The relevance of the topic
Commercial banks are an important intermediary financial institution in the market economy, shifting capital from the surplus to the underdog (Perter S Rose,
Commercial banks are crucial in connecting the savings and investment sectors, significantly contributing to a country's economic development An effective and disciplined banking system fosters rapid growth across various economic sectors Efficiency is a key factor influencing economic changes, as noted by Mat-Nor et al (2006) In the context of globalization, Vietnamese commercial banks face intense competition from non-bank financial intermediaries and foreign banks, leading to the potential elimination of less competitive banks in favor of more efficient alternatives.
In their 1994 study on predicting bank failures, Barr, Seiford, and Siems emphasized that operational efficiency is a critical factor influencing a bank's likelihood of failure Consequently, assessing operational efficiency has become essential for evaluating a bank's viability in today's highly competitive global market.
Improving operational efficiency is crucial for commercial banks, prompting extensive research into the factors influencing their performance The Data Envelopment Analysis (DEA) method, first introduced by Farrel in 1957 and further developed by Charnes, Cooper, and Rhodes in 1978, has become a popular tool for measuring bank efficiency This method allows for the selection of various input and output variables, reflecting the unique characteristics of the banking industry As highlighted by Grigorian and Manole (2002), the multidimensional impact of these variables provides a comprehensive understanding of bank performance However, the choice of specific input and output variables can vary significantly across studies due to the industry's inherent complexities.
Researching the factors influencing the operational efficiency of the Vietnamese banking system is crucial This analysis provides bank managers with insights to identify underlying issues and develop effective strategies to enhance their banks' performance Consequently, the topic "The Determinants of Commercial Banks' Performance in Vietnam" addresses these pressing needs.
Literature review
Banking operates primarily as a profit-driven business, yet assessing key factors like output, technological advancements, and productivity growth poses challenges This difficulty arises from the inherent inequality in the services banks offer and the complexities involved in measuring these services effectively.
Banking services typically lack transparent pricing, relying instead on market interest rates that fall below deposit balances, which skews the perceived revenue streams and complicates the selection of essential products Additionally, the banking sector is heavily regulated, revealing notable inefficiencies that hinder the widespread adoption of technical innovations, limiting productivity gains to only the most efficient institutions.
This article aims to synthesize and apply various methods for measuring the performance of commercial banks in Vietnam from 2010 to 2020 Efficiency measurement has gained popularity across diverse organizations, with banks being a focal point for many researchers Currently, two main approaches to efficiency measurement are widely recognized: structured and non-structural methods, as noted by Hughes and Mester (2008).
In a nonstructural approach to banking performance analysis, researchers often utilize indicators such as return on equity (ROE), return on assets (ROA), and cost ratio (C/I) However, this method has significant drawbacks: it fails to evaluate the market value of assets and the associated risk levels, and it is only applicable when a bank operates with a single input or produces a single output.
Researchers analyze banking efficiency using structural approaches that focus on cost, revenue, and profit functions This method is favored in studies due to its optimization, ease of comparison, and relevance to the banking sector The non-restructuring approach encompasses two primary methodologies.
Firstly, parametric approach with three main methods: (i) Stochastic Frontier Approach (SFA); (ii) TFA analysis method (Thick Frontier Approach); (iii) and DFA (Distribution Free Approach) analysis
Secondly, the non-parametric approach with two main methods: (i) data envelope analysis method (DEA); (ii) and the Hull Free Factor (FDH) method
The DEA analysis method is one of the methods used by domestic and foreign authors in many studies
Farrell (1957) is recognized as the pioneer of measuring technical efficiency, which assesses a bank's capability to maximize output from its available inputs Building on Farrell's foundation, Charnes, Cooper, and Rhodes (1978) advanced this concept into the Data Envelopment Analysis (DEA) model, utilizing the Production Possibility Frontier (PPF) as a standard for evaluating efficiency among companies within the same industry, known as Decision-Making Units (DMUs).
The DEA method, developed by Banker, Charnes, and Cooper in 1984, has been extensively applied in various models to assess economies of scale Notably, Fukuyama (1993) analyzed the scale efficiency of 143 commercial banks in Japan, while Zaim (1995) utilized the DEA approach to evaluate the effectiveness of commercial banks pre- and post-reform Additionally, Kasman (2002) focused on the cost efficiency, economies of scale, and technological advancements within the Turkish banking system, highlighting the method's versatility in banking research.
