VIETNAM ACADEMY OF SOCIAL SCIENCES GRADUATE ACADEMY OF SOCIAL SCIENCES MAI THI HONG FACTORS AFFECTING FINANCIAL LEVERAGE RATIO AT COMMERCIAL BANKS A CASE STUDY OF VIETNAM AND THAILAND Major Internatio[.]
VIETNAM ACADEMY OF SOCIAL SCIENCES GRADUATE ACADEMY OF SOCIAL SCIENCES - MAI THI HONG FACTORS AFFECTING FINANCIAL LEVERAGE RATIO AT COMMERCIAL BANKS: A CASE STUDY OF VIETNAM AND THAILAND Major: International Economics Major code: 31 01 06 PHD IN ECONOMICS THESIS Ha Noi – 2023 The research was completed at: VIETNAM ACADEMY OF SOCIAL SCIENCES GRADUATE ACADEMY OF SOCIAL SCIENCES Scientific Advisors : Assoc Prof Dr Nguyen Manh Hung Assoc Prof Dr Nguyen Thi Hien Counterargument 1: Assoc Prof Dr Luu Ngoc Trinh Counterargument 2: Assoc Prof Dr Ha Van Hoi Counterargument 3: Prof Dr Do Duc Binh The thesis is defended at the Academy-level Thesis Judging Committee, meeting at the Graduate Academy of Social Sciences, Vietnam Academy of Social Sciences, 477 Nguyen Trai Street, Thanh Xuan District, Hanoi At ,2023 The thesis can be found at: - National Library of Vietnam - Graduate Academy of Social Sciences Library INTRODUCTION Rationale Commercial banks are considered a special type of enterprise that operate in the currency sector, in which equity only accounts for a small proportion of total capital Therefore, they always involve many risks In particular, during the global financial crisis of 2007-2009, many commercial banks overuse mobilized capital to conduct risky business activities, which has created a need for research on the selection of the optimal structure between mobilized capital and equity Regulation of financial leverage ratios in the commercial banking system has also been mentioned in Basel International Capital Treaties The specific roadmap for the application of the financial leverage ratio is more strictly regulated in the Basel III Capital Treaty 2010 In Vietnam and Thailand, commercial banks are on their way to complete capital adequacy regulations that follow Basel II standards Thailand and Vietnam are both part of ASEAN Currently, both countries have been strengthening cooperation in using technology to meet development requirements in the new economic period such as knowledge exchange, production innovation, cooperation in the field of finance The system of credit institutions in Thailand and Vietnam also has many similarities in organizational structure including: commercial banks, nonbank credit institutions, microfinance institutions, foreign bank branches and representative offices of foreign banks The operation of commercial banks follows Basel international practice, which is closely supervised by the central bank and serves as the backbone of the economies of both countries According to financial statements of 28 commercial banks in Vietnam and 11 Thai commercial banks in the period 2011-2020, the debt ratio of commercial banks in Vietnam has tended to decrease slightly since 2017 from 92.9% to 92.5% in 2020 It can be seen that the demand for capital mobilized by commercial banks in Vietnam is very large to serve the capital needs of individuals and enterprises before the requirements of ensuring the government's socio-economic development goals However, the current increase in high debt ratios raises concerns from the problems of using capital by commercial banks; in particular, focusing on credit growth, investment activities, business model transformation, business performance, management and stability of commercial banks The Asian financial crisis of 1997 left Thailand's commercial banking system reeling, forcing restructuring to overcome the crisis and operate more stably The deep reduction in the debt ratio of Thai commercial banks also reflects the reality of hot credit growth, uncontrolled use of financial leverage as a result of real estate credit activities, the financial market developing too fast while revealing many inadequacies in management supervision, especially the bond market corporate vouchers Thailand's commercial banking system addresses the consequences of credit risks (intra-table and off-balance) and reduces the competitiveness of Thai commercial banks' credit activities At the same time, this is also said to be a sign of actively transforming their traditional business to their non-traditional activities In fact, Thai commercial banks tend to transform their business models faster and stronger than Vietnam Currently, Vietnam's commercial banking system is also facing difficulties that Thailand's commercial banking system faced in the past The problem of bonds and real estate credit has caused commercial banks to restructure their businesses, restructure capital and use capital more efficiently Given the comprehensive relationship and cooperation between Vietnam and Thailand and the importance of commercial bank capital in policy making and governance of commercial banking activities, this study explores whether there are any similarities or connections to the financial structure of commercial banks in the commercial banking system These two developing countries or not To answer this, the author has chosen the research topic "Factors affecting financial leverage ratio at commercial banks: A case study of Vietnam and Thailand" as the research topic for the doctoral thesis Research Objectives 2.1 General Objectives The thesis was conducted for the purpose of identifying and assessing the actual status of factors affecting the financial leverage ratio of commercial banks in Vietnam and Thailand From there, the thesis proposes policy implications for the use of financial leverage ratio for commercial banks in Vietnam in the context new through empirical evidence in Thailand and Vietnam 2.2 Specific Objectives In order to contribute theoretical and practical basis related to factors affecting the financial