Finance dissertation on determinants of commercial banks performance in vietnam from 2017 2021

Dissertation submitted in partial fulfillment of the Requirements for the MSc in Finance TRUONG YEN PHI ID No 21071812 Intake Supervisor: Assoc Prof Dr Do Thi Kim Hao Banking Academy of Vietnam September, 2022 Tai ngay!!! Ban co the xoa dong chu nay!!! 17014126251831000000 Table of Contents CHAPTER 1: INTRODUCTION 1.1 Rationale 1.2 Research objectives Error! Bookmark not defined 1.3 Research questions 1.4 Scope of research 1.5 Methodology 1.5.1 Data sources 1.5.2 Research method Error! Bookmark not defined 1.6 Dissertation structure 10 CHAPTER 2: LITERATURE REVIEW Error! Bookmark not defined 2.1 Theoretical Framework .Error! Bookmark not defined 2.1.1 Bank profitability Error! Bookmark not defined 2.1.2 The internal factors Error! Bookmark not defined 2.1.2.1 Bank size (BSIZE) Error! Bookmark not defined 2.1.2.2 Captial adequacy ratio (CAR) .Error! Bookmark not defined 2.1.2.3 Non-performing loans (NPL) Error! Bookmark not defined 2.1.2.4 Operating costs (OC) Error! Bookmark not defined 2.1.3 The external factors 14 2.1.3.1 Gross Domestic Product (GDP) 14 2.1.3.2 Inflation (INF) Error! Bookmark not defined 2.2 Empirical Studies Review 15 CHAPTER 3: DATA AND METHODOLOGY 17 3.1 Data sources 17 3.2 Methodology 20 3.2.1 Regression model 20 3.2.2 Estimation technique 21 CHAPTER 4: EMPIRICAL RESULTS 25 4.1 Descriptive statistics 25 4.2 Regression model results 27 4.3 Discussion 31 CHAPTER 5: CONCLUSION 33 REFERENCES .36 APPENDIX 40 Descriptive statistics 40 Correlation maxtrix 40 ROA estimation with Random Effects 40 ROE estimation with Random Effects 41 ROA estimation with Fixed Effects 42 ROE estimation with Fixed Effects 42 Data for the estimation 43 List of Tables Table 1: Listed joint-stock commercial banks of Vietnam 17 Table 2: Symbols of the variables 19 Table 3: Expected results of variables upon bank profitability 23 Table 4: Summary of Descriptive statistics 25 Table 5: Correlation matrix 26 Table 6: Summary of Regression model results 27 Table 7: Actual results of variables upon bank profitability 31 List of Figures Figure 1: Research model 21 Figure 2: Research method framework 22 Executive Summary The research aims to analyze and evaluate the determinants of Vietnamese commercial banks’ ability to generate profit using Regression Analysis for Panel Data set of 25 commercial banks from 2017-2021 Aside that, Random Effects Model (REM) and Fixed Effects Model (FEM) along with Hausman test are performed to ensure the validity, thereby, selecting the suitable for the research Based on previous research papers, the internal factors affecting the profitability of banks are: bank size (total assets), capital adequacy ratio, non-performing loans, and operating cost Meanwhile, the external factors are GDP growth and inflation Following the release of the data, discussion and recommendations will be made to assist banks in improving their operational efficiency Acknowledgements First and foremost, I would like to share my sincere gratitude for my supervisor – Assoc Prof Dr Do Thi Kim Hao Mrs Hao has given me valuable guidance, recommendations and patience that I need throughout my time conducting this research Whenever I find myself struggling with the work, I can always ask her for useful suggestions and instructions Therefore, I am very thankful to learnt valuable research skills from her Next, I would like to thank the lecturers of Banking Academy MSc Finance intake for teaching me and my classmates meaningful and applicable lessons throughout the entire course Above all, my postgraduate study would have not been completed without the wonderful field trip to England, United Kingdom – leaded and assisted us by Mrs Thao Dang and Mr Hai Pham Last but not least, to all my friends and family who have always been there to support me in pursuing my education enrichment, thank you for all your unconditional love and encouragement in trusting me to become the better version of myself Truong Yen Phi Chapter 1: Introduction 1.1 Rationale In any period of time, the banking industry plays a vital and prominent role, being the lifeblood of the whole economy Therefore, it links capital sources and provide a variety of financial services to citizens, investors, enterprises, and other institutions In other words, the performance of banks greatly affects the entire financial system of a country Hence, the banking industry plays crucial functions in the context of emerging nations Additionally, when investment projects in various sectors flourish and are backed by commercial banks, more jobs become available for domestic workers, which lowers unemployment rates The central bank of any developing nation may strengthen the weak economy when the business cycle is in contraction or another unfavourable phase by prescribing an appropriate monetary policy for commercial banks to follow As a consequence, inflation, deflation, and other