsoincreased However, Ratanavararak &

Ananchotikul (2018) found significant effectofc r e d i t t o G D P t o b a n k s ’ R O A i n a l o w i n t e r e s t e n v i r o n m e n t a l t h o u g h t h e s i g n was positive Kohler (2012) stated that credit to GDP had positive and significanteffecton thebanks’profitability quoted throughROA.

Credit growth rate is provided by World Bank in annual basis Awdeh (2017)obtainedempiricalevidenceinwhichcreditgrowthrateandROAwasnotstatistically significant correlated with each other In the study of Antoni & Nasri(2015), credit growth rate had positive and significant effect on ROA of the banks.In addition, Kohlscheen et al (2018) identified that credit growth rate supported thebanks’profitability quoted by ROA index.

Macro-economic variables include annual GDP growth rate, inflation rate,foreign exchangeratebetweenVNDand USD.Each variableisdiscussed asbelow: 3.3.3.11 AnnualGDPgrowthrate(GDP)

(2013) did not find significant effect of annual GDP growth rateon ROA of the banks, other researchers obtained different empirical evidences.According to Bertay et al.

(2018), annual GDP growth rate affected positively andsignificantly ROA of the banks.Tan (2012) obtained empirical evidence in whichannual GDP growth affected negatively and significantly the banks’ profitabilitymeasuredby ROA.

Inflation rate was taken from World Bank in annual basis Khan et al. (2014)confirmed that when inflation rate increased, ROA of the banks decreased and viceversa Marimba (2018) explored that inflation rate had negative impact on ROA ofthebanks.Ishfaq&Khan(2015)studyalsofoundnegativeeffectofinflationrate o nROA ofthebanks in Pakistan andthiseffectwasstatisticallysignificant.

Foreign exchange rate between VND and USD is taken from Investing.comin monthly basis Then, monthly foreign exchange rate data is transformed to yearlydata by using average function Moreover, yearly data of foreign exchange ratebetweenVNDandUSDistransformedbynaturallogarithm.Sayedi(2014)indicated that the effect of foreign exchange rate on ROA of the banks was positivebutinsignificant.However,Otieno(2015)confirmedthattheeffectofforeignexchangerate onROAofthebankswasstatisticallysignificantandpositive.Mkandawire (2016) also confirmed that the depreciation of foreign exchange ratereducedROAof the banks.

Summarize

In addition to ROA as a dependent variable, the study presents independentvariablesi n t h r e e g r o u p s , i n c l u d i n g b a n k - s p e c i f i c f a c t o r s : b a n k s i z e , n o n - performingloan,equityratio,liquidityratio,loanratio,depositsratio,incomediversification ratio, operating cost ratio; Industry-specific factors such as credit toGDP, credit growth rate and macro-economic specific factors represented by

GDP,inflationandexchangeratebetweenVNDandUSD.Macrofactorssuchaseconomic growth or inflation are mentioned in most studies on this topic As for theinternal factors, most national studies refer to factors: bank size, loan, liquidity,depositor credit ratios, operating costand equity ratio.

As for foreign studies, in order to further understand the impact of the macroenvironment and the industry on the profitability of commercial banks, foreignauthorsh a v e a d d e d o t h e r m a c r o - e c o n o m i c v a r i a b l e s w h i c h i s e x c h a n g e r a t e a n d industry-specific factors such as credit to GDP, credit growth rate.The resultsshowed that these variables have an impact on bank profitability Meanwhile, theresearches in Vietnam have rarely mentioned exchange rate, credit to GDP, creditgrowth rate; they only examined the impact of familiar macro variables such asinflation and GDP growth.

Therefore, in order to further analyze the impact ofVietnam'smacroenvironmentandbankingindustryontheprofitabilityofVietnamesec o m m e r c i a l b a n k s , t h e a u t h o r d e c i d e d t o c o n s i d e r t h r e e m o r e independent variables, namely exchange rate, credit to GDP and credit growth ratealong with two familiar macro factors which are inflation and GDP growth.

Code Description Equation Expected signs

ROA Return onassets ROA=NetprofitaftertaxesAveraget otalassets

SIZE Banksize SIZE=LN(Totalassets) +

Almaqtari et al. (2018),Yaoet al.(2018), Al- Omar, H & Al- Mutairi, A.

Non- performinglo an NPL=Non −performing loanvalue

Petria et al. (2015),Nguyen (2018),Vo& Batten(2014)

LIQ Liquidity ratio LIQh& cashequivalents

Almaqtari et al. (2018),Yaoet al (2018), Kawshala

(2015);Nguyen (2019),Gulet al (2011), Khaled, M etal (2016)

LOAN Loan ratio LOAN=T o t a lloans

&Sakr(2018), Kohler (2013),Gul et al. (2011)

DEP Deposit ratio DEP=Totaldeposit

Incomedive rsification ratio IDR=Non −interestincome

Yuksel et al. (2018),Nguyen (2017),Abel&

OPR Operating cost ratio OPR=Totaloperatingexpenses

Not calculated variable, taken from

Kohler (2012),Kok et al. (2015), Ratanavararak

CGR Creditgr owthrate Not calculated variable, taken from

Not calculated variable, taken from

Nguyen (2017);Vo & Batten(2014);Yuk sel et al

Not calculated variable, taken from

Yuksel et al. (2018);Nuhiu et al

&Vu(2013), Gul et al. (2011) ER

Almaqtari et al. (2018);Otieno (2015);Sayedi (2014)