leverage ratio of commercial banks, the thesis focuses on solving with specific objectives as follows: Assess the current status of financial leverage ratio of commercial banks in Vietnam and Thailand Identify factors affecting the leverage ratios of commercial banks in Vietnam and Thailand Measure and evaluate factors affecting the leverage ratio of commercial banks of Vietnam and Thailand Propose financial leverage ratio policy implications for commercial banks in Vietnam through Vietnam and Thailand empirical research Research Questions What is the current status of financial leverage of commercial banks in Vietnam and Thailand? What factors affect the leverage ratios of commercial banks in Vietnam and Thailand? What is the influence and extent of the impact of factors on the financial leverage ratio of commercial banks in Vietnam and Thailand? What are the policy implications for the financial leverage ratio of commercial banks in Vietnam through Vietnam and Thailand empirical research? Research subjects and scope 4.1 Research Subject Factors affecting the financial leverage ratio of commercial banks 4.2 Research Scope */Spatial Scope: Factors affecting the financial leverage ratio of commercial banks of Vietnam and Thailand */Study duration: The thesis is studies on the current situation of factors affecting the financial leverage ratio of commercial banks of Vietnam and Thailand in the period 2010-2020 From there, the thesis proposes policy implications, recommending conditions to implement solutions to use financial leverage for commercial banks of Vietnam to 2025 and vision to 2030 */ Inclusion: The thesis aims to systematize the theoretical and practical basis related to the factors affecting the financial leverage ratio of commercial banks Develop a research model to test hypotheses and assess the current situation of factors affecting the financial leverage ratio of commercial banks of Vietnam and Thailand in the period 20102020 From there, the author proposes policy implications of scientific and practical significance and recommendations to improve the efficiency of using financial leverage ratio for commercial banks in Vietnam in the new context */ Subject: Micro entities are defined as commercial banks and macro banks are the government and the State Bank of Vietnam Methodology The thesis uses review methods, literature analysis, and quantitative research methods with secondary data Significance of Research 6.1 Scientific Significance The thesis systematized a number of theoretical problems about the financial leverage ratio of commercial banks Theoretically, it can be seen that the decision of commercial banks to choose the optimal financial leverage ratio can be said to be an important issue in order to limit risks in commercial banking activities, while helping to minimize capital costs and maximize the added value of commercial banks Since capital is critical to the profitability and survival of commercial banks, identifying sources of capital that can absorb risk and make commercial banks remain competitive is an important function of financial managers Through the analysis of previous researches and theories of financial leverage, the thesis has introduced a new perspective on the financial leverage of commercial banks in Vietnam and Thailand The study filled the research gap by building a SYS-GMM regression model to assess the factors affecting the financial leverage ratio of commercial banks by studying the role of off-table income and stability of commercial banks in addition to traditional micro and macro factors 6.2 Practical Significance The thesis deeply analyzed and assessed the current situation and factors affecting the financial leverage ratio of commercial banks in Vietnam and Thailand in the period 2010-2020 From there, the thesis identified the change of financial leverage and generalizing the role of decisive factors to the use of financial leverage by commercial banks At the same time, compare factors affecting the financial leverage ratio of commercial banks in Vietnam and Thailand The novelty of the topic is evident in quantifying the role of off-balance sheet accounts, operational risks in addition to traditional macro and financial characteristics factors to the financial leverage ratio of commercial banks in Vietnam and Thailand This study further selected Thai data to highlight similar and different international economic issues, in order to objectively assess the leverage ratios and factors affecting the leverage ratios of commercial banks in developing countries in Asia The study highlights that it is best for commercial banks to reduce debt ratios and maintain relative equity-to-asset ratios in order to maintain stability Commercial banks need to reassess credit risks, strengthen risk management capacity to have a reasonable lending expansion strategy to ensure the Government's economic development goals, while ensuring capital adequacy, effectively controlling internal bad debts and potential off-balance-sheet bad debt risks In fact, off-balance sheet activities of commercial banks are increasingly popular and have been used more in business activities both in Vietnam and Thailand in the new context However, this activity has not really developed and contributed much to the income of commercial banks, even some off-balance sheet amounts and accompanied by risks arising affecting the safety of the commercial banking system The increase in offbalance sheet accounts will create pressure on capital, liquidity and risk; therefore, it will reduce the financial leverage ratio The study also concluded that only large commercial banks tend to expand their scale and are interested in developing investment, while the smaller of which tend to maintain them From the current situation analysis results and