In their 1998 study, Chen and Yeh analyzed the efficiency of 33 banks in Taiwan using the Data Envelopment Analysis (DEA) methodology They identified key output variables, including loan services, portfolios, interest income, and non-interest income, while input variables encompassed the number of employees, bank assets, number of bank branches, operating costs, and deposits.
Burki and Niazi (2003) conducted a study to assess cost-effectiveness, scale efficiency, and technological advancement in Pakistani banks from 1991 to 2000, categorizing them into state-owned banks (SBV), private banks, and water banks They measured performance using cost-efficiency ratios and employed Data Envelopment Analysis (DEA) to evaluate the impact of various factors on resource allocation efficiency The research aimed to answer three key questions regarding the effects of privatization, liberalization policies, and individual bank regulations on performance The authors developed efficiency measures and applied a fixed effects model to analyze the relationship between efficiency and policy variables, particularly interest rates The findings indicated that banking policies significantly hindered performance, suggesting that in a challenging domestic macroeconomic environment, policy reforms are unlikely to improve individual bank outcomes.
Delis and Papanikolaou (2009) utilized the DEA model to analyze the effects of bank size, equity, risk management, total investment on GDP, and short-term interest rates on banking efficiency in Europe Similarly, Chen (2005) employed the DEA model to assess changes in technical efficiency and total productivity factors, alongside regression models to evaluate the performance of commercial banks in Taiwan during the Asian financial crisis Additionally, Naceur (2005) and Zeitun (2012) applied the DEA model in the context of Gulf countries, focusing on various variables in their regression analyses.
The performance of banks is significantly influenced by several key factors, including ownership type and bank size Additionally, important indicators such as Return on Assets (ROA) and Return on Equity (ROE) also play a crucial role in assessing bank performance.
Identifying the inputs and outputs in the banking industry poses significant challenges due to its complex nature as a service sector Currently, there is no comprehensive theory or definition that clearly delineates a bank's inputs and outputs, leading to confusion in studies regarding the role of deposits as either inputs or outputs, and whether these should be measured by quantity or currency volume To address this, five approaches have been proposed to define bank input and output variables: (1) The Production Approach, which emphasizes the technical efficiency of banks as service providers, treating deposits as outputs while excluding interest payments from total costs; (2) The Intermediary Approach, which views banks as institutions that mobilize and allocate loans, considering deposits as inputs and including interest payments in operating costs; and (3) The Asset Approach, which distinguishes between debt assets as inputs and other assets as outputs.
The value-added approach treats any balance sheet item as an output if it attracts labor and capital contributions, while items not attracting these are considered inputs Under this framework, deposits are viewed as outputs due to their role in creating added value Conversely, the cost-use approach defines output and input based on net contributions to bank revenues, also categorizing deposits as outputs In conclusion, selecting the appropriate approach depends on the collected data and the bank's actual operations.
6 approach to select the best input and output variables, the most suitable for measuring the commercial banks' performance measures,
Many authors also choose to use the methods of Pooled OLS, REM, FEM to study how internal and external factors affect the bank's performance
Davydenko (2011) analyzes the determinants of bank returns in Ukraine from 2005 to 2009 using fixed effects and random effects models, focusing on the ROA index across 178 banks The study employs three distinct models: the first encompasses all banks, the second targets the ten largest banks controlling 50% of total assets, and the third examines the remaining 168 banks Key independent variables include equity ratio, credit risk reserve, bank size, management cost to income, liquidity, lending, and deposits, while external factors consist of foreign ownership, GDP logarithm, inflation, and exchange rates The findings reveal that Ukrainian banks struggle with low-quality loans and inadequate management, hindering their ability to capitalize on the growing deposit volume Although internal operational margins are low, banks benefit from favorable external conditions, particularly the exchange rate Additionally, the research identifies a distinct profit model for foreign-owned banks compared to domestic monopolies.
A study conducted by Kristina Bojare and Inna Romanova (2017) analyzed quarterly data from 17 banks in Latvia between 2005 and 2016, focusing on 11 variables that encompass both internal and macroeconomic factors affecting bank profitability The findings indicate that the economic environment, transportation, budgetary policies, and competition within the banking sector significantly influence profitability Key factors such as economic growth, credit size, asset size, and cost management efficiency demonstrate a positive correlation with the profitability of banks in Latvia.
