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MINISTRY OF EDUCATION AND TRAINING HO CHI MINH UNIVERSITY OF BANKING GRADUATION THESIS FACTORS AFFECTING CAPITAL ADEQUACY RATIO OF VIETNAMESE COMMERCIAL BANKS Major Finance – Banking Code 7 34 02 01 T[.]
MINISTRY OF EDUCATION AND TRAINING HO CHI MINH UNIVERSITY OF BANKING GRADUATION THESIS FACTORS AFFECTING CAPITAL ADEQUACY RATIO OF VIETNAMESE COMMERCIAL BANKS Major: Finance – Banking Code: 34 02 01 TRINH BAO NGOC HO CHI MINH CITY, 2023 MINISTRY OF EDUCATION AND TRAINING HO CHI MINH UNIVERSITY OF BANKING GRADUATION THESIS FACTORS AFFECTING CAPITAL ADEQUACY RATIO OF VIETNAMESE COMMERCIAL BANKS Major: Finance – Banking Code: 34 02 01 Student’s name: TRINH BAO NGOC Student’s ID: 030135190375 Class: HQ7 – GE06 SUPERVISOR DR LE HA DIEM CHI HO CHI MINH CITY, 2023 i ABSTRACT The thesis “Factors affecting capital adequacy ratio of Vietnamese commercial banks” aims to specify the bank-specific factors and macroeconomic factors as they affect the capital adequacy ratio (CAR) of commercial banks in Vietnam The secondary panel dataset is collected from annual reports of 29 operating commercial banks in Vietnam in the timespan of thirteen years from 2010 to 2022 The author uses regression models such as Pooled-OLS, FEM, REM with the assistance of Microsoft Excel office software program and STATA 15 statistical software program to examine the significant level of each instrumental variable in the database The FEM model chosen for the research appears to have autocorrelation, heteroscedascity and endogenous phenomenons so by applying GMM method, the author manages to find a statistical significant relationship between seven out of nine determinants and CAR According to the study result, leverage ratio (LEV) is proven to have a positive impact on CAR Conversely, profitability (ROA), non-performing loans (NPL), loan loss reserves (LLR), liquidity (LTD), deposite rate (DEP), and inflation rate (INF) have a negative effect on CAR Keywords: Capital Adequacy Ratio, Commercial Banks, Vietnam ii DECLARATION My name is Trinh Bao Ngoc My student ID is 030135190375, and I am enrolled at the Ho Chi Minh University of Banking in the HQ7-GE06 class I hereby state that the thesis topic for my Finance - Banking major is "Factors affecting capital adequacy ratio of Vietnamese commercial banks" and that Dr Le Ha Diem Chi is my supervisor Except for the properly cited citations in the thesis, the data and research findings in this thesis are entirely original and have never been published or made by anyone else Ho Chi Minh City, August Author Trinh Bao Ngoc , 2023 iii APPRECIATION First and foremost, I would like to thank my research supervisor, Dr Le Ha Diem Chi Without her assistance and dedicated involvement in every step throughout the process, this paper could have never been accomplished I am extremely grateful to her for supporting and understanding me during the past time Additionally, I want to express my gratitude to the professors who have taught me a lot over the course of four years at the university I appreciate the chance they gave me to study and acquire knowledge at Ho Chi Minh University of Banking I owe a huge debt of gratitude to all of my lecturers for their education over the past four years, as finishing my dissertation required more than just academic help Finally, at the very