the discussion on the impact of factors on the financial leverage ratio of commercial banks, the thesis proposed policy implications of scientific and practical significance and recommendations to improve the efficiency of using financial leverage ratios for commercial banks in Vietnam in the new context CHAPTER LITERATURE REVIEW 1.1 Overview of researches on factors affecting the financial leverage ratio of commercial banks 1.1.1 Researches about micro factors affecting financial leverage ratios of commercial banks 1.1.1.1 Multinational researches Gropp and Heider (2009) analyzed the factors influencing the leverage ratios of the 200 major U.S and European commercial banks from 1991 to 2004 Afolabi (2014) assessed the role of commercial bank ownership structure in the financial leverage ratios of 244 commercial banks across 44 countries in Asia, Africa and Latin America Anarfo (2015) studied the leverage ratios of commercial banks in 37 countries in sub-Saharan Africa from 2000 to 2006 Al-Mutairi and Naser (2015) studied the capital structure of commercial banks in the Gulf Cooperation Group (GCC) The study used table data of commercial banks from 2001 to 2010 Umar and Sun (2016) studied the commercial banking and financial leverage ratios of BRICS countries for the period 2007-2014 Of these 188 banks, 24 are Brazilian, 64 are Russian, 62 are Indian, 24 are Chinese and 14 are South African Al-Harby (2019) compared the factors affecting the leverage ratios of 79 Islamic banks and 139 convertible banks in 16 countries in the Middle East (MENA) region from 1989 to 2008 1.1.1.2 Researches in developing countries in Europe Caglayan and Sak (2010) studied the factors affecting the leverage ratios of 25 banks in Turkey from 1992 to 2007 Giordana and Schumacher (2012) studied the factors affecting leverage in Luxembourg's banking sector from the first quarter in 2003 to the first quarter in 2010 1.1.1.3 Researches in developing countries in Africa Ayanda et al (2013) studied the factors affecting the financial leverage ratio of 05 major commercial banks of Nigeria from 2006 to 2010 Kusi et al (2016) studied the factors affecting the financial leverage ratio of 07 commercial banks listed in Gana Research data are extracted from financial statements of commercial banks from 2005 to 2012 Assfaw (2020) factors influencing the decision of private commercial banks in Ethiopia to use financial leverage from 2010 to 2018 1.1.1.4 Researches in developing countries in Asia besides South East Asia Sheikh and Qureshi (2017) analyzed the impact of factors on the leverage ratios of 20 converted commercial banks and 05 Islamic banks in Pakistan between 2004 and 2014 Suntraruk and Xiaoxing (2017) studied the leverage ratios of 25 listed commercial banks in China between 2003 and 2015 Abeysekara (2021) studied the capital structure of commercial banks in Sri Lanka for the period 2017-2019 1.1.1.5 Researches in Vietnam, Thailand and some South East Asian countries Kamil and Mansor (2014) studied the capital structure of commercial banks in Malaysia from 2002 to 2012 Tita and Robin (2016) used regression model analysis of table data showing that ROA, growth, tax shield negatively impacted the financial leverage ratios of 21 commercial banks in Indonesia from 2007 to 2012 Astuti (2018) analyzed the impact of factors on the financial leverage ratios of 26 commercial banks in Indonesia between 2014 and 2016 In Thailand: Allen et al (2013) examined the determinants of the capital structure (leverage ratio) of 14 Thai commercial banks between 1999 and 2008 Sakunasingha et al (2018) explored the key determinants of the capital structure of 14 Thai commercial banks from 2004 to 2014 In Vietnam: Ngo Hoang Vu (2020) said that bank size, collateral value, credit growth, asset growth affect the capital structure of commercial banks in the same direction In contrast, the factor of profitability on total assets and fixed assets, the factor of commercial banks with large state capital has the opposite effect Le Thi Tuan Nghia and Pham Manh Hung (2016) analyzed the factors affecting the financial leverage ratio of 22 commercial banks in Vietnam from 2009 to 2014, showing that ROA negatively impacted the debt to asset ratio The size of the bank has a direct relationship Tin and Diaz (2017) studied the factors affecting the financial leverage ratio of 31 commercial banks in Vietnam in the period of 20092014 1.1.2 The study of macro factors affecting the financial leverage ratio of commercial banks 1.1.2.1 Researches in BRICS countries Umar and Sun (2016) argued that the new Basel III regulations must be implemented gradually and gradually to avoid stock market turmoil Bank executives must be more cautious as deadlines for implementing new, stricter capital rules approach Moreover, different types of policies must be applied to banks of different sizes 1.1.2.2 Researches in developing countries Kusi et al (2016) made recommendations that the Gana government should pursue policies to reduce the cedi depreciation rate, as well as reduce the level of inflation compared to developed countries Since operational efficiency is important in determining financial leverage, banks should optimize costs and be cautious when accessing high-interest capital to mobilize loans to meet the needs of economic sectors Sheikh and Qureshi (2017) argue that in need of improving the regulatory framework in Pakistan, policymakers in Pakistan need to provide a conducive business environment for banks as well as non-financial companies so that they can make their decisions optimally not only as required by regulation but also respond flexibly their internal attributes and make it possible for them to determine a balanced capital structure to maximize the interests of shareholders Al-Harby (2019) compared the