Research problem and objectives
Research problem
Commercial banks serve as both financial intermediaries and profit-driven businesses, inherently involving a degree of risk (Rose, 2004) Different perspectives exist in banking literature; some authors view banks primarily as producers (Benston, 1965; Ferrier et al., 1990; Zenios et al., 1999), while others emphasize their role as financial intermediaries (Sealey and Lindley, 1977; Casu et al., 2003) Additionally, some researchers argue that banks fulfill both functions (Frexias and Rochet, 1997; Athanassopoulos and Giokas, 2000) This multifaceted approach highlights the importance of evaluating a bank's operational and financial intermediation efficiency.
Numerous studies have identified key factors influencing bank performance, categorized into internal and external elements This research focuses on examining how these internal and external factors specifically impacted the performance of Vietnam Joint Stock Commercial Bank from 2010 to 2020.
Research objectives
Objective 1: The thesis will apply the theory of banking performance, based on the research results of the leading authors at home and abroad, to determine the factors affecting efficiency operations of banks in Vietnam and giving suitable research model
Objective 2: From the research results, the article will build proposed solutions to improve the operational efficiency of Vietnamese banks.
Research question
With the above research objectives, the thesis will focus on researching and solving the following four questions
Question 1: How is the current performance of Vietnamese banks?
To evaluate the performance of commercial banks, key criteria include profitability, asset quality, capital adequacy, and liquidity management In the context of Vietnamese banks, factors influencing their performance encompass economic conditions, regulatory frameworks, and competitive pressures To enhance operational efficiency, banks can implement advanced technologies, streamline processes, and focus on customer-centric strategies.
Research method
This study employs a quantitative research method to analyze operational efficiency in Vietnamese banks, focusing on identifying and modeling the factors that influence it Utilizing a theoretical framework, the research collects actual survey data from the Vietnam Joint Stock Commercial Bank and applies mathematical statistics through EXCEL and STATA software to test the proposed model The findings from this approach aim to address specific research questions related to operational efficiency.
Data sources and data collection methods
The course utilizes secondary data sources, including financial statements from bank websites, as well as reports, books, magazines, and dissertations related to the operational efficiency of banks Additionally, it incorporates documents from the State Bank of Vietnam (SBV), the Ministry of Finance, and the Department of Taxation to enhance the analysis.
Sample selection method and sample size determination:
- The thesis uses a non-probability sampling method, in which the convenient sample is used Specifically, a survey of 25 commercial banks
This thesis analyzes data from 25 commercial banks over a decade, specifically from 2010 to 2020, resulting in a comprehensive dataset comprising 275 samples The study focuses on determining the value of various financial variables within this timeframe.
The research period from 2010 to 2020 was chosen for two main reasons: first, to ensure the findings are based on updated credit data for greater applicability, and second, to reflect the significant reforms in the Vietnam commercial banking system that have occurred since the annual renewal period began in 1986, including three major reforms from 1987-1990, 1990-2000, and the latest reform thereafter.
Since 2000, research has focused on the third reform of the banking system, serving as a foundation for policymakers to analyze the advantages and disadvantages of this reform.
Methods of analysis and data processing:
This study analyzes the current performance of commercial banks using descriptive statistical methods Data is entered using Microsoft Excel XP, and the Summarize procedure in Stata is employed for analysis The findings will highlight key indicators that reflect the operational status of the banks.
This study examines the factors influencing bank performance by employing three estimation models: Pooled Ordinary Least Squares (OLS), Random-Effects Model (REM), and Fixed Effects Model (FEM) After identifying the limitations of these models, the author opts to utilize the Generalized Least Squares (GLS) model for a more robust analysis.
Structure of the study
The study is divided into five parts:
Chapter 1: Theoretical basis of bank performance
Chapter 2: The current status of the performance of the Vietnamese commercial banking system
Chapter 4: Research results and discussion
THEORETICAL BASIS OF BANK PERFORMANCE
Overview of commercial banks
1.1.1 Commercial bank and the role of commercial banks in the economy
The evolution of the banking system is closely tied to the growth of the commodity economy, leading to a significant transformation of commercial banks into modern, multinational financial corporations As the market economy advanced, the banking system evolved from its primitive origins to become a vital financial intermediary that connects savers with investors Commercial banks serve as money trading organizations that accept deposits, facilitate lending operations, and invest in profitable assets while offering a range of financial, credit, and payment services Consequently, commercial banks play a crucial role in the economy, underpinning financial stability and supporting economic growth.