end of this journey, I thank all my family and friends, especially the father whom I hold dear, exceed blood bound is his nurture and care, hidden in time is his silent declare, through ups and downs he’s been by side, and through it all he’ll be my guide Ho Chi Minh City, August Author Trinh Bao Ngoc , 2023 iv TABLE OF CONTENTS ABSTRACT i DECLARATION ii APPRECIATION iii LIST OF ACRONYMS ix LIST OF TABLES AND FIGURES x CHAPTER 1: INTRODUCTION 1.1 REASONS FOR CHOOSING THE TOPIC 1.2 RESEARCH OBJECTIVES 1.2.1 General objectives .2 1.2.2 Specific objectives .3 1.3 RESEARCH QUESTIONS .3 1.4 RESEARCH SUBJECT AND SCOPE 1.4.1 Research subject 1.4.2 Research scope 1.5 RESEARCH CONTRIBUTION 1.6 RESEARCH GAP 1.7 RESEARCH METHODS 1.8 RESEARCH STRUCTURE CONCLUSION CHAPTER CHAPTER 2: LITERATURE REVIEW 2.1 BASIC CONCEPT OVERVIEW 2.1.1 The concept of capital adequacy ratio .8 v 2.1.2 The measurement of capital adequacy ratio 2.2 FACTORS AFFECTING CAPITAL ADEQUACY RATIO 10 2.2.1 Bank-specific factors .10 2.2.2 Macroeconomic factors 12 2.3 PREVIOUS STUDIES OVERVIEW 13 2.3.1 Domestic studies 13 2.3.2 Foreign studies 15 CONCLUSION CHAPTER 21 CHAPTER RESEARCH METHODOLOGY 22 3.1 DATA COLLECTION 22 3.2 RESEARCH MODEL 22 3.3 MEASUREMENT OF RESEARCH VARIABLES 23 3.3.1 Capital adequacy ratio (CAR) 23 3.3.2 Bank size (SIZE) .24 3.3.3 Profitability (ROA) 24 3.3.4 Leverage ratio (LEV) .24 3.3.5 Non-performing loans (NPL) 25 3.3.6 Loan loss reserves (LLR) 25 3.3.7 Liquidity (LTD) .25 3.3.8 Deposit rate (DEP) 25 3.3.9 Economic growth (GDP) 26 3.3.10 Inflation rate (INF) 26 3.4 RESEARCH HYPOTHESIS 26 vi 3.4.1 Bank size (SIZE) .26 3.4.2 Profitability (ROA) 27 3.4.3 Leverage ratio (LEV) .28 3.4.4 Non-performing loans (NPL) 29 3.4.5 Loan loss reserves (LLR) 30 3.4.6 Liquidity (LTD) .30 3.4.7 Deposit rate (DEP) 31 3.4.8 Economic growth (GDP) 32 3.4.9 Inflation rate (INF) 32 3.5 RESEARCH PROCESS 34 3.6 RESEARCH METHODS 36 3.6.1 Standard Ordinary Least Squares Model (Pooled – OLS) 36 3.6.2 Fixed Effects Model (FEM) 37 3.6.3 Random Effects Model (REM) .37 3.6.4 Feasible Generalized Least Squares (FGLS) 37 3.6.5 Generalized Method of Moments (GMM) 37 CONCLUSION CHAPTER 40 CHAPTER RESEARCH RESULTS AND DISCUSSION 41 4.1 DESCRIPTIVE STATISTICAL ANALYSIS .41 4.2 CORRELATION ANALYSIS .43 4.3 ESTIMATING THE REGRESSION MODELS AND TESTING THE REGRESSION HYPOTHESES 44 4.3.1 Estimating the Pooled – OLS, FEM, REM models 44 vii 4.3.2 Comparing Pooled – OLS model and FEM model 45 4.3.3 Comparing FEM model and REM model .45 4.3.4 Comparing Pooled – OLS model and REM model 46 4.4 TESTING FOR MODEL DEFECTS 46 4.4.1 Multicollinearity test 46 4.4.2 Autocorrelation test 47 4.4.3 Heteroscedasticity test .48 4.5 OVERCOMING THE RESEARCH MODEL DEFECTS 48 4.5.1 Feasible generalized least squares (FGLS) 48 4.5.2 Generalized method of moments (GMM) .49 4.6 SUMMARIZE AND DISCUSS RESEARCH RESULTS 52 4.6.1 Profitability (ROA) 52 4.6.2 Leverage ratio (LEV) .53 4.6.3 Non-performing loans (NPL) 54 4.6.4 Loan loss reserves (LLR) 55 4.6.5 Liquidity (LTD) .56 4.6.6 Deposit rate (DEP) 57 4.6.7 Inflation rate (INF) 58 CONCLUSION OF CHAPTER 60 CHAPTER CONCLUSIONS AND RECOMMENDATIONS 61 5.1 CONCLUSION 61 5.2 RECOMENDATION .62 5.3 LIMITATION AND FUTURE DIRECTION FOR THE RESEARCH 64 viii 5.3.1 Research limitation 64 5.3.2 Future direction for the research 64 CONCLUSION CHAPTER 66 REFERENCES i APPENDIX v