Proposedresearch modelandhypotheses

ROAit= 𝛽O+𝛽1SIZEit+𝛽2NPLit+𝛽3LIQit+𝛽4EQRit+𝛽5LOANit

+𝛽6DEPit+𝛽7IDRit+𝛽8OPRit+𝛽9CRDt+𝛽1OCGRt

Where:βo: constant termo:constant term βo: constant term1, , βo: constant term14: Regression coefficients for the independent variablesi:bank;t:year of observation;μi: error term/ residualterm

VND)NPL: non-performing loan

DEP:depositsratio(%) IDR: income diversification ratio (%)OPR:operating costratio(%)

CRD: credit to GDPCGR:creditgrowthrat e

INF:inflation GDP:grossdomesticproduct ER: exchange rate between VND and USDResearchhypothesesaredevelopedasbelow:

H1: SIZE has a positive impact on commercial banks' profitabilityH2:NPLhas anegativeimpactoncommercialbanks'profitability

H3: LIQ ratio has a negative impact on commercial banks' profitabilityH4: EQR ratio has a positive impact on commercial banks' profitabilityH5: LOAN ratio has a positive impact on commercial banks' profitabilityH6: DEP ratio has a positive impact on commercial banks' profitabilityH7:IDRhasa positive impactoncommercialbanks'profitability

H8: OPR has a negative impact on commercial banks' profitabilityH9: CRD has a positive impact on commercial banks' profitabilityH10: CGR has a positive impact on commercial banks' profitabilityH11: GDP has a positive impact on commercial banks' profitabilityH12: INF has a negative impact on commercial banks' profitabilityH13:ER hasa negative impactoncommercialbanks'profitability

Researchmethods

Pooledordinaryleast square(Pooled OLS)

Yit= α+βo: constant term1Xit,1+βo: constant term2Xit,2+ …+βo: constant termkXit,k+uit,where:

Xit,1;Xit,2;Xit,k…: independentvariableobserved for individualiattime tαi:intercept βo: constant term:thecoefficient to estimate the impactofexplanatoryvariable Xit,k

Pooled OLS is a regression method to estimate the coefficients of selectedvariables based on the dataset consisted of both time series and cross-sectional data.There are some statistical indicators that are extracted from Pooled OLS procedure.R-square reflects theinfluence ofindependent variables on dependentvariable.Higher r-square value means higher variance of dependent variables explained byindependentvariables.F- testisconductedtotesthowthesignificanceintheinfluence of independent variables on dependent variable P-value is statistical testvalueanditisoftencomparedwith0.05.Ifp- valueislessthan0.05,theinfluenceofindependentvariableson dependent variableisstatistically significant.

Fixedeffectmodel(FEM)

Yit=αi+βo: constant term1X1,it+βo: constant term2X2,it+ …+βo: constant termkXk,it+uit,where:

Yit:the dependentvariable observed for individualiattimet αi:includinginterceptand unobservedtime-invariantindividual effectβo: constant term:thek x 1matrix of parameters(slope forfactor X)

Xit:independent variable;uit:the error term

FEM assumes that different individuals in the data are accommodated indifferent intercepts This regression model uses dummy variables to capture theintercept of each bank in the dataset Overall estimation process of FEM is stillbased on ordinary least square method Key statistical indicators in the output ofFEMaresimilartoR-square,F- testandp- valuesinPooledOLS.Withtheapplicationoffixedeffectmodel,itisbelievedthateachcommerci albankinVietnam has its own characteristics and these characteristics may or may not affectitsprofitability.Sinceindividualcharacteristicsofabankmayaffecti t s profitability, FEM removes the effect of time-invariant characteristics so that the neteffectofindependentvariablesonthebanks’profitabilityareestimated.

Randomeffectmodel(REM)

Yit= α +βo: constant term1X1,it+βo: constant term2X2,it+ …+ βo: constant term k X k,it +ω it Withωit=εi+νit,where:

Yit:thedependentvariable observed forindividualiattimetα:commonintercept of all crossunits βo: constant term:the kx 1matrixof parameters(slope forfactor X)

Xit:independent variable;ωit:complex errorεi:component error ofdifferentobjects νi:crosscorrelation andnon-correlation stringinthesameobject REM assumes that the intercepts of different individuals in the data areaccommodated by the error term of each individual The benefit of using REM isthatitwilleliminatetheissuerelatedtoheteroskedasticity.Keye s t i m a t i o n technique is generalized least square The rationale behindR E M i s t h a t , u n l i k e FEM,thevariationacrossentitiesisassumedtoberandom anduncorrelat edwiththe predictor or independent variables included in the model REM assume that theentity’s error term is not correlated with the predictors which allows for time-invariant variables to play a role as explanatory variables In REM, it is required tospecifythoseindividualcharacteristicsthatmayormaynotinfluencethepredictor variables.Theproblemwiththisisthatsomevariablesmaynotbeavailablethereforeleading to omitted variablebiasin the model.