Commercial banks serve as crucial financial intermediaries by transforming household savings into credit for businesses and investment activities They are the primary source of consumer credit and play a significant role in the market for government bills and bonds, which are essential for funding public programs Additionally, commercial banks provide vital working capital as well as medium and long-term financing for enterprises.
A commercial bank facilitates payments on behalf of customers for goods and services by issuing and clearing checks, as well as providing an electronic payment network.
- As a guarantor, a commercial bank commits repaying debts to customers when the customer loses its solvency
- As an agent, commercial banks on behalf of customers manage and underwrite securities issuance or redemption
- Finally, as policy implementation, commercial banks are also an important channel to implement the government's macro policy, contributing to regulating economic growth and pursuing the social goal
1.1.2 Basic operations of commercial banks
Commercial banks are professional institutions that offer a range of financial and monetary services to the public while playing a vital role in the economy Their success hinges on their ability to deliver services at competitive prices The core business operations of commercial banks can be categorized based on their various functions.
A commercial bank engages in two key activities: capital mobilization and creating working capital To thrive in their business operations, these banks focus on capital mobilization, which is essential for generating the necessary funds to support their financial activities.
- Equity: This is the starting capital and is added during the operation
While equity may only constitute about 10% of a bank's total wealth, it is crucial for the bank's operational expansion and network growth This source of capital supports various activities, including mobilization efforts, investment in fixed assets, joint ventures, and financing subsidiaries, all of which reflect the bank's financial strength and risk management capabilities Equity sources comprise the bank's charter capital, business-generated funds, and other assets in accordance with state regulations.
Savings deposits constitute a significant portion of the total capital mobilized by commercial banks, primarily from residents Additionally, banks attract term deposits from businesses and social organizations, which can either be fixed-term deposits or corporate accruals Alongside these, demand deposits are also mobilized, allowing depositors to withdraw funds at any time While demand deposits, including those for asset security, offer low mobilization costs, they also present challenges due to their volatility, complex mobility, and associated risks.
Commercial banks can enhance their competitiveness in the financial market by issuing various securities, such as certificates of deposit, bonds, and promissory notes These instruments come with different terms and interest rates, allowing banks to diversify their capital mobilization strategies and cater to customers' needs for holding multiple asset types simultaneously.
Commercial banks often face increased loan demand or cash flow shortages, prompting them to borrow from other banks, including the State Bank, through methods such as discounting and rediscounting valuable papers or credit contracts Additionally, they may seek funds from other financial institutions in the money market to address temporary capital shortages Another crucial function of commercial banks is engaging in credit and investment activities, which generate revenue and help offset operational costs.
Credit activities remain a fundamental aspect of commercial banks, contributing significantly to their income by representing 60% to 80% of their assets While these activities are essential for profit generation, they also expose banks to various risks, including liquidity risk, interest rate risk, political risk, and ethical risk, which can impact their stability and growth.
15 they will significantly impact the bank because most of the bank's capital is mobilized from the economy
Investment activities play a crucial role for commercial banks by diversifying capital usage, mitigating operational risks, enhancing income, and ensuring liquidity when needed Beyond traditional credit operations, these banks engage in various investment strategies, including indirect investments in the stock market through the buying and selling of government or corporate securities, as well as direct investments by contributing capital to businesses and finance companies.
As economic development progresses, service delivery activities have become crucial for diversifying operations and generating significant revenue for banks Key services offered include payment processing, treasury services, guarantees, foreign currency trading, trust and agency services, and securities trading Furthermore, with the rise of information technology, banks are expanding their offerings to include innovative solutions such as card services and Internet Banking.
The determinants of commercial bank performance
1.2.1 The efficiency and nature of the performance of commercial banks
In the operations of commercial banks, according to the system theory, efficiency can be understood in two aspects as follows:
- Ability to convert inputs into outputs or profitability or reduce costs to increase competitiveness with other financial institutions
- Probability of safe operation of the bank
The stability and development of the economy are closely linked to the health of the commercial banking system, as these banks serve as financial intermediaries connecting the savings and investment sectors Consequently, fluctuations in commercial banking can significantly impact various national economic sectors.
Commercial banking functions as a business entity focused on maximizing profitability As noted by Peter S Rose (2004), a Yale University professor of economics and finance, while risk is a factor in banking operations, the primary objective remains profitability High income enables banks to maintain capital, enhance market share, and attract investment capital.
