Determinants of credit risk empirical evidence in vietnamese joint stock commercial banks

BANKING ACADEMY OF VIETNAM BANKING FACULTY THESIS OF GRADUATION DETERMINANTS OF CREDIT RISK: EMPIRICAL EVIDENCE IN VIETNAMESE JOINT STOCK COMMERCIAL BANKS Student name : Bui Ngoc Nhung Class : K21CLCA Faculty : Banking Student Code : 21A4010913 Supervisor & Instructor : Assoc Prof Ph.D Nguyen Thuy Duong Hanoi, May 2022 Tai ngay!!! Ban co the xoa dong chu nay!!! 17014126153651000000 BANKING ACADEMY OF VIETNAM BANKING FACULTY THESIS OF GRADUATION DETERMINANTS OF CREDIT RISK: EMPIRICAL EVIDENCE IN VIETNAMESE JOINT STOCK COMMERCIAL BANKS Student name : Bui Ngoc Nhung Class : K21CLCA Faculty : Banking Student Code : 21A4010913 Supervisor & Instructor : Assoc Prof Ph.D Nguyen Thuy Duong Hanoi, May 2022 DECLARATION To beginning with, I hereby declare that the graduation thesis entitled: “Determinants of Credit Risk: Empirical Evidence in Vietnamese Joint Stock Commercial Banks” is my own work and submitted to the Faculty of Banking, Vietnam Banking Academy In addition, secondary data used in the research is fully and accurately cited and referenced under the regulations of the Banking Academy I warrant that I not copy any other author's work or use any material from other uncredited sources i ACKNOWLEDGEMENT First, being a student of Banking Academy and experiencing four years of studying here was like a dream for me Although this 4-year dream is long, standing at the end of it right now, I feel extremely anxious and regretful It must be emphasized that, without the teachers of Banking Academy, family, and friends, there would not be the me of today Second, I would like to thank all the teachers of Banking Academy in general and the Faculty of Banking for their dedicated guidance and guidance during my years of university The teachers not only imparted profound knowledge to me, but they also acted as role models for me to learn how to become an active and enthusiastic student Third, I would like to thank the lecturer who directly guided me to this thesis: Assoc Prof Ph.D Nguyen Thuy Duong, Dean of Banking Faculty I am grateful to her because although she is very busy, she has spent a lot of time and enthusiasm guiding and editing the thesis for me Her comments and suggestions were helpful and made my thesis more complete Finally, I would like to thank my family and friends They are a solid spiritual fulcrum for me to freely assert myself Thank you sincerely! Hanoi, May 29th, 2022 Student ii Contents DECLARATION i ACKNOWLEDGEMENT ii LIST OF ABBREVIATIONS iv LIST OF TABLES v INTRODUCTION 1 The urgency of the research topic Research objective Object and scope of research Research methodology Research structure CHAPTER I: LITERATURE REVIEW OF DETERMINANTS OF CREDIT RISK: EMPIRICAL EVIDENCE IN VIETNAMESE JOINT STOCK COMMERCIAL BANKS 1.1 Research on credit risk 1.1.1 Definition of credit risk 1.1.2 Criteria for assessing credit risk at commercial banks 1.3 Research gap 22 CHAPTER II: RESEARCH METHOD 24 2.1 Research process 24 2.2 Research method 25 2.2.1 Research data 25 2.2.2 Method of estimation 26 2.3 Determinants affecting credit risk at commercial banks and hypothesis 30 2.3.1 Macro Determinants and Micro Determinants 30 2.3.2 Research models 44 CHAPTER III: RESEARCH RESULTS 45 3.1 Regression results 45 3.2 Discussion 50 CHAPTER IV: GENERAL RECOMMENDATIONS AND CONCLUSIONS 54 4.1 For Vietnamese commercial banks 54 4.2 For State Bank 56 4.3 General conclusions 56 REFERENCES 58 iii LIST OF ABBREVIATIONS Abbreviations Meaning NPL Credit risk CAR Bank capitalization CPA Capital structure GRO Loan growth DIV Bank diversification ROE Bank performance LSIZE Bank size CIR Bank inefficiency INF Inflation UEM Unemployment DEB Public debt BAS Basel C19 Covid-19 Pooled OLS Conventional linear regression model FEM Fixed-effects model REM Random-effects model iv LIST OF TABLES Table Summary of variables and sign expectation 41 Table Summarizing the results of the regression 45 Table Statistical summary of variables 47 Table Correlation coefficient matrix 48 Table Coefficient of variance inflation 48 Table Summarizing the results of regression models 49 v INTRODUCTION The urgency of the research topic According to the State Bank of Vietnam (2022), in the short term, in case the economic recovery is slow due to the impact of the Covid-19 epidemic in 2021 and the epidemic continues into 2022, the domestic non-performing loan ratio, potential on-balance sheet non-performing loan ratio is forecasted to be quite high, possibly even reaching over 7.5% within the next year In the medium and long term, if the Covid-19 epidemic continues to develop complicatedly, it is forecasted that the credit quality of the system of credit institutions will be seriously affected, the