FGLS(FeasibleGeneralizedLeast Squares)

FGLS is a regression technique which is used when the researchers want toestimate the coefficients of a multiple linear regression model and their covariancematrix in the presence of non-spherical innovations with an unknown covariancematrix The key benefit of using FGLS is that it helps the author to remove the issuerelatedtoheteroskedasticityandautocorrelationintheregressionmodel.I n practice, the author conducts FLGS to estimate the coefficients in the model in casethere is autocorrelation, cross-sectional correlation and heteroskedasticity in thepaneldata.

Throughout the third chapter, the research developed a research model inwhich ROA was explained by bank-specific variables, industry-specific variables,andmacro- economicvariables.Bank-specificvariablesarebanksize,non-performing loan ratio, liquidity ratio, equity ratio, loan ratio, deposit ratio, incomediversification and operating cost ratio Industry-specific variables represent for theimpact of credit to GDP ratio and credit growth rate in Vietnamese banking system.Macro-economic variables are selected as annual GDP growth rate, inflation rate,and foreign exchange rate between VND andUSD The author also proposed theway to collect data as well as which data analysis techniques to be applied duringmodelestimationprocess.

DescriptiveStatistics

In this section, description statistics will be conducted It delivers mean andstandard deviation value of each variable captured in this study As mentioned inprevious chapter, a research model is developed with dependent variable as ROAandindependentvariablestobecharacterizedto3groups.Thefirstgroupconsist sof bank-specific variables, including bank size (SIZE), non-performing loan ratio(NPL), liquidity ratio (LIQ), equity ratio

(EQR), loan ratio (LOAN), deposit ratio(DEP)andincomediversificationratio(IDR).Thesecondgroupconsistsofindustry- specific variables, including credit to GDP (CRD) and credit growth rate(CGR) The last group represents for macro-economic variables, including GDP,inflation rate (INF) and exchange rate between VND and USD (ER) A total of 280observations in the dataset that represents for 28 commercial banks in Vietnam.Obtainedresult of descriptive statisticsispresented asbelow:

Variable Observation Mean Std.Dev Min Max

Source:Resultsarecalculatedby Stata, detailedin Appendix03 -Picture 1

IntermsofROA,meanvalueiscapturedat0.0079102ands t a n d a r d deviation is 0.0072615 Min value is -0.055117 (TP Bank has negative net profitaftertax in2011, leadingto negative ROAvalue) Maxvalue is0.047524.

Intermsofbanksize,thisvariableistransformedbynaturallogarithmfunction.Meanandstan darddeviationvaluesarecapturedat18.29905and1.255708.Min value is14.6987while max value is20.9956.

In terms of NPL, NPL measures the value of non-performing loans to totalloan book values Mean value is captured at 0.023431 and it is lower than therequirementofStateBankofVietnamat3%.Standarddeviationvaluei s 0.0152925.

BaoViet Bank has min value at 0, in 2009 BaoViet Bank did not haveNPL and it is explained by the fact that BaoViet Bank is very new at that time andthereforeitsloanbookwasnotmatureenoughtoturntoNPL.Maxvaluei s capturedat0.114017 whichismorethan3timeshigherthanstandardrequirementofState Bankof Vietnam.

In terms of liquidity ratio, this variable has mean value of 0.0133972 whilestandard deviation value is captured at 0.0160224 Min and max values of liquidityratio of selected commercialbanksare0.002278 and0.129202.

0 0 8 5 7 9 0 7 I t s standard deviation value is calculated at 0.0531981 Min and max values for equityratioare0.023702 and0.413455.

Loan ratio has mean value of 0.5431772 or 54.31772% of the banks’ assetsareforlendingtothecustomers.Standarddeviationofloanratiovariableis0.1381626.Min valueis0.113904 and max value is0.841253.

Deposit ratio has mean value and standard deviation valued at 0.6280826 and0.1320094.Min and max values arecapturedat 0.25084 and0.893717.

In terms of income diversification ratio, mean and standard deviation valuesare captured at 0.0608661 and 0.0929968 Min and max values are also captured at0.00164and 0.792952.

Credit to GDP ratio’s mean value is 1.226694 while standard deviation valueis0.1392535 Minvalue iscalculated at1.04914whilemax value is1.41886.

32 Min and max valuesare1.10601and1.45328.

In terms of GDP growth rate, mean value is calculated at 0.0614925 orVietnam recorded average economic growth rate at 6.14925% during 2009-2018.Standard deviation value is 0.0060111 Lowest economic growth rate of Vietnamduring this period is 5.2474% and the country reached the peak in its economicgrowthrate of 7.0758%.

Intermsofinflationrate,meanvalueandstandarddeviationvalueare0.0661701 and 0.0473902 Min and max values are 0.008786 and 0.186755 It iscaptured that Vietnam suffered a year when inflation rate was more than two digitsnumber (18.6755%).

Intermsofexchangerate,thisvariableistransformedbyusingnaturallogarithm function Mean value and standard deviation value are 9.954161 and0.0747583.Min and max values are 9.79048 and10.0453.