Efficiency in economics, as defined in the English-Vietnamese Dictionary of Mathematical Economics, Statistics, and Econometrics by Nguyen Khac Minh (2004), refers to the relationship between the input of scarce resources and the output of goods and services It assesses how effectively markets distribute resources Essentially, efficiency measures the success of businesses or banks in utilizing available inputs to produce outputs that meet specific objectives.
Producers aim to minimize waste by either maximizing output from limited inputs or reducing input usage for a specific output This focus on efficiency is known as technical efficiency, which involves optimizing input use to achieve desired output levels At a broader level, producers seek to minimize costs while producing outputs or to maximize sales and profits using available inputs This approach is referred to as economic efficiency, emphasizing the importance of cost minimization in relation to output levels Ultimately, manufacturers strive for high economic efficiency, measured through key indicators such as costs, revenue, and profit.
Efficiency encompasses the impact of technological advancements, optimal resource allocation, workforce skills, and management expertise It highlights the relationship between economic performance and the costs incurred to achieve it.
Evaluating the performance of commercial banks can be divided into two groups: absolute efficiency and relative efficiency:
Absolute efficiency indicators, defined as operational efficiency equating to economic performance minus the costs incurred, provide a comprehensive evaluation of commercial banks' performance However, these indicators can pose challenges for comparison; for instance, larger banks may yield higher profits than smaller ones, yet this does not necessarily imply greater efficiency Consequently, absolute efficiency does not effectively reflect the potential economic value or the wastefulness of input utilization.
Relative efficiency is a crucial measure that does not inherently reveal potential economic waste; it can be represented in both static and dynamic forms In static terms, performance is calculated as financial performance divided by the costs incurred to achieve that outcome, or conversely as costs divided by economic performance In dynamic or marginal terms, performance is defined as the increase in economic performance relative to the increase in price These indicators facilitate effective comparisons over time and across different entities, such as enabling an efficient analysis of banks of varying sizes and operating in different time periods.
The concept of efficiency varies depending on the research objectives, as it can be assessed from multiple perspectives Due to constraints in time and available data, this thesis evaluates the performance of commercial banks through specific economic performance criteria It highlights the optimal relationship between financial results and the costs incurred to achieve those results In essence, the thesis defines efficiency in the context of commercial banking as the capability of banks to transform inputs into outputs effectively.
1.2.2 Factors affecting the performance of commercial banks
Efficiency is the decisive condition for the survival and development of a bank, so improving efficiency also means strengthening financial capacity, operating capacity to create accumulation and facilitate expansion Business
Eighteen key activities play a vital role in maintaining and enhancing the brands of commercial banks To improve operational efficiency, it is essential to identify the factors influencing the performance of these banks, aiming to mitigate risky activities while preserving capital and boosting income and profits These influencing factors can be categorized into two groups: objective factors and subjective factors The impact of these elements on a bank's performance varies based on the specific conditions of each institution.
1.2.2.1 Group of external factors a Domestic and foreign economic, political and social environment:
Commercial banks serve as crucial financial intermediaries, connecting the savings sector with the investment sector of the economy Consequently, their operations are significantly influenced by shifts in the economic, political, and social landscape.
A stable economic, political, and social environment fosters favorable conditions for commercial banks, ensuring a smooth production process and enhancing the capital absorption and repayment capabilities of enterprises With robust and steady economic growth, the demand for loans rises as businesses across all sectors seek to expand their operations This increased demand allows commercial banks to grow their lending activities, while simultaneously reducing credit risk and the likelihood of bad debts, ultimately strengthening the financial health of enterprises.
Economic, political, and social instability negatively impacts commercial banks by reducing loan demand and increasing the risk of overdue and bad debts, ultimately harming their performance Additionally, the current trend of robust international economic integration further influences the banking landscape.
The economies of the countries in the world are increasingly dependent on each other; international capital flows have been pouring into Asia vigorously, creating
Vietnam's banking system is presented with numerous opportunities, particularly in leveraging capital, technology, and management expertise from developed economies However, it also encounters significant challenges due to increased competition from emerging financial corporations, which excel in capital, technology, and management capabilities Currently, Vietnamese commercial banks are relatively weak in financial strength, banking management experience, and technological advancements Furthermore, as international economic integration deepens, fluctuations in the global economic, political, and social landscape—especially among Vietnam's key partners—substantially impact the performance of these banks.