leverage ratios of 79 Islamic banks and 139 convertible banks in 16 countries in the Middle East (MENA) region, showing that high inflation makes Islamic banks less leveraged and riskier than conventional banks According to Assfaw (2020) and Abeysekara (2021), commercial banks should pay due attention to microeconomic variables and macroeconomic conditions while clearly defining the optimal financial structure that can minimize the weighted average cost of capital and enhance the value of commercial banks 1.1.2.3 Researches in Vietnam and Thailand 2.1.3.5 Pecking Order Theory 2.1.3.6 Market-timing Theory 2.2 Financial leverage ratio of commercial banks 2.2.1 Capital of commercial banks 2.2.1.1 Capital raised via deposit account 2.2.1.2 Borrowed capital 2.2.1.3 Owners’ capital 2.2.2 Financial leverage ratio of commercial banks 2.2.2.1 The concept of financial leverage ratio of commercial banks There is no single measurement that can be used as a representation of capital structure The researchers agree that measures of capital structure should vary according to the purpose of the analysis Rajan and Zingales (1995) propose total debt to total assets ratio as the most appropriate measure of financial leverage because and early on provides a better warning sign of default risk and is a more accurate picture of past financing choices Most research studies in the banking sector use financial leverage ratios that measure capital structure A commercial bank's leverage ratio is measured by its debt-to-total assets ratio (Sheikh and Qureshi, 2017; Sritharan, 2014; Almutairi and Naser, 2015) Total debt Financial leverage ratio = Total Asset 2.2.2.2 Significance of financial leverage ratio in commercial banks 2.2.3 Capital and financial leverage regulations of commercial banks according to Basel standards and CAMEL rating system 2.2.3.1 For Basel standards Excessive leverage by banks is considered by many to be one of the factors contributing to the global financial crisis (FSB, 2009) Therefore, the Basel Committee has introduced leverage ratios to supplement the minimum capital requirements This ratio was added by BCBS in response to criticism of the reliance of previous frameworks on banks' own internal models in setting capital requirements BIS (2011) argues that requiring leverage ratios will help prevent excessive leverage accumulation in the banking system, as happened during the global financial crisis The recommended leverage ratio is calculated by comparing tier capital with total assets at risk (BIS, 2011) Tier capital Commercial bank leverage ratio according to BIS >3% = (2011) Total assets at risk 2.2.3.2 For CAMEL rating system 11 Commercial banking assesses the overall performance of commercial banks by implementing a regulated commercial banking supervision framework One such measure of monitoring information is the CAMEL rating system that first went into effect in the United States in 1979 (Gupta, 2014) The CAMEL rating system was first introduced by U.S supervisory authorities for spot inspection of commercial banks 2.2.4 Evaluation and application of research theories on financial leverage ratios of commercial banks Table 2.1 Application of research theories on financial leverage ratios of commercial banks Author(s) Theory Application in research Modigliani and Miller (1958, 1963) M&M theory The theory is descriptive and does not explain exactly how much leverage is appropriate Tax shield, bank size, non performing loan ratio, Capital structure profitability, inflation, liquidity, trade-off theory growth opportunities and tangible asset ratio Ownership structure, corporate Jensen – Meckling governance, dividends, growth Agency theory (1976) opportunities and banking stability Earnings, growth and share Stephen A Ross Signalling theory price, market value of the (1977) enterprise Quy mô ngân hàng, tỷ suất sinh Myers and Majluf Pecking order lời, khoản, tài sản hữu (1984) Theory hình, sách cổ tức, tăng trưởng kinh tế Earnings, growth and share Baker and Wurgler Market timing price, market value of the (2002) hypothesis enterprise Source: Synthesis of theories 2.3 Factors affecting the financial leverage ratio of commercial banks 2.3.1 Microelements Kraus and Litzenberger (1973) 12 From theories related to financial leverage ratio and empirical studies, the thesis has synthesized micro factors affecting the financial asset ratio such as: Bank size; Rate of return on assets; NPL ratio; Liquidity; Growth opportunities; The ratio of tangible assets; Dividend policy; Tax shield; The ratio of operating expenses; Income fluctuations; Business risk; The ratio of off-balance sheet amounts; The stability of the bank; Cash flow control; Type of ownership; Centralized possession 2.3.2 Macroelements Economic growth; Inflation; Monetary policy; Stock Market Conditions CHAPTER RESEARCH METHODOLOGY 3.1 Research hypotheses Research Hypotheses: Hypothesis H1: The ratio of off-balance sheet accounts has the opposite effect on the financial leverage ratio of commercial banks Hypothesis H2: The stability of banks has an inverse impact on the financial leverage ratio of Vietnamese commercial banks Hypothesis H3: Return on assets (ROA) has a direct relationship with the financial leverage ratio of Vietnamese commercial banks Hypothesis H4: The NPL ratio has an inverse relationship with the financial leverage ratio of Vietnamese commercial banks Hypothesis H5: The size of banks has a direct relationship with the financial leverage ratio of Vietnamese commercial banks Hypothesis H6: Economic growth has a direct relationship with the financial leverage ratio of Vietnamese commercial banks Hypothesis H7: Inflation has an inverse relationship with the financial leverage ratio of Vietnamese commercial banks 3.2 Research variable measurement models and methods 3.2.1 Research