Finance dissertation on the determinants of bank profitability the case of vietnamese listed banks

Dissertation submitted in partial fulfillment of the Requirement for the MSc in Finance FINANCE DISSERTATION ON THE DETERMINANTS OF BANK PROFITABILITY: THE CASE OF VIETNAMESE LISTED BANKS … NGUYEN THI KHANH LINH ID No: 19046150 Intake Supervisor: Dr Nguyen Thanh Nhan September 2020 Tai ngay!!! Ban co the xoa dong chu nay!!! 17014126241141000000 ABSTRACT This research investigates the determinants of profitability of Vietnamese listed banks over the five-year period, from 2015 to 2019 In total, 64 observations are collected from listed banks in HNX and 10 listed banks in HoSE This paper employs quantitative design with the help of various statistical mathematical tools to discover the relationship between variables Dependent variables of the research are indicators of bank’s profitability while independent variables are bank-specific factors, which are size, capital adequacy, loan ratio, deposit ratio and bad debt ratios, and macroeconomic factors, which are re-discount interest rate and inflation rate Using the Pearson correlation method, the research concludes that CAP (capital ratio) is the determinant with positive influence while DEP (deposit ratio) and UEP (unemployment rate) are determinants with negative influences In addition, this paper constructs three model to describe profitability indicators from seven investigated independent variables TABLE OF CONTENTS CHAPTER I – INTRODUCTION 1 Rationale 2 Research questions 3 Research scope 4 Overview about the research methodology Research structure Overview about the Vietnamese banking system Theoretical reviews 2.1 Profitability: definition and measurements 2.2 Theories about the profits and profitability 2.2.1 The rent theory suggested by Walker (1887) 2.2.2 The risk theory suggested by Hawley (1893) 2.2.3 The wage theory of profit suggested by Taussig (1910) 2.2.4 The uncertainty-bearing theory suggested by Knight (1921) 2.2.5 The innovation theory suggested by Schumpeter (1934) 10 2.2.6 The dynamic theory of profits suggested by Clark (1990) 10 Empirical reviews 11 3.1 Cross-countries researches 11 3.2 Single country researches 15 3.3 Researches on Vietnamese market 18 3.4 Summary about previous researches 20 CHAPTER III – METHODOLOGY 22 Research design 22 Collection of data and sampling techniques 22 Variables used in the research 24 Hypotheses 25 Analysing techniques 26 CHAPTER IV – ANALYZES AND FINDINGS 27 Descriptive results 27 Correlation results 28 Regression results 33 3.1 Model 33 3.2 Model 37 3.3 Model 40 CHAPTER IV – CONCLUSIONS .44 Conclusion 44 Limitations and recommendations for the future researches 47 REFERENCES 48 LIST OF TABLE Table 1: Summary about previous researches Table 2: Banks included in the research Table 3: Description of variables used in the research Table 4: Descriptive statistics Table 5: Correlations results Table 6: Hypothesis acceptance Table 7: Variables Entered/Removed Table 8: Model summary Table 9: ANOVA test Table 10: Coefficients Table 11: Variables Entered/Removed Table 12: Model Summary Table 13: ANOVA test Table 14: Coefficients Table 15: Variables Entered/Removed Table 16: Model Summary Table 17: ANOVA test Table 18: Coefficients CHAPTER I – INTRODUCTION Rationale If the economy is considered as a body, the banking system will play the role of blood veins, which allocate the funds from savers to borrowers The importance of the financial institutions in general and the banking system in particular for the economy could not be rejected Both microeconomic and macroeconomic activities largely depend on the banking system As a business organization, making profits is one of its surviving purposes and the profitability of banking system will contribute to the stability of the economy Researching on the determinants of bank’s profitability is important for bank’s management to adjust policy and formulate appropriate strategy This topic receives many attentions from scholars and economists The determinants of bank’s profitability could be categorized into three main groups: (1) bank-specific factors, (2) industry-specific factors and (3) macroeconomic factors For the first group, the common indicators are total assets, equity ratio, loan ratio, deposit ratio, liquidity ratio and so on The common indicator of the second group is market concentration and the main indicators for the third group is inflation rate, economic growth, unemployment rate and interest rate On the other hand, the popular indicators of bank’s profitability are ROA, ROE, and NIM There are many empirical researches to determine the influencers of bank’s profitability Some researchers investigate some countries