The legal environment encompasses the completeness of the legal system, adherence to legal documents, and the intellectual capacity of the populace The evolution of market economies over centuries underscores the significance of a robust legal framework in regulating economic activities A poorly constructed legal system can hinder economic progress, particularly in countries like Vietnam, which has transitioned from a planned economy to a market-oriented one over the past two decades The current legal framework in Vietnam is inadequate, posing challenges for commercial banking operations Moreover, the rapid monetization necessitates the swift enactment of new laws and the amendment of outdated regulations to align with contemporary economic realities A comprehensive legal environment is essential for effectively addressing disputes and complaints arising from socio-economic interactions, highlighting the critical role of legal structures in fostering economic activities.
20 of commercial banks, in particular, it is the premise for the development of the banking industry fast and sustainable c GDP- economic growth
According to Tran Huy Hoang's textbook on Commercial Bank Management in
In 2011, the banking sector encompasses money, credit, and banking services, playing a crucial role in socio-economic life Economic volatility significantly impacts bank performance, which is reflected in GDP growth levels The relationship between GDP growth and banking performance is reciprocal; banks contribute to GDP growth while also benefiting from it through improved operational efficiency Commercial banks mobilize surplus funds from various sources, converting them into profitable investments rather than merely storing them This efficient circulation of capital through the banking system supports economic growth, particularly in areas like infrastructure development, ultimately benefiting depositors and the banking intermediary system Additionally, banks, as profit-driven entities, engage in credit screening to allocate capital to profitable enterprises, ensuring resources are distributed effectively across industries This strategic allocation fosters overall economic growth, while ineffective sectors are left without funding, highlighting the importance of financial intermediaries in wealth distribution.
21 economy operates effectively, it also contributes to increasing the banking system's operational efficiency
THE CURRENT STATUS OF THE VIETNAMESE BANKING
An overview of the development of the Vietnam commercial bank system
Prior to 1988, Vietnam's banking system operated as a one-tier structure, comprising the State Bank of Vietnam and its branches distributed across various administrative regions This system primarily focused on state management of monetary, banking, credit, and payment operations while also functioning as a commercial bank Essentially, the banking system served as an instrument to execute government directives and monetary plans, acting as a "second financial agency" alongside the Ministry of Finance to allocate capital within the economy.
Following the introduction of Decree 53 by the Council of Ministers in 1988, a pilot implementation of a two-tier banking system was established This system, operational from 1988 to 1990, effectively separated the business functions from the management functions of the State Bank, delegating the business responsibilities to specialized banks.
In the 1990s, the Vietnamese banking system experienced significant reforms highlighted by the introduction of the Ordinance on the State Bank and the Ordinance on Credit Institutions, marking a pivotal shift towards modernization and enhanced financial stability.
In 1990, Vietnam's banking system underwent significant reform, aligning it with market economies by eliminating state monopolies and allowing the establishment of various types of commercial banks The introduction of joint venture banks and foreign bank branches facilitated foreign investment and accelerated the transfer of modern banking technology to Vietnam Additionally, this reform emphasized the central role of the State Bank, particularly through regulations on compulsory reserve management for commercial banks, ensuring overall safety in the banking sector.
To ensure a healthy banking system in Vietnam and prevent breakdowns like those seen in the past, it is essential to diversify banking operations in terms of ownership and types of banks While Vietnamese banks have made significant strides in refining their management mechanisms and diversifying lending and capital mobilization, their primary focus remains on lending activities This reliance exposes commercial banks to substantial risks, including challenges in debt recovery, which has led to a notable increase in bad debts across the banking sector.
Between 2000 and 2010, state-owned commercial banks underwent significant restructuring as part of a government-approved plan initiated in October 2001 This process aimed to reorganize the banks' operational frameworks, improve their operational efficiency, and enhance business management A key focus was to differentiate the lending functions of policy banks from the monetary operations of commercial banks, thereby strengthening their financial capabilities.