associated dangers would be under control In a nutshell, the soundness and health of the banking sector, particularly commercial banks, play a major role in the development of a growing economy Commercial banks have a variety of functions, in which, the goal of gaining profit is the main requirement for their existence and development Particularly, facing the current situation of globalization, deregulation and intensive competition from an increase in the share of non-bank institutions, commercial banks must remain profitable otherwise, their viability may be jeopardized To be more precise, financially stable financial institutions may diversify their operations to reduce their exposure to unsystematic risks After the 2007-2008 Financial Crisis, it was shown that profitable banks not only weathered the storm but also shielded the economy as a whole (Ramlall, 2009) Therefore, in order for banks to meet their yearly profit goals, it is necessary for management to have a deep understanding of the elements influencing commercial bank profitability Not only have bank executives been concerned about profitability, but so have hundreds of academics, financial market experts, and government authorities In recent years, the Vietnamese banking system has witnessed tremendous expansion As of November 2021, the list of banks in Vietnam records 49 banks in total, in which, there are 31 joint-stock commercial banks, 04 state-owned commercial banks, 09 banks with 100 % foreign capital, 02 policy banks and many international bank branches Total assets of the entire banking industry in recent years have changed markedly In 2016, the total assets of the banking industry reached about VND 5,600,000 billion By the end of September 2021, this number has doubled, reaching VND 10,200,000 billion Thus, on average, the total industry assets increased by about 12% per year from 2016-2020 (State Bank of Vietnam, 2021) 1.2 Research Objectives As researchers found, the degree to which commercial banks are able to perform well can highly be affected by a number of factors existing in the national economic environment and also the creditworthiness of itself Hence, with the world changing every day at a rapid speed, commercial banks ought to find its way to cope with the situation Therefore, this study aims to analyze and evaluate the influence of internal and external factors on the profitability of 25 commercial banks in Vietnam within 2017 and 2021 From there, proper discussion and recommendations will be given to improve operational efficiency of the banks 1.3 Research Questions  What factors significantly impact the profitability of commercial banks of Vietnam?  What are the recommendations needed in order to improve the performance of the commercial banks? 1.4 Scope of Research The research investigates the significant and non-significant influence of internal (bank size, capital adequacy, non-performing loans, and operating costs) and external factors (GDP growth and inflation rate) affecting the ability to create profit of 25 Vietnamese commercial banks from 2017 to 2021 1.5 Methodology 1.5.1 Data collection For the internal factors, this study used data of 25 listed commercial banks of Vietnam in a 5-year-period from 2017 to 2021, which are obtained from the commercial banks’ yearly annual financial statements Furthermore, these data are also available on Vietstock Finance as well as the banks’ websites As regards to the external ones, the data was collected via World Bank database 1.5.2 Research method  Qualitative method: Statistical methods are applied to illustrate the impact and extend to which the determinants may affect upon Vietnamese commercial banks’ profitability From there, the author has an overview of the impact to discuss and give recommendations  Quantitative method: Regression model for panel data is conducted to inspect the effects of the determinants on the commercial banks’ profitability Aside that, the research also tests Random Effects Model (REM), Fixed Effects Model (FEM), and Hausman test to investigate the significance between the dependent and independent variances, thus, determine which one is the suitable model for the research 1.6 Dissertation Structure Chapter 1: Introduction – Introducing a brief background of the dissertation, research objectives and research questions, the scope of research and research methodology Chapter 2: Literature Review – Overviewing the concept, measurements, as well as the determinants of bank profitability From there, summarizing the results of previous research papers about the factors that affect the profitability of banks Chapter 3: Data and Methodology – Mentioning the sources of data collection and the research method of the dissertation Chapter 4: Empirical Results – Presenting the estimation results, performing tests to achieve the most accurate results and interpreting it Chapter 5: Conclusion – Concluding the dissertation and confirming the research objectives 10