nonperforming loan ratio on the balance sheet and potential loans will be affected, potential to become non-performing loan can continue to increase rapidly and at a higher level Thus, the risk of non-performing loans increasing again due to the Covid-19 epidemic will negatively affect all economic activities Also, Dr Can Van Luc, Chief Economist of BIDV, assessed that in the second half of 2022, the legal framework issues may turn in a direction that is not favorable to the problem of non-performing loan handling in the entire banking industry Specifically, Circular 14 will expire from June 30, 2022, and if not extended, the potential non-performing loan from the debt balance structured under this Circular will be more clearly shown on the balance sheet assets of banks, making the risk of non-performing loans likely to increase Moreover, Resolution 42 will also expire from August 15, 2022, and then the entire pilot mechanism to handle non-performing loans under this Resolution will also end If Resolution 42 is not extended or legalized, it will cause a lack of effective non-performing loan handling mechanisms The problem of non-performing loans may become the focus of Vietnam's financial market in 2022 The gross nonperforming loan ratio has been at the highest level in the past years, disrupting the restructuring achievements of credit institutions Due to the delay, the nonperforming loan on the balance sheet is forecasted to reach 2.3-2.5% and the gross non-performing loan will be about 6% in 2022,” warned Mr Luc This fact shows the need to study the factors affecting the credit risk of Vietnamese joint-stock commercial banks, especially when the loan collateral is mostly real estate Credit risk in banking is unavoidable but can be prevented and controlled Good risk control is an indirect channel to generate profits for banks Low credit risk is a competitive advantage and a value-creation tool that helps drive more effective business strategies To achieve the goal of limiting credit risk at a joint-stock commercial bank in Vietnam, it is necessary to identify and analyze the factors affecting credit risk, to clarify the picture of credit risk of joint-stock commercial banks in Vietnam, from which there are effective recommendations Therefore, the author chooses the research topic: "Determinants of credit risk: empirical evidence in Vietnamese joint-stock commercial banks" Research objective 2.1 General objective This study focuses on clarifying the determinants of credit risk at Vietnamese joint-stock commercial banks The issue to consider here is whether the factors have an impact on the credit risk of Vietnamese commercial banks: Macro factors or micro factors 2.2 Detail goal - Reviewing the theoretical basis of factors affecting credit risk - Measure the impact of macro and micro factors on credit risk using three econometric models OLS, REM, and FEM - Proposing solutions based on the model's conclusions to minimize credit risks and develop the economy Object and scope of research 3.1 Research object Determinants of credit risk at commercial banks The question is, what factors are the credit risks of banks determined by? 3.2 Research scope: includes time scale, spatial scope, and content About the time range: Data mining study for the period 2007-2021 In terms of spatial scope: A level study of the entire Vietnamese banking system including 19 state-owned and private joint-stock commercial banks About the scope of content: The study analyzes the determinants of the credit risk of Vietnamese joint-stock commercial banks based on statistics Modeling and testing the relationship between macro and micro factors to credit risk at 19 banks in 2007-2021 based on data collected and processed from many sources such as World Bank, General Statistics Office of Vietnam, financial statements of banks, … Research methodology In this study, the following models are used: - The Least-squares Model (OLS) - Fixed Effect Model (FEM) - Random Effect Model (REM) It is proposed to use a static model, so testing of models is carried out: including fixed-effects model (FEM), random-effects model (REM), Pooled OLS model Through testing steps including the Hausman test, and the Lagrange multiplier test, for the data set of the study, the FEM model becomes the most suitable model Next, we tested for possible defects in the model The results show that the model does not have multicollinearity, has autocorrelation defects, and has a variable variance Research structure In addition to the Declaration, Acknowledgment, Table of Contents, List of Abbreviations, and List of Tables, the research is structured into chapters as follows: Chapter 1: Literature review Chapter 2: Research Methods Chapter 3: Research results Chapter 4: Conclusion and recommendations