The current status of operational efficiency of the system of Vietnam's
Table 2.1: Non-performing loan ratio from 2010 to 2019
Source: Compiled from the State Bank
In the context of high credit growth and poor credit quality, the NPL ratio from 2010-2014 tended to increase sharply from 2.52% (2010) to the highest in
In Vietnam, the non-performing loan (NPL) ratio peaked at 4.86% in 2012, decreasing to approximately 3.7% in 2013 and 2014, following a significant increase of 85,000 billion VND, which accounted for 3.3% in 2011 This rise in NPLs can be attributed to several factors: an unreasonable economic development model, a loosening monetary policy that led to rapid credit growth without ensuring quality, and the impact of the global economic crisis in 2008 on businesses, particularly in the import and export sectors As credit institutions remain the primary capital channel in Vietnam's transitioning economy, fluctuations in macroeconomic indicators significantly influence banking operations By the end of 2011, the banking sector faced potential systemic risks, highlighted by soaring lending rates exceeding 20% from 2009 to 2011 and liquidity challenges within commercial banks.
33 system encountered difficulties, interbank lending rates were up to 30% - 40%; lousy debt increased rapidly; efficiency and profit decline
The high non-performing loan (NPL) ratio has led to liquidity issues for banks, adversely affecting their business performance However, following a comprehensive restructuring of the credit institutions system by the State Bank from 2015 to the end of 2020, the NPL ratio has gradually decreased to a low level of approximately 1.63% per year.
2.2.2.The industry average of the ROE and ROA
Table 2.2: The Average ROA and ROE ratio of CBs from 2010 to 2019
Source: Compiled from the State Bank
Return on equity (ROE) and return on total assets (ROA) are essential metrics for assessing bank profitability In 2010-2011, both ratios remained robust, with ROE consistently exceeding 20% and ROA above 1%, indicating effective business operations and high profitability However, following an increase in the non-performing loan (NPL) ratio in 2011, Vietnam's commercial banking system experienced a significant decline in these metrics, with ROE dropping from over 20% in 2011 to 13.8% in 2012, and further decreasing to just 10.05% by 2014, primarily due to the adverse effects of rising bad debt levels.
In 2015, key financial indicators plummeted to alarming lows of 5,989% and 0.49% In response, the Prime Minister approved a debt settlement scheme aimed at restructuring the credit institutions system, which subsequently led to a gradual increase in the ROE and ROA indicators.
In 2018, banks accelerated their efforts to boost equity to meet capital adequacy ratios as outlined in Circular 41/2016/TT-NHNN Despite this, the growth of after-tax profits outpaced equity growth, allowing the return on equity (ROE) ratio to remain high, with 13 out of 26 banks achieving ROE between 10% and 28% Additionally, the number of banks with a return on assets (ROA) exceeding 1% increased to 9 out of 26, up from 6 in 2017 and 3 in 2016.
In 2019, the ROE and ROA ratios reached an impressive number of 15.29% and 1.08%, respectively
2.2.3 Credit growth and economic growth in Vietnam
Table 2.3: The GDP and Credit growth from 2010 to 2019
Source: Compiled from the State Bank
Credit growth serves as a crucial indicator for evaluating economic growth in countries, reflecting the effectiveness of monetary policy implementation and the focus of monetary policy executives on coordinating economic activities.
In the period 2010-2014, credit growth had a quite strong decline due to this period; the NPL ratio increased, so banks had to tighten credit
Between 2014 and 2019, Vietnam experienced a significant surge in credit growth that outpaced the GDP growth rate during the same timeframe.
Vietnam's economy is experiencing a robust recovery, driven by global economic growth and strong domestic demand, leading to a significant increase in credit growth From 2014 to 2019, Vietnam's GDP growth steadily improved, culminating in a remarkable 7.08% growth rate in 2018, the highest in a decade This positive trend indicates a thriving economy, marked by a clear shift in its economic structure towards industrialization and modernization Over the past five years, there has been a notable transition with a greater emphasis on services and industry, while the agricultural sector's proportion has decreased, reflecting a smooth and rapid transformation in Vietnam's economic landscape.
The economic growth has led to a notable recovery in credit growth at commercial banks, particularly evident in the 2016-2017 period, which saw an impressive increase of approximately 18.25%, three times the GDP growth during the same timeframe This surge in credit is attributed to various factors influencing the economy and reflects optimistic expectations for recovery across all production and business sectors, as well as an improvement in the population's income.
Between 2018 and 2019, there was a notable decrease in the banking sector, which is seen as an expected outcome given the industry's expanding scale Additionally, the implementation of new legal regulations designed to enhance banking safety has somewhat limited growth in the number of operations, but has ultimately contributed to the long-term sustainability of banking businesses.