Correlationanalysis

In this section, the author will generate Pearson correlation coefficient foreach pair of variables used in the research model A statistical test is conducted withp-value to check whether the relationship between two variables are statisticallysignificant.Obtained result ofPearsoncorrelationispresented asbelow:

ROA SIZE NPL LIQ EQR LOAN DEP

Source:Resultsarecalculatedby Stata, detailedin Appendix03 -Picture 2

Pearsoncorrelationispresentedbyamatrixinwhichther e l a t i o n s h i p betweeneach variableandoneothervariableiscalculated.Alongwiththecoefficient,astatisticaltestisconduct edtocheckwhetherthiscoefficientisstatistically significant As shown in table 4.2, ROA has statistically significant withSIZE,NPL,EQR,LOAN,DEP,IDR,OPR,CGR,GDPandERat10%significant level In which, ROA has negative relationship with NPL, LOAN, IDR, OPR andER.Otherwise, ROA has positive correlation with SIZE, EQR, DEP, CGR andGDP It is also concluded that the relationship between ROA and other variablesare mostly low or moderate Highest significant and positive Pearson coefficient iscapturedinthe relationship betweenROA andSIZE at0.3181.

Modelestimation

Pooledordinaryleast square(PooledOLS)

R-square=0.3520;AdjustedR-square=0.3203;F-test.11;Prob>F0.0000

(Note: ***, **, * are equivalent to significance level of 1%, 5% and

10%)Source: Results are calculated by Stata, detailed in Appendix 03 -

Picture 3Adjustedr- squareiscalculatedat0.3203or32.03%ofvarianceofROAis explainedb y b a n k - s p e c i f i c v a r i a b l e s , i n d u s t r y - s p e c i f i c v a r i a b l e s a n d m a c r o - economicvariables.F-testis11.11andp-valueforF- testis0.0000whichislower than 0.05 Thus, F-test is statistically significant at 95% confidence The effect ofeachindependent variableonROA inPooled OLSmodelisexplainedasbelow:

The coefficient of OPR and ER are -0.0038013 and -0.031288 respectively,whichtellsachangeinonepercentofOPRandERwillhaveaneffecttoachange in ROA in -0.0038013 and -0.031288 OPR’s p-value = ER’s p-value = 0.000 < α

=1%.ItisconcludedthatOPRandERhavenegativeimpactonROAbuttheeffectof these variables are not statistically significant at 95% confidence level In otherwords, IDR and OPR have effect on ROA with negative direction of relation andstatisticallysignificantat99%confidencelevel,meaningthatthehighertheOPR/ER ratio, the less efficient is the bank, leading to the decline in profitability ofcommercial banks and vice versa In contrast, the coefficient of SIZE is 0.0512939,T-test’s p-value = 0.000

< α = 1% It means that bank size has positive effect onROA and statistically significant at 99% confidence level The higher bank size, thehigherROA of commercial banksand viceversa.

Thec o e f f i c i e n t o f N P L i s - 0 0 5 7 8 2 4 4 T - t e s t v a l u e i s - 1 9 7 a n d p - v a l u e i s 0.050 = α = 5% Thus, t-test of NPL is statistically significant at 95% confidence Itis concluded that ROA of commercial banks is negative affected by their NPL level.The higher

NPL ratio, the lower ROA of the banks and vice versa On the otherhand,thecoefficientofDEPis0.0233087,t- testvalueis2.04andp-valueis0.042

α

= 10% Since p-value of LIQ is higher than 10%, the effect of LIQ toROA is negative but insignificant Similarly, the coefficient of INF is -0.0007308and p-value is 0.903 > α 10% so the impact of INF to ROA is negative butinsignificant.Incontrast,thecoefficientofCRDandGDPare0.0016474and0.0096277respectiv ely,CRD’sp-valueis0.571>α%;GDP’s p-valueis0.110

>α %,so the effectof CRDandGDP toROAispositive but insignificant.

Fixedeffectmodel(FEM)

(Note: ***, **, * are equivalent to significance level of 1%, 5% and

10%)Source: Results are calculated by Stata, detailed in Appendix 03 – Picture 4Overallr - s q u a r e i s c a l c u l a t e d a t 0 2 5 7 6 o r 2 5 7 6 % o f v a r i a n c e o f R O A i s explainedb y b a n k - s p e c i f i c v a r i a b l e s , i n d u s t r y - s p e c i f i c v a r i a b l e s , a n d m a c r o - economic variables F-test is 18.14 and p-value for the test is 0.000 which is lowerthan 5% Thus, F-test is statistically significant at 95% confidence The effect ofeachindependent variable onROA in FEMmodelisexplained asbelow:

The coefficient ofLIQ, OPR and ERare-0.2878617;-0.0049205and-0.0323325 respectively, which tells a change in one percent of LIQ, OPR and ERwill have an effect to a change in ROA in -0.2878617; -0.0049205 and -0.0323325.LIQ’s p-value = 0.002 α = 1 0 % Therefore,INFhasnoeffectonROA,contrarytotheautho r'sinitialexpectations.In other words, hypothesis 12 is rejected The result contradicts many findings ofother existing research such as Yuksel et al (2018); Nuhiu et al (2017); Ishfaq &Khan(2015),Nahm&

Exchangerate (ER)

H13: Foreign exchange rate has a negative impact on commercial banks'profitability The coefficient of ER is -0.031288 and p-value is 0.000 < α = 1% Therefore,ER has negative impact on ROA and statistically significant at 1% significancelevel This result meets the expectations of hypothesis 13 and consistent with theresults of previous studies of Almaqtari et al. (2018); Otieno (2015); Sayedi (2014).The result can be explained that when the exchange rate increases, the price offoreign exchange in the black market will rise much higher than the bank, leading tothe fact that people who have foreign currencies will sell to the black market ratherthan to the banks In addition, exporting enterprises that collect money in foreigncurrenciesw i l l a l s o t e n d n o t t o s e l l f o r e i g n c u r r e n c i e s t o b a n k s , i n s t e a d t h e y w i l l hold foreign currencies to serve their imports activities or wait for higher price tosell. Therefore, the bank's foreign currency purchase turnover tends to decrease,whichisnotenough toservetheneedto buyforeigncurrenciesofimportingbusinesses. This partly caused the bank profitability to decline due to the size of itsforeign currency trading business is reduced Moreover, with unstable exchange ratefluctuations, banksthatdonot havepolicies toensureexchangeraterisksm a y spendgreatamount ofexpensestocompensate forforeign exchangeactivities.

