Determinants of profitability in vietnamese commercial banks

Dissertation submitted in partial fulfillment of the Requirement for the MSc in Finance FINANCE DISSERTATION ON DETERMINANTS OF PROFITABILITY IN VIETNAMESE COMMERCIAL BANKS DO THANH HUYEN ID No: 19046130 Intake Supervisor: PhD Tran Ngoc Mai September 2020 Tai ngay!!! Ban co the xoa dong chu nay!!! 17014126203771000000 TABLE OF CONTENT CHAPTER I: INTRODUCTION 1.1 THE IMPORTANCE OF THE TOPIC 1.2 MOTIVATION 1.3 STEP PROGRESS AND OBJECTIVES 1.4 OBJECT AND SCALE OF RESEARCH 1.5 RESEARCH APPROACHES 1.6 STRUCTURE OF DISSERTATION CONCLUSION OF CHAPTER I CHAPTER II: LITERATURE REVIEW 2.1 LITERATURE REVIEW 2.1.1 Worldwide literature review 2.1.2 Nation-wide literature review 12 2.2 AN OVERVIEW OF BANKING PROFITABILITY 14 2.2.1 Definition of banking profitability 14 2.2.2 Importance of banking profitability 15 2.2.3 Factors defining the banking profitability 16 2.3 DETERMINANTS OF BANKING PROFITABILITY 18 2.3.1 Internal factors 18 2.3.2 External factors 22 SUMMARY OF THE CHAPTER II 23 CHAPTER III: DATA AND RESEARCH METHODLOGY 27 3.1 RESEARCH MODEL BRIEF INTRODUCTION 27 3.2 VARIABLES DEFINITIONS AND MEASURING 27 3.2.1 Dependent variables 27 3.2.2 Independent variables and hypothesis 29 3.3 DESCRIPTIVE STATISTICS OF QUANTIVIVE VARIABLES 38 3.3 RESEARCH MODEL 41 3.5 METHODS OF DATA COLLECTION AND DATA PROCESSING 43 CONCLUSION OF CHAPTER III 45 CHAPTER IV: RESULTS OF EMPIRICAL ANALYSIS OF BANKING PROFITABILITY IN VIETNAM COMMERCIAL BANKS 46 4.1 CORRELATION ANALYSIS BETWEEN VARIABLES 46 4.2 REGRESSION RESULTS 47 4.2.1 Model estimation 47 4.2.2 Regression outcomes 49 4.2.3 Regression result analysis 54 4.3 EVALUATE THE SUITABILITY OF THE REGRESSION MODEL 58 4.3.1 Evaluate the suitability of the regression model 58 4.3.2 Multi-collinearity testing 59 4.3.3 Integration test 60 4.3.4 Heteroskedasticity test 60 4.3.5 Wald test 61 CONCLUSION OF CHAPTER IV 62 CHAPTER V: CONCLUSION AND SOLUTIONS TO IMPROVE PROFITABLITY IN VIETNAM COMMERCIAL BANKS 64 5.1 CONCLUSION 64 5.2 SOLUTIONS 65 5.2.1 Solution groups increase the positive influence of factors outside the bank 65 5.2.1.1 Government 65 5.2.1.2 State bank 67 5.2.2 The group of solutions increases the positive effects of internal factors of commercial banks 68 5.3 LIMITATIONS OF THE DISSERTATION 71 5.4 PROPOSE THE NEXT RESEARCH DIRECTION 71 CONCLUSION OF CHAPTER V 72 CONCLUSION OF THE DISSERTATION 72 REFERENCES 74 APPENDICES 76 CHAPTER I: INTRODUCTION The banking industry is an essential part of the economy, playing an important financial intermediary The profitability of the banking industry has a significant effect on the growth of the economy Currently, banks are facing a rapid change of business environment and increasing competition in domestic and international markets (Muhammad Bilal, Asif Saeed, Ammar Ali Gull, Toquer Akram, 2013) A stable and effective banking system will be able to deal with negative shocks and contribute positively to the stability of the national financial system Therefore, knowledge of profitability as well as knowledge of factors affecting bank profitability is useful not only for bank managers but also for many stakeholders such as the Bank central banks, bank associations, governments and other financial institutions Around the world, empirical studies have been conducted to understand the factors affecting bank profitability, in which profitability is measured through indicators such as the ratio of income to total income assets (ROA), the ratio of income to equity (ROE), the ratio of net interest income (NIM) (Gul, Faiza and Zaman, 2011) In general, previous studies have shown that factors affecting the bank's profitability including factors inside the bank are expressed through financial indicators and factors outside the bank expressed through macroeconomic factors such as the annual real GDP growth rate, inflation, etc In Vietnam, empirical studies have analyzed on profitability and influencing factors often implemented in businesses Meanwhile, the research on the profitability of the bank is very limited and still limited Stemming from the above reasons, I decided to select the topic "Determinants of profitability in Vietnamese commercial banks" to research for master's thesis 1.1 THE IMPORTANCE OF THE TOPIC The research results will provide valuable information to existing shareholders and potential investors, provide a better understanding of the factors that affect the profitability of the bank and are the basis let investors make investment decisions in bank stocks The research results are also a source of information to provide administrators of joint-stock commercial banks, support managers to make decisions, risk prevention measures and appropriate development policies The rationale is based on the positive as well as the negative effects of factors affecting profitability The research