model The research model is expressed through the regression equation as follows: Among them: LEV (financial leverage ratio), ZSC (bank stability), OFFB (off-balance sheet to assets ratio); SIZE (bank size), NPL (NPL 13 ratio), economic growth (GDP) and inflation (CPI); I,T is Bank I, time T for the period 2010-2020; βk is the regression coefficient; ε is the residual Table 3.2 Measurements of research variables Variables Measurements Source LEV Financial leverage ratio ROA Return on Assets OFFB Off-balance sheet to asset ratio Sritharan (2014), Assfaw (2020) Amidu (2007), Sritharan (2014), Mutairi and Naser (2015) Adrian and Shin (2010); Giordana and Schumacher (2012) Impact Direction +/- - ROA+ETA SDROA ZSC ROA is the Return on Assets ratio, ETA is Equity to Assets ratio SDROA is the standard deviation of ROA SIZE Natural logarithms of assets NPL Non-performing loan ratio GDP % of annual GDP change CPI % annual change in consumer price index Lepetit and strobe (2014), Umar and Sun (2016) Sritharan (2014); Assfaw (2019b) Allen et al (2013), Umar and Sun (2016) Muthama and cộng (2013) Avci and Çatak (2016) Anarfo (2015); Avci and Çatak, (2016) - + - +/- +/- Source: Previous researches Measure research variables Research Data The data used in the study was collected from audited financial statements and annual reports of 28 Vietnamese commercial banks and 11 Thai commercial banks between 2010 and 2020 The criteria for sample 3.2.2 3.3 14 selection are banks with full financial statements including balance sheet, statement of operating statements, statement of cash flows and notes to financial statements In addition, data is also collected from the World Bank (WB), websites of commercial banks, central banks Data used is compared and compared with many different sources to ensure reliability and accuracy 3.4 Data processing method 3.4.1 Descriptive statistics 3.4.2 Correlation analysis 3.4.3 Table data regression validation analysis 3.4.4 GMM model regression and hypothesis testing CHAPTER CURRENT SITUATION OF COMMERCIAL BANK FINANCIAL LEVERAGE RATIO IN VIETNAM AND THAILAND AND INFLUENCING FACTORS 4.1 An overview of the system of commercial banks in Vietnam and Thailand 4.1.1 Overview of commercial banking system in Vietnam 4.1.2 Overview of commercial banking system in Thailand 4.1.3 Overview of problems of commercial banks in Vietnam and Thailand 4.2 Current status of financial leverage ratio of commercial banks in Vietnam and Thailand in the period of 2010 – 2020 In the capital structure of Thai and Vietnamese commercial banks, the equity ratio of commercial banks is always less than 15% and the debts of commercial banks are mainly capital mobilized deposits from residents and economic institutions The interest rate level is flexibly adjusted by central banks to ensure support for the banking system and economic growth, while keeping the value of the currency stable in a reasonable way For commercial banks in Vietnam, this equity ratio is always below 10% and there is negligible fluctuation in the period 2010-2020 Meanwhile, mobilized capital always has a higher growth rate than credit growth, so liquidity risks in the banking system are guaranteed much higher than the limit in SBV's regulations (maximum 85% for all credit institutions) The debt ratio of commercial banks in Vietnam has tended to decrease slightly since 2017 from 92.9% to 92.5% It can be seen that the demand for capital mobilized by commercial banks in Vietnam is very large to serve the capital needs of individuals and enterprises before the requirements of ensuring the government's socio-economic development goals However, the current 15 increase in high debt ratios raises concerns from the problems of using capital by commercial banks; in particular, focusing on credit growth, investment activities, business model transformation, business performance, risk management and stability of commercial banks In Vietnam, the increase in foreign investor ownership is obstructed by Decision 58/2016/QD-TTg and although it has been replaced by Decision 22/NQ-CP dated July 2nd, 2021, the State must still own at least 65% of the total number of voting shares in state-owned commercial banks in the period 2021-2025 On the other hand, Thai commercial banks tend to increase equity, a trend that has been evident since 2014 The equity ratio increased from 9.8% in 2014 to 15.2% in 2020 Commercial banks mainly increase the ownership ratio of foreign investors in the short term Obviously, the need for support from investors with strong financial potential such as foreign investors is great to help Thai commercial banks increase the scale of equity, increase financial capacity, and accelerate the settlement of bad debts However, the deep reduction in debt ratio also reflects the reality of hot growth, addressing the consequences of credit risks and reducing the competitiveness of credit activities of Thai commercial banks At the same time, this is also a sign of actively converting their traditional business to their non-traditional activities 4.3 Current situation of factors affecting commercial banks in Vietnam and Thailand in the period of 2010 - 2020 4.3.1 Current situation of off-balance sheets accounts of commercial banks in Vietnam and Thailand 4.3.2 Financial stability of commercial banks in Vietnam and Thailand 4.3.3 Sizes of commercial banks in Vietnam and Thailand 4.3.4 Current profitability of commercial banks in Vietnam and Thailand 4.3.5 NPL ratio of commercial banks in Vietnam and Thailand 4.3.6 GDP growth status of Vietnam and Thailand 4.3.7 Inflation situation of Vietnam and Thailand 4.4 Analysis of the impact of factors on the financial leverage ratio of Vietnamese and Thai commercial banks 4.4.1 Research variable descriptive statistics 4.4.2 Correlation analysis 4.4.3 Regression