In this chapter, the author provided the analyses in order to understand thecentraltendencyofeachvariablethroughitsmeanvalue.Moreover,Pearsoncorrelation analysis is conducted to verity the relationship between variables Therewere 3 regression models which were firstly used, namely Pooled OLS, FEM andREM Then, some statistical tests were developed to choose which model is better.Obtained result shows that FEM is better than Pooled OLS in F-test and FEM isbetter than REM in Hausman’s test It was identified that FEM model faced up withheteroskedasticity issue In addition,there is the issue related to autocorrelation inthe dataset To fix the model estimation issues, FGLS was applied and obtainedresult showed that SIZE, EQR, LOAN, DEP, IDR,CGR and GDP have positive andstatistically significant effect on ROA In contrast, NPL, OPR and ER has negativeand significant effect on ROA Other variables (LIQ, CRD and INF), however,donothavesignificant effect on ROA.

Conclusion

The main research objective of this thesis is to measure the effect of factorson the profitability of commercial banks in Vietnam This research objective isfulfilled well throughout the establishment of different chapters The concept ofcommercialbankisdiscussedinliteraturereviewinwhichitisdefinedasa financialinstitution anditoperatesinthewayofholdingdepositandpayinginterests to the depositors and issuing credit to different economic sectors and tofacilitate economic development of a country.

It is denoted that the profitability isoneofthemostprominentperformanceindicatorsofcommercialbanks.Bankprofitability is defined as a relative number (a percentage), which expresses the ratiobetween profit and revenue Commercial bank profitability made during the yearrepresentsthe capability of making profit.

The author also collected empirical evidences to identify the factors affectingprofitability of commercial banks The outcome referred to an equation in whichbank profitability is measured by ROA and it is influenced by 13 factors Thesefactors are grouped into bank-specific factors (size, non-performing loans ratio,liquidityratio, equity ratio, loanratio, deposit ratio, income diversificationr a t i o , and operating cost ratio), industry-specific factors (credit to GDP ratio and creditgrowth rate of Vietnam), and macro-economic factors (annual GDP growth rate,inflation rate, and foreign exchange ratebetween VNDandUSD).

To measure the effect of these factors on the profitability of commercialbanks in Vietnam, the author collected secondary data from annual reports of allcommercial banks which are currently operating in the country The author appliedfour different regression techniques, namely Pooled OLS, FEM, REM and FGLSwith respective statistical test to check which regression technique is better thanotherand to diagnose predictedmodel.

The result of model choice analysis showed that both FEM and REM werebetterthanPooledOLS.Furthermore,FEMwasprovenasbetterthanREM.

However, the author identified that there was autocorrelation issue in the dataset.Ther esu lt of h e t e r o s k e d a s t i c i t y c h e c k r e ve a l e d t h a t F E M m o d e l di df a c e u p w it h thisissue.Tofixthemodelproblems,theauthorconductedFGLSregressiontechnique. Obtained result showed that ROA of commercial banks in Vietnam wasstatisticallys i g n i f i c a n t l y a f f e c t e d p o s i t i v e l y b y S I Z E , E Q R , L O A

N , D E P , I D R , CGRandGDP;whileNPL,OPRandERhavenegativeimpactonROA.I n addi tion,LIQ,CRDandINFdonotaffectROAandarenotstatisticallysignificant.

Recommendation

Banksize (SIZE)

Researchresultsshowthattheincreaseinthesizeoftotalbankassetspositivelyaffectbankprof itability.Inordertoincreasethesizeofbanks,commercial banksshould:

Firstly, increasing total assets by investing in more facilities, increasing loans(including business loans and personal loans) In addition, to expand the networkand bank size effectively, commercial banks need to have a specific plan to increasecapitalandimprovethequalityofproductsandservices,therebybringingprofitabilityto commercial banks.

The second is to expand more branches and transaction offices in denselypopulatedareasandindustrialzonestoenhancethepopularityofthebanktocustomers.

In addition to the two recommendations mentioned above, commercial bankscould also consider merging banks If a large bank merges with a small bank, orsmall banks themselves merge with each other, it will increase the size and networkof branches Commercial banks need to focus on asset quality as well as need to setupareasonablestructureinassetsandcapital(ensuretheminimumc a p i t a l adequacy ratio according to the State Bank of Vietnam’s regulations) to ensure theability to cope with any situation that may occur and to meet liquidity requirements.A rational asset and capital structure will help commercial banks maximize profitsandstrictly control risks.

Non-performingloan (NPL)

Commercial banks in Vietnam must focus on how to manage NPL level intheir lending portfolio The issue of bad debt leads to higher provision cost to thebanks and it reduces their profitability To deal with the bad debt issue, commercialbanksin Vietnammust furtherstrengthen theirrisk managementcapabilities.