results are a scientific basis for the Government and the State Bank to consider the factors affecting the profitability of joint stock commercial banks in Vietnam, which can make macro policies timely and rationally in order to build a sustainable development of banking system, healthy and effective operation, and development of the economy 1.2 MOTIVATION In the trend of integration and globalization, our country is transforming itself in the renovation process, the economy is transporting following market mechanism, with great regulation and management issue of the State To survive and thrive, commercial banks must work effectively, so profitability is a top concern Because profitability is a general economic indicator to evaluate operational efficiency activities of banks It is not just the source financial savings to expand production, but it is also important resources to fulfill the financial obligation to the government, increase national income and encourage workers to have strong attachment to their own work Therefore, analyzing and measuring profitability to assess business performance, thereby finding out measures to improve profitability is a very important and necessary issue for commercial banks of Vietnam in the current period The operation of the bank is an important economic activity, in recent years has contributed significantly to the development of the national economy Most commercial banks are profitable How to develop and operate more and more effectively in the period of regional and global economic integration is a matter of great concern for commercial banks With the function of an effective economic management tool, profitability analysis will help managers to run commercial bank activities most effectively The objective of this study is to assess and identify the factors affecting the profitability of commercial banks in Vietnam from which to make some recommendations to the regulators of commercial banks Besides, subject about determinants of banking profitability is a good topic and appeals many researchers Nevertheless, number of researches in Vietnam stock market is not as many as other markets like the London Stock Exchange, the New York Stock Exchange because it is still an emerging market in a developing nation Shortly speaking, we conduct the quantitative research about determinants of banking profitability of Vietnam listed commercial banks on stock exchange, as well as contribute to the knowledge and experience for future reports 1.3 STEP PROGRESS AND OBJECTIVES This study target to determine the factors affecting the profitability of commercial banks in Vietnam The data has been collected from financial statements of more than 20 Vietnam’s commercial banks in the years 2012-2019 The research provides some recommendations that will help the management operations of commercial banks reached the highest efficiency The first step of the study is to research the theoretical basis of profitability and affecting factors profitability of commercial banks The second step of the study is to analyze the current situation of profitability at Vietnamese commercial banks The following target of the dissertation is to analyze the current situation of profitability at Vietnamese commercial banks, examine the impact of each determinant on the banking profitability of commercial banks in Viet Nam Thereby, the study may put forward some recommendations that will help managers managing the activities of commercial banks achieve the highest efficiency The last step of the dissertation is to propose solutions to improve profitability in Vietnamese commercial banks The results of this study will provide guideline to the investors in choosing the most potential Vietnam listed commercial banks in making profitability While deciding to trust company information as well as macroeconomic situation of the country simultaneously, the companies can set their policies and strategies in terms of relatively important factors, for business survival and success The possible impact of macroeconomic factors may help the policy makers while building up monetary and financial policies Hence, we could conclude what determinants of banking profitability on Vietnam stock market In addition, this research would contribute to studies of change in share price and also a reference for investors before making their investment 1.4 OBJECT AND SCALE OF RESEARCH The object of the research is the factors affecting profitability at Vietnamese commercial banks The research scope is 24 Vietnamese commercial banks in terms of asset size in the period of 2012-2019 Analytical data is taken from audited financial statements at the end of the year of more than 20 Vietnamese listed commercial banks in the period of 2012-2019 The independent variables of external factors of banks are data related to macroeconomic factors collected from the World