analysis of the data model of factors affecting the financial leverage ratio of commercial banks in Vietnam and Thailand 16 4.4.4 GMM model analysis and discussion on the impact of factors affecting the financial leverage ratio of commercial banks in Vietnam and Thailand The study uses systematic GMM estimation (sys-GMM) to address endogenous phenomena in dynamic table data models that are short-term and unbalanced Check the relevance of system GMM estimation using AR (2) and Hansen (1982) Table 4.1 Regression analysis of factors affecting financial leverage ratios of Vietnamese and Thai commercial banks GMM system Variables Vietnam and Vietnam Thailand Thailand OFFB -0,0724*** -0,0541*** -0,294* [-3,01] [-6,46] [-1,67] ZRC -0,000872*** -0,000592*** -0,00107** [-5,46] [-3,44] [-2,54] ROA -2,838*** -1,995*** -1,983*** [-8,13] [-9,81] [-3,83] NPL -1,046*** -0,795*** -1,016* [-6,30] [-13,78] [-1,73] SIZE 0,0138*** 0,0196*** 0,0112 [6,60] [12,15] [1,37] GDP 0,205*** 0,0853*** -0,036 [3,71] [5,25] [-0,79] CPI 0,0911*** 0,0610*** 0,425*** [5,67] [3,81] [3,57] Blocking factor 0,709*** 0,590*** 0,768*** [16,66] [18,15] [4,73] No of 429 308 121 observations 28 11 39 No of groups 0,36 (p>0,05) -1,42 (p>0,05) -1,82 (p>0,05) AR (1) -1,32 (p>0,05) -0,28 (p>0,05) -1,24 (p>0,05) AR (2) 16,37 (p>0,05) 2,20 (p>0,05) 14,79 (p>0,05) Hansen 17 *, **, *** are 10%, 5%, and 1% significance levels, respectively Source: Data from 28 commercial banks in Vietnam, 11 commercial banks in Thailand from 2010 to 2020 Table 4.2 Comparison of the influence of factors on the financial leverage ratios of Vietnamese and Thai commercial banks Vietnam Thailand Regression Regression Importance Importance coefficient coefficient ROA -1,995*** -1,983*** NPL -0,795*** -1,016* GDP 0,0853*** -0,036 CPI 0,0610*** 0,425*** OFFB -0,0541*** -0,294* SIZE 0,0196*** 0,0112 ZRC -0,000592*** -0,00107** *, **, *** are 10%, 5%, and 1% significance levels, respectively Source: Data from 28 commercial banks in Vietnam, 11 commercial banks in Thailand from 2010 to 2020 The return on assets (ROA) of commercial banks inversely and significantly affects the financial leverage ratio of commercial banks at a meaningful level of less than 5% The results of the regression model showed that when other factors were kept constant, the ROA of commercial banks increased by one unit, resulting in a decrease in the financial leverage ratio, Off-balance sheet to asset ratio (OFFB): Off-balance sheet items have an inverse relationship with the financial leverage ratios of commercial banks of Vietnam and Thailand The results of the regression model show that when other factors are kept constant, the increase in OFFB of commercial banks leads to the leverage ratio Non-performing loan ratio (NPL): inverse impact on the financial leverage ratio of commercial banks in Vietnam The results of the regression model showed that when other factors were kept constant, the NPL of commercial banks increased, leading to a fall in the financial leverage ratio Factor 18 Stability of commercial banks (ZRC): Research results show that there is a inverse effect on the financial leverage ratio of commercial banks in Vietnam and Thailand When other factors are kept unchanged, the ZRC of commercial banks increases, leading to a decrease in the financial leverage ratio of commercial banks The results of the study agree with Lei and Song (2013); Imbierowicz and Rauch (2014), Umar and Sun (2016) show that stable commercial banks tend to have lower debt-to-capital ratio Bank Size (SIZE): Research results show that there is a direct relationship between the size of commercial banks and the financial leverage ratio of commercial banks in Vietnam and Thailand When other factors are kept constant, the SIZE of commercial banks increases by one unit, resulting in the financial leverage ratio of the Commercial banks fell This may indicate that the smaller the size of commercial banks in Vietnam, the more difficult it is to mobilize external capital GDP growth has a direct relationship with the financial leverage ratio of commercial banks in Vietnam and Thailand according to the common model of the countries However, when separated, GDP only affects the financial leverage ratio of Vietnamese but not for Thai commercial banks Inflation (INF) has a direct relationship on corporate financial decisions about debt (Neves et al., 2019) In fact, rising inflation will lead to a rise in the cost of raising capital when it is clear that depositors will be provided with higher returns, and the flow of money into commercial banks will increase (Frank and Goyal, 2009; Avci and Çatak, 2016) Therefore, controlling the inflation rate needs to achieve the economic goals, credit growth, profitability and safety of the commercial banking system CHAPTER SOME POLICY IMPLICATIONS ON THE USE OF FINANCIAL LEVERAGE BY VIETNAM'S COMMERCIAL BANKS IN THE NEW CONTEXT 5.1 Problems with the financial leverage of global commercial banks in the new context 5.2 Proposing policy implications for the use of financial leverage ratios by commercial banks in Vietnam 5.2.1 Policy implications for commercial bank profitability Basis and Objectives: The research results show that the ROA of commercial banks has the inverse influence and the strongest impact on the 19 financial leverage ratio of commercial banks It is necessary to further synchronize solutions to diversify, increase income, control costs, create a favorable spread from credit activities, ensure the implementation of business strategies to increase business efficiency and ensure the safety of the system of commercial banks towards Basel II and III international standards Policy implication details: Promote the implementation of business plans and improve the financial capacity of commercial banks in Vietnam Optimizing the