at the same time, such as the research of Yılmaz (2013) on emerging countries or the research of Petria et al (2015) on European countries or the research of Islam & Nishiyama (2016) on South Asian countries Whereas, some researches take into account single market in researches, such as the research of Obamuyi (2013) on Nigeria, the research of Serwadda (2018) on Hungary or the research of Tam et al (2017) on Vietnam market Findings of different researches are also different For example, Yılmaz (2013) suggests that determinants of bank’s profitability are capital adequacy, operating expense management, credit risk, bank size and inflation rate while Tam et al (2017) concludes the determinants are size, asset growth rate, GDP growth rate and interest rate Generally, different researches on different target markets got different results or even the researches on the same target market but covering different time concluded differently This research aims to investigate the determinants of bank profitability using the cases of Vietnamese banks during five most recent years, from 2015 to 2019 Research questions This paper aims to find answers for two below research questions: (1) What are potential determinants of profitability for the bank? Through carefully reviewing both available theories and previous empirical researches, the research will come to the conclusion about the potential determinants of bank’s profitability in general Then, the research will select some determinants to investigate their effects on Vietnamese banks (2) What are the determinants of profitability for Vietnamese banks? The selected potential determinants from the first research question will be investigated empirically for the case of Vietnamese banks using various statistic tools The level and direction of influencing relationship will be concluded In addition, the research will aim to construct regression models, which are used to explain the bank’s profitability indicators by included dependent variables Research scope The research targeted Vietnamese listed banks only There are two stock exchange markets in Vietnam, which are Hanoi Stock Exchange (HNX) and Hochiminh Stock Exchange (HoSE) and the research considers both of them The covered period is five most recent years, from 2015 to 2019 Overview about the research methodology This paper employs quantitative design with the help of various statistical mathematical tools to discover the relationship between variables The researcher expects to collect data from all listed thirteen banks during five most recent years, from 2015 to 2019 Therefore, in total, there are 65 observations should be collected Rather than primary data, the secondary data is employed to generate results Selected indicators of bank’s profitability as dependent variables are ROA, ROE and NIM Whereas, selected independent variables are some bankspecific factors and some macroeconomic factors Research structure There are five chapters in this paper:  Chapter I: Introduction  Chapter II: Literature Reviews  Chapter III: Methodology  Chapter IV: Analyses and Findings  Chapter V: Conclusion CHAPTER II – LITERATURE REVIEW Overview about the Vietnamese banking system Vietnamese bank system is bank-based financial system, where the financial sources for companies mainly come from the bank system Before Revolution (Doi Moi) in 1986, rather than market-oriented, the financial system of Vietnam was operated by only the State Bank of Vietnam (SBV for short), which acted as the government’s tool and budget From Revolution with economic reform purposes and plans, the Vietnamese banking system has been operating and developing in market-orientation and get many improving results (Thanh, 2010) The Vietnamese economy, with the transformation from a centrally planned to market-oriented, got many sweet fruits and developments Its banking system is not an exemption From 1990, with three Decrees, from one-tier, Vietnamese banking system has been two-tier system with the liberation of other banks except SBV Then, the Vietnamese banking system developed quickly (Thanh, 2010) Until end of 2019, total assets of Vietnamese banking system were 12,146,226 billion Vietnam Dong and total charter capital were 617,473 billion Vietnam Dong and various bank types, including State commercial banks (4 banks), Policy banks (2 banks), Commercial Joint Stock banks (31 banks), Foreign banks (9 banks), and Co-operative bank (1 banks) (According to statistics of the State Bank of Vietnam published in its official website http://Sbv.gov.vn) Despite above developments, Vietnamese banking system has low market capitalization, which is only 33% GDP in 2016 (Vuong, 2018) In the bond market, the main player is