Bank website 1.5 RESEARCH APPROACHES We use qualitative and quantitative methods: - Qualitative method: by the table of data, we analyze the situation of profitability and influencing factors drawn from previous research documents - Quantitative method: using the regression estimation method with table data to analyze internal and external factors affecting profitability at Vietnamese commercial banks Specifically:  Descriptive statistical analysis, calculation of mean values, standard deviations, maximum and minimum values of each study variable, to describe the basic characteristics of data collected from empirical research to provide the most general information about the sample  Correlation analysis to examine the relationship between independent and dependent variables  Regression analysis to measure the degree of significant or insignificant impact of the independent variable on the dependent variable, thereby knowing the direction of the impact of each independent variable on the dependent variable The results of the model were tested and compared to find the most suitable model in studying the factors affecting profitability at joint stock commercial banks in Vietnam 1.6 STRUCTURE OF DISSERTATION The thesis consists of chapters: - Chapter I: Introduction - Chapter II: Literature review - Chapter III: Data and research methodology - Chapter IV: Results from empirical analysis of banking profitability in Vietnamese listed commercial banks - Chapter V: Conclusion and solutions to improve profitability at Vietnamese commercial banks CONCLUSION OF CHAPTER I Profitability reflects the performance of the bank, is the condition for the bank to compete and develop sustainably The improvement of profitability should be closely linked with safety in banking operations The empirical studies are conducted to test the factors affecting profitability of commercial banks in each country In general, factors affecting the profitability of commercial banks are divided into two groups: external factors (economic growth, inflation) and internal factors (capital owner, bank size, customer deposits, credit balance, cost of provision for credit losses, operating expenses, and form of ownership) Research on the hypothetical agenda helps us to evaluate more profoundly the affiliation of elements to the profitability of commercial banks The consequences on the conformation of the influence factors and the nature of the connection are diversified depending on the data of each country, in each detailed study period Thus, in order to have precise examination and make proper commendations, we first grasp the basic concepts related to the bank's profitability, the general concept related to its determinants (both internal and external) This content will be conducted by the author in the next chapter CHAPTER II: LITERATURE REVIEW 2.1 LITERATURE REVIEW 2.1.1 Worldwide literature review Most empirical studies around the world use linear regression models to study the factors affecting the profitability of commercial banks, namely: Muhammad Bilal, Asif Saeed, Ammar Ali Gull and Toquer Akram (2013) studied the influence of internal factors and macro factors on the profitability of 25 commercial banks in Pakistan between 2007 and 2011 The authors used the dependent variable to study the ratio of income to total assets (ROA) and the ratio of income to equity (ROE) The independent variables that represent the intrinsic characteristics of the bank used include bank size, equity, bad debt, customer deposits, and net interest income ratio The independent variables that represent macroeconomic factors are inflation, industrial production growth rate and real gross domestic product growth rate Research results show that bank size is positively correlated with bank profitability Bad debt is not significantly correlated with ROA, but has a negative inverse correlation with ROE Customer deposits are positively but not significantly correlated with both ROA and ROE Equity has a significant relationship with ROE but a negligible relationship with ROA The ratio of net interest income is significantly positively correlated with the profitability of the bank In addition, macroeconomic factors such as the growth rate of gross domestic product actually have a positive correlation with the bank's profitability Inflation has negligible positive correlation with ROE but has a strong negative correlation with ROA In addition, Nesrine Ayadi and Younès Boujelbene (2012) also used the regression model to study the factors affecting the profitability of Tunisian Deposit Banks The authors used the return on assets (ROA) as a proxy for bank profitability Independent variables representing the intrinsic characteristics of the bank include: liquidity risk, credit risk, equity and bank size Variables representing financial structure include: concentration, total bank assets on GDP,