difference between interest rates on capital mobilization and lending to customers, focusing on solutions for effective credit growth, increasing income, offsetting costs Improve the efficiency of supervision, ensure security, safety and reliability of commercial banks for electronic payment and card payment systems; supervise electronic payment systems in accordance with international supervision principles, ensuring that payment systems operate safely and effectively Develop a standard expense management process, establish a job description for each position; improve income fund distribution regimes associated with work performance to encourage talents and retain employees; Focusing on investing in human resources, modernizing commercial banking technology, promoting the application of new technologies, it is necessary to have the orientation to shift from IT application in breadth to development and application in depth 5.2.2 Policy implications for non-performing loan ratios of commercial banks Basis and Objectives: The results are of the same view of capital structure trade-off theory and empirical studies such as Papagianni (2013); Allen et al (2013); Umar and Sun, (2016) Improving the efficiency of bad debt management of commercial banks needs to harmonize development and efficiency, improve competitiveness and integration of commercial banks in the new context Policy implication details: Strengthen the urging and collection of debts in combination with the inspection of capital use, financial situation and collateral situation Take appropriate debt settlement measures for each loan Debt settlement measures according to regulations of commercial banks Commercial banks must review all dossiers and procedures for loan security of overdue debts, thereby taking supplementary, complete, valid, lawful and adequate measures to facilitate the handling Accelerate the sale 20 and settlement of bad debts in order to quickly recover the loaned capital, limit investments and high-risk loans Proactively and flexibly handle bad debts, drastically in selling collaterals, strictly controlling, limiting to the lowest level the arising of new bad debts Develop and apply software programs that automatically classify customers, identify credit risks for customers being economic organizations and scoring software for individual customers as a basis for making loan decisions 5.2.3 Policy implications for macroeconomic fluctuations Basis and Objectives: GDP growth and inflation (CPI) have a positive relationship with the leverage ratios of commercial banks, in line with previous empirical studies It is important for commercial banks to have effective strategies to respond to complex macroeconomic fluctuations Policy implication details: Commercial banks need to keep abreast of macroeconomic and monetary developments Ready plans to receive liquidity support from the State Bank of Vietnam Commercial bank administrators need to develop an optimal roadmap, closely direct and regularly supervise the roadmap to apply the ratio of short-term capital sources to use appropriate medium and long-term loans, ensuring the safety of commercial banking activities and reducing liquidity pressure Proactively and flexibly interest rates in capital and credit mobilization, effectively and promptly take advantage of solutions to stabilize the State Bank of Vietnam interest rate level More flexibility in operating, supervising and researching monetary policy tools to business effectively in the currency market, stock market and initially deploy business efficiency in the derivatives market 5.2.4 Policy implications for bank asset management Basis and Objectives: The results of the study are that the smaller the size of commercial banks with total assets, the more difficult it is to raise capital and the pressure to raise capital is great This result tests hierarchical order theory (Titman and Wessel, 1988; Sritharan 2014; Anarfo, 2015; Jaafar et al., 2017) The results of this study show that according to the size and characteristics of banks, it is necessary to have an asset management strategy in line with international practices and with the developing economy still highly dependent on credit activities 21 Policy implication details: Complete capital management philosophies for each commercial bank and actively improve the set of measurement indicators and capital indicators; assessment of commercial bank capital according to Basel II standards; focus on reducing capital waste, enhancing the stability of commercial banks Systematically synchronous implementation of operational risk management mechanisms (credit risk, liquidity risk, interest rate risk, exchange rate risk) following Basel II standards Ensure the Capital Adequacy Ratio (CAR) in accordance with the regulation of >9%, strengthen inspection and supervision of the safety and profitability of real estate investments, securities and derivatives Commercial banks actively improve the proactive balance between capital mobilization, credit activities and the development of modern banking services Use capital efficiently to ensure stable and continuous liquidity; reduce operating costs to maximize profits, set up provisions for response risks and minimize risks Reduce credit ratios to invest in more liquid assets, setting an appropriate ratio between deposit and lending 5.2.5 Policy implications for off-balance sheet accounts Basis and Objectives: The results of the study agree with Adrian and Shin (2010); Giordana and Schumacher (2012) However, the ratio of off-balance sheet accounts at commercial banks in Vietnam is uneven and has not shown stability, off-balance sheet activities are still new and contain many potential risks Policy implication details: The policy of low interest rates for a long time led to increased