In more detail, credit risk management must be setup in right manner withclear checking point in different stages of loan approval process For example, saleofficers must submit the loan applicant to independent units to avoid the interestconflicts.Commercialbanksmustsetupdifferentverificationinloanapprovalprocesstoav oidbadethicalbehaviorswhicharerisenfromthec o o p e r a t i o n betweensalesofficers andcreditapprovalofficers.

Commercial banks must develop a mechanism in which internal audit teammustmake a sitevisitto differentbranchestomonitor their activities.

Commercial banks must establish credit monitoring team to ensure that alllending activities of the branches are monitored in daily basis The branches whichare exceedspecific NPLt h r e s h o l d w i l l b e s t o p p e d g r a n t i n g n e w l o a n s a n d t h e y mustfocusonthe collection ofoverdue debt.

Commercial banks should establish independent debt collection unit to dealwith overdue case This unit works under a process to be characterized by pre- overdue,overduebutnotturningtobaddebtandbaddebtcollections t a g e Differentstageofde btcollectionmustbedefinedwithclearrolesandresponsibilitiesof debt collection teams.

CommercialbanksshouldusetechnologiessuchasSMStoremindthecustomers about overdue debts or to help the customers to submit the letter of loanrestructurewhen they faceupwithfinancialinstability.

Commercial banks in Vietnam should also work closely with VietnamAssetManagement Company (VAMC) to resolve high bad debt case and therefore theycangain thebenefitfrom provision reversion.

Equity ratio (EQR)

The research results show that the ratio of equity to total assets has a positiveeffect on the rate of return on equity Thus, the increase in the size of equity willcontributetoincreasingprofitsofcommercialbanks.Commercialbankscanincreasethe sizeof equity through thefollowing forms:

Firstly, increasing equity through issuing shares to existing shareholders andthe public or raising capital from existing shareholders, capital contributors anddomestic/ foreign investors, increasing the percentage of accumulation capital fromaftertax profits.

It is advisable to merge/ acquire small and local domestic banksthat are difficult to sustain in the market to create banks with sufficient financialstrength,larger equity, betterfinancial capacity.

Thirdly, bank managers should calculate the optimal ratio of equity that thebank needs to maintain so that the increase in equity to the optimal ratio canh e l p the bank improve its profitability In order to achieve economic benefits effectively,bank managers should pay attention to improving the efficiency of managementcapacity to use the capital resources properly and avoid overcapacity of too muchnon-profit capital In other words, banks managers should come up with specificcapital raising strategies in each period and avoid the situation of continuous capitalincrease over a period of time without an effective plan Bank managers should alsocalculate additional equity options not only to improve capital adequacy ratios andbutalso to improve theoperationalefficiencyof thebank.

In addition, commercial banks which have not been listed in stock marketmust find the difficulty to increase owners’ equity since they are not able to accesswider source of capital in the stock exchange market Therefore, these banks shouldcooperate with foreign banks in the globe through selling their stakes to foreigninvestors It is also recommended that commercial banks in Vietnam should workwitht h e S t a t e B a n k o f V i e t n a m a n d o t h e r g o v e r n m e n t a l b o d i e s i n V i e t n a m t o increase the maximum foreign ownership ratio since it allows the banks to acquiremoreprofessionalknowledgeandexperiencesfromforeignbanks Commercialbanks which have been listed in Vietnam stock exchange markets should take intoaccounttheiroperationstoensuresafeandsoundinfinancialstructuresandoperating activities to increase the trust from the investors and therefore they canincrease equity ratio through higher stock price traded in the market Commercialbanks should establish a team to work with key investors to understand their needsduring the investment period and therefore the banks can provide the decisions toadjustbusinessin the positive way.

Loanratio (LOAN)

Researchresultsshowthatincreasingtheloanratiowillincreasetheprofitability of commercial banks In order to increase loan ratio, or in other words,increasethe profit of commercial banks,the author recommendsthe following:

First is to issue credit policies such as applying attractive and appropriateinterest rates for lending activities with diverse loan terms and promotion programs,boostingconsumerloansasconsumerloansplayaveryimportantroleintheeconomy:meeti ngcapitalneedstomaintainessentialneedsforcustomers,aswellas contributingtoeconomic development investment, promotingthe process ofcapitalconcentration.

The second is to diversify the customer base by expanding the appropriatelending packages, serving the needs of many customer segments, increasing thenumberofcustomersthroughmarketingandadvertisingpolicies.S p e c i f i c a l l y , bank s should set up customer experience management department, specializing indesigningandimplementingdemandassessmentprograms,marketsurveysforinternalandext ernalcustomersaswellascustomerresearchprogramsf o r improvingservicequalityanddevelo pingnewproducts.Therebyp r o v i d i n g research results, customer service quality assessment or information from customerresearch programs to related units/ personnel to support branches/sub-branches tobetteru n d e r s t a n d t h e i r c u s t o m e r s B a n k s s h o u l d r e g u l a r l y c o n d u c t m e a s u r e m e n t , evaluation and perform quality analysis of existing products and services to identifythe limitations that need to be improved Developing solutions to improve servicequalityaswellasimproveexisting productsto suitchanges in customers'needs.

Furthermore, bank is the professional financial institution in economic andfinancial field, so bank can consider tob e c o m e f i n a n c i a l a d v i s e r f o r c u s t o m e r Banks should give advice and assist enterprises with effective plans and businessprojects (especially large enterprises that have business projects with big budgets,helpingthembuildplans,suggestqualitysuppliers,assessthereputationofbuyer s,

Depositratio (DEP)

Researchr e s u l t s s h o w t h a t i n c r e a s i n g t h e d e p o s i t s c a l e w i l l i n c r e a s e t h e profit of commercial banks Deposit activities play a vital role in commercial banksand bring significant profits to the bank, so changes in deposit scale will impactbank profits significantly Therefore, in order to increase thedeposit scale, theauthorrecommend thefollowing:

First is to issue mobilization policies such as applying attractive and suitableinterest rates for mobilizing capital from promotions/ incentives for customers withhigh deposits at the counter, activities of giving gifts to customers on holidays andbirthday, encouraging customers to use the mobile app by applying a higher depositrate.

Second is to enhance marketing activities to promote products and services,widelyintroducesavingsproductstocustomersonmultiplemediasucha s facebook, email, website, mobile app, leaflets Advertising content needs to beconcise,easy to understandbut still canremain in mindsof customers.

Furthermore,banksshouldconsiderdevelopingtransactionnetwork,expanding their operating areas to increase customers base Bank managers need tohaveaspecificplanforinvestigatingmarketdemandintheareawheretheyintend toopentransactionpoints,estimatingpossiblecostsandprofitsinthefuture,limitationsandadva ntagesthatbanksmayencounterwhenexposedtoan e w market, thereby making the appropriate decision In addition to building incentivepolicies for new customers, banks should also focus on developing preferentialpolicy for specific groups of customers (loyal customers, customers who have greatcashflow, …).

Besides,banksalsoneedtoenhancetheimage,customerserviceandprofessionalism of their employees so that customers can have the best experiencewhen using the bank's products and services, thereby building brand and reputationtogain trust fromcustomers.

Incomediversification ratio (IDR)

Commercial banks should not depend only/mostly on interest income but onnon- traditionalactivitiesaswell.Theyshouldfocusonprovidingsolutionstodevelop modern banking services, depending on each type of customer (personal orbusiness) to offer the appropriate service such as credit card fees and commissions,financialadvisoryservices,import/exportfinance,internationalpayments,centr alized account management, insurance, granting POS machine Banks shouldencourage customers to use SMS banking, mobile app, internet banking, integrateQR pay on internet banking, link payment via e-wallets such as Momo, Airpay,Moca,

Increasing non-interest income from commissions and fees by promotingcross- sellingo f p r o d u c t s a n d s e r v i c e s t o e x i s t i n g c u s t o m e r s , s t i m u l a t i n g d e m a n d andsellingmoreproducts,servicesthatcustomershavenotused,especiallyfocu son exploiting groups of customers who have loans at banks Providing non-cashpayment methods, encouraging customers to use card by implementing attractivepromotions (for example: top 10 Visa cardholders with the highest total paymentvaluein theweekwill get1 luckycode to join thelucky draw program).

Increasing profitability from foreign currency trading: Cooperate with moneytransfer serviceprovidersaroundthe worldtoreceive remittances(fore x a m p l e : Citi,WellsFargo…).

Operatingcostratio(OPR)

Commercial banks need to improve operating cost management efficiency.Researchresultsshowthattheratioofoperatingexpensestoprofitaftertaxnegativelya ffectsthe profitabilityofcommercial banks Therefore, commercialbanksneedto havestreamlinedmeasurestoreducewastetoincreaseprofitability.

Specifically,operatingcostsofthebankincludesalaries,groundrent,depreciation, management costs However, not every cut will be an effective plan.For example, reducing salaries will not create incentives for employees, leading to adecrease in the quality of labor and failure to attract labor resources If excessivemarketing communication costs are reduced, that bank andi t s p r o d u c t s / s e r v i c e s will not be widely known to customers Therefore, depending on the characteristicsof each bank, bank managers need to determine clearly what costs can be flexiblyincreased or decreased from time to time, which expenses must be reduced andwhichcannot be reduced.

For expenses related to daily activities such as printing paper, ink, businessexpenses, reception costs, stationery, transportation fees, telephone, documents should be developed norms and strict control Cost savings need to be built into acultureforevery bank, frommanagement to staff.

Forpersonnelpolicies,banksshouldeffectivelyuseexistinghumanresources,improveth equalificationsofhumanresourcesandavoidunevendistributionofpersonnel(avoidthesituatio nwhentherearebranchesthatareredundant,andtherearebranchesthatlackpersonnel).Bes ides,theapplicationof advanced technology will help reduce the time and effort in banking operations,thereby saving costs.

Creditgrowth rate (CGR)

In order to ensure safe and effective banking activities and credit growth inaccordance with the State Bank's orientation, banks must take effective measures tomanageand improve creditquality in theirgranting-credit operations.