reliance on off-balance sheet activities for asset financing and directed commercial banks to reduce their dependence on traditional equity and deposits, which reduced the profit margins of commercial banks Commercial banks need to actively manage off-balance sheet risk rather than treating it as a commercial banking support activity as it is doing Commercial banks need to develop appropriate management mechanisms and processes to control and manage risk portfolios in accordance with risk tolerance levels to make the most synchronous, accurate and effective management decisions In view of stabilizing the financial system and commercial banking, regulators and commercial banks need to be cautious about the rapid development of off-balance sheet activities of commercial banks in Southeast Asian countries 5.2.6 Policy implications for the stability of commercial banks 22 Basis and Objectives: The results of the study show that stable commercial banks tend to have lower debt ratios in the capital structure of commercial banks, consistent with most previous studies The major challenge for commercial banks in the context of integration and globalization is the strategy of mobilizing more equity capital and moving towards modern commercial banking governance standards in line with international practices Policy implication details: Commercial banks need to increase their equity ratios to ensure capital adequacy ratios as well as improve financial stability so that effective risk management models can be applied Proactively strengthen risk control to apply Basel II international standards, proceed to Basel III while ensuring profit growth goals and improving the competitiveness of commercial banks in the market It is necessary to develop a credit development strategy in conjunction with effective safety, focusing capital on business activities, especially priority areas Ensuring liquidity through the construction of an appropriate reserve limit, investing in valuable papers so that, when necessary, it is possible to apply for re-discounting or enter the open market Limit borrowing in the money market Money market borrowing is used by most commercial banks when they need to meet liquidity needs 5.3 Recommendations CONCLUSION The thesis systematized the theoretical basis of capital structure, applied capital structure theory in the study of commercial bank financial leverage ratio and identified factors affecting the financial leverage ratio of commercial banks The thesis provides a new perspective on the financial leverage of commercial banks in Vietnam and Thailand by filling the research gap by assessing the role of off balance sheet income, the stability of commercial banks in addition to financial and macro characteristics factors that can affect financial leverage ratio of commercial banks The results of SYS – GMM regression show that the off-balance sheet ratio (OFFB), non-performing loan ratio (NPL), ROA has the opposite effect on the financial leverage ratio of commercial banks in Vietnam and Thailand Meanwhile, GDP growth and inflation (CPI) affect in the same direction It can be seen that the role and direction of the impact of the factors are almost similar 23 The thesis also proposed policy implications for the use of financial leverage ratio of commercial banks in Vietnam, including: (1) enhancing the profitability of commercial banks; (2) managing bad debts of commercial banks; (3) respond effectively to macroeconomic fluctuations; (4) management of commercial bank assets; (5) governance of off-balance sheet accounts; (6) ensuring the stability of commercial banks At the same time, the thesis made recommendations and proposals to the government and the State Bank of Vietnam The thesis has achieved certain results, but there are still some limitations as follows: The study only collected data of 28 commercial banks in Vietnam and 11 Thai commercial banks that are not fully representative of the commercial banking system in Vietnam and Thailand Although the research data for the time period relatively long period 2007-2020 However, this shows that the limitation is that the influence of factors on credit growth before and after the 2007 financial crisis has not been classified The study also did not classify the influence of financial and governance factors at different levels on the financial leverage ratio of commercial banks The influencing factors are not really representative to reflect the nature of the influence of the financial leverage ratio of commercial banks in Vietnam Based on the limitations mentioned above, the study proceeded to expand the data by increasing the number of commercial banks in the country Use data of 100% foreign-owned commercial banks or branches of foreign banks in Vietnam At the same time, comparing with commercial banks in the region and around the world, increasing the length of the study period comparing the difference in financial leverage ratios of commercial banks in Vietnam before and after the 2007 financial crisis Further studies can continue to find new factors to complete the current research model by adding factors related to corporate governance, ownership structure, and other macro factors 24 LIST OF PUBLISHED WORKS BY THE AUTHOR Mai Thi Hong Nguyen Manh Hung, Nguyen Thị Hien, Nguyen Thu Thuy (2022) Factors affecting the financial leverage ratio of Vietnamese commercial banks: SYS – GMM accreditation Journal of Economics Studies, Volume of October (533), p.107-120 Mai Thi Hong (2022) The impact of off-balance sheet income on the profitability of commercial banks, Journal of Finance, Volume of October (786), p.84-87 Nguyen Thu Thuy, Mai Thi Hong et al (2021) Impact of capital structure on banking performance in Vietnam: SYS-GMM estimation Journal of Economics Studies, Volume of August (519) p.52-66