Specifically, banks need to develop and issue internal regulations to guideandcontrol credit quality,enhance the appraisal, inspectionandsupervision ofcustomers' loan use purposes, ensure the right purpose and limit newly arising baddebts Limitingthe level of credit concentrationf o r p o t e n t i a l l y r i s k y f i e l d s w i t h longp a y b a c k p e r i o d R e s t r u c t u r i n g c r e d i t s t r u c t u r e i n t h e d i r e c t i o n o f p r i o r i t i z i n g the concentration of loans for agriculture, rural areas, exports, small and mediumenterprises,hi- techenterprises.Atthesametime,regularlyorganizet r a i n i n g courses to improve professional knowledge as well as practical knowledge about themarket in order to improve the professional qualifications of employees, therebylimitrisks for creditactivities.

In addition, bank managers need to review and strengthen risk management,activelyimproveregulationsonassets,deductions,methodsofsettingupriskprovi sionsand theuse of provisions to handle risksin bankoperations.

Furthermore, bank managers should also proactively build an internal creditratingsystemandacollateralsratingsystembycalculatingtheassessmentcrite riainline withthecharacteristics of each bank.

Grossdomestic product(GDP)

TheresearchresultsshowthatGDPhaspositiveimpactonROAofcommercialbanks.The refore,inordertocreateamoreeffectivebusinessenvironment,governmentagenciesneedtomak epolicyrecommendationstoaccelerate the growth of GDP and at the same time endeavor to maintain GDPgrowth.

Firstly, efforts should be made to immediately handle loss-making projects,handle bad debts and remove difficulties for production and business to developmarkets,increase purchasingpowerand boostconsumptionof goods.

Secondi s t o f o c u s o n i mp ro vi ng l a b o r p r o d u c t i v i t y , o p e r a t i o na l e f f i c i e n c y , competitivenesso f s e c t o r s a n d e v e n t h e e c o n o m y , e s p e c i a l l y p r o m o t i n g t h e applicati onofhigh technology,taking advantageofopportunitiesof4.0technology. Thirdly, speeding up the reform of administrative procedures in order tocreatefavorableconditionsforindividualsandbusinessesto invest.

Inshort,thegovernmentagenciesneedtocarryoutsynchronousa n d effective solutions to macroeconomic stability, create an environment and a drivingforceforeconomicdevelopment,improveproductivity,efficiencyandcompetitiveness as well as improve thequalityofhumanresources, strengthenscientificandtechnologicalpotentialstocontributetostabilityandpromoteeconomic growth.

As for commercial banks, when the economy grows, they should focus moreon gaining market share and promoting more in services In contrast, when theeconomydeclines,itisnecessarytoconsidersolutionstonarrowthelevelofpromotingservicesto the market.

Exchangerate (ER)

Researchresultsshowthatexchangeratehasanegativeimpactoncommercialbanksprofit ability.Whentheexchangerateincreases,theforeigncurrency trading in particular and the foreign currency business in general of thebank are narrowed because individuals and businesses prefer to buy and sell foreigncurrenciesontheblackmarket.Therefore,inordertohelpcommercialbanksincrease profitability, the State management agencies need to set and implementpolicies to limit the illegal trading of foreign currencies and contribute to stabilizingtheexchange rateonthemarket:

Firstly,thepurchaseandsaleofforeigncurrencystilltakesplacequiteactivelyintheblackm arketdespitetheregulationsthatareonlyallowedto exchangeforeigncurrencytransactionswithcommercialbanks,sothes t a t e agencies need to strictly manage and control more about this issue, as well asadministrative sanctions on the above acts to limit this issue in order to ensure thelegitimacyandstabilityofthemarket,toavoidaffectingcommercialbankoperations.

Secondly, the State needs to have sufficient foreign exchange reserves to bemoreflexible and proactive in adjustingthe exchange rateto be stable.

Limitationof the study

- Time: During short period of time of completing the study, the author getssomedifficultiesto collectdata.

- Sampleparticipants:Lackoffullresource/ informationduringthestudyperiod.Therefore,thestudydoesnotpenportraittheo verallpictureofprofitabilityof thebankingindustryin Vietnam.

- The findings of this study cannot demonstrate the global situation becausethisstudy isconfined toVietnambanking sector only

Futureresearch directions

The thesis was developed for commercial banks in Vietnam in last 10 years,from

2009 to 2018 This time covered two economic cycle in which economicdownturnwashappenedduring2008-

2012andeconomicrecoveryafter2012.Different economic cycle can be used to explain for the reason of not so manyindependent variables affected significantly ROA of commercial banks in Vietnam.It is recommended that a dummy variable must be developed to capture differenteconomic cycle during the period Secondly, it was readdressed that the maximumROA’s variance explained by independent variables was found in REM model withoverallR- squarewas31.41%whileFEMmodelandPooledOLSmodelonlyexplainedfor25.76%and32.03% ofvarianceofcommercialbanks’ROA.Itmeans that there are other factors which can explain for the variance of ROA For futureresearches, it is recommended that other researchers should take into account thedifference in economic cycle as well as the addition of more independent variablesintotheirresearch models.

In this chapter, the author summarized the findings from previous chapters.The output of model estimation was compared with previous empirical evidences tocheck the similarities and the differences A set of recommendations was developedto address the importance of significant independent variables, including SIZE,EQR, NPL, LOAN,DEP, IDR, OPR, CGR, ER and GDP of the economy Thischapter also highlighted the key limitations and it provided the futureresearchdirections. xviii

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Year Bank ROA SIZE NPL LIQ EQR LOAN DEP IDR OPR CRD CGR GDP INF ER

Picture7:Modelchoice between FEMand REM