This chapter details the evolution and growth of Vietnam's banking system, focusing on the operational performance of commercial banks from 2010 to 2020 Despite facing challenges in their operating budgets during the difficult economic years of 2012-2013, the banking sector has shown gradual improvement in recent years.
RESEARCH METHODS
Object range, timing and data collections
The sample includes 25 Vietnamese commercial banks (appendix 9)
Researching to select a period from 2010 to 2020 to study the factors affecting the bank's performance to be able to make the most appropriate, timely, and useful recommendations
The course utilizes secondary data sources, including financial statements obtained from bank websites, as well as reports, books, magazines, dissertations, and documents pertaining to the operational efficiency of banks Additionally, information is gathered from the State Bank of Vietnam (SBV) websites to enhance the analysis.
Research model building
3.2.1 Determine the variables of the model
The author selects Return on Assets (ROA) and Return on Equity (ROE) as key indicators to evaluate the performance of commercial banks in Vietnam ROE reflects the bank's ability to generate returns from stockholders' equity investments, while both ROA and ROE have been utilized by numerous previous researchers, including Nader Naifar.
(2010), Sangeeta D.Misra (2015) ROA and ROE are the indicators representing the financial performance of enterprises, while the efficiency of commercial banks is mainly shown in terms of financial capacity
3.2.1.2 Independent variables and research hypotheses a Equity ratio (ETA)
The equity ratio, calculated by dividing equity by total assets, plays a crucial role in assessing bank profitability This key metric reveals the safety of a bank's capital and provides insights into its overall stability and strength.
The equity ratio plays a crucial role in various research contexts, as it enhances a business's resilience to losses from risks, particularly credit risks, which can facilitate credit growth and lead to higher returns (Berger, 1995b) Additionally, increasing the equity ratio can improve a commercial bank's credit rating, effectively lowering capital costs (Molyneux, 1993).
The investment portfolio theory highlights a risk-expected return relationship, indicating that as commercial banks increase their equity ratio, their overall risk diminishes Consequently, this leads to lower expected returns compared to scenarios with lower equity ratios or higher financial leverage Research by Tan (2014) on Chinese commercial banks corroborates this, revealing that banks with substantial equity and lower leverage tend to exhibit reduced return on equity (ROE).
The relationship between equity ratio and the profitability of commercial banks remains inconclusive according to existing theories (Dietrich and Wanzenried, 2011), as it varies based on the specific research sample and the dependent variables utilized in the experimental model Drawing from prior research, the author has selected the equity-to-assets ratio (ETA) as a key factor influencing bank profitability, forming the basis for their hypothesis.
H1: "Financial autonomy has a positive correlation with the performance of commercial banks." b Efficient funding (DTA)
Deposits play a crucial role in measuring capital efficiency for banks, as they primarily rely on public deposits to finance customer loans Serving as the cheapest source of funds, high deposits can enhance bank profits when there is strong demand for loans However, if loan demand is low, substantial deposits may negatively impact a bank's income due to increased costs from higher interest rates and longer terms.
Sehrish, Faiza and Khalid (2011) did a research in Pakistan, indicated that deposit to assets ratio has positive impact on bank’s Protability Based on this research, the author suggests a hypothesis:
The relationship between deposit rates and a bank's profitability is positive when there is a strong demand for loans Conversely, when borrowing demand is low, the mobilization rate tends to negatively impact the bank's profitability Understanding these dynamics is crucial for managing the bank's assets and liabilities effectively.
The ratio of total loans to total assets serves as an important indicator of asset composition, highlighting that loans are the primary source of income for commercial banks Research by Mamatzakis Sehrish and Remoundos (2003), as well as Faiza and Khalid (2011), demonstrates a positive correlation between the loans to assets ratio and bank profitability, suggesting a significant hypothesis regarding the financial performance of banks.
H3: "Ratio of outstanding loans and bank profitability is a positive relationship." d Bad debt (NPLs)
Numerous empirical studies indicate that non-performing loans (NPL) and loan loss provisions serve as key indicators of credit quality and risk for commercial banks Generally, an increase in the bad debt ratio signifies a decline in the credit operations' quality, leading to heightened credit risks and negatively affecting the banks' business performance However, research findings vary significantly based on the country, time frame, and performance measurement criteria This study focuses on the period analysis of NPL to provide insights into these dynamics.
H4: “NPLs has an inverse correlation with the performance of commercial banks” e Effective cost management (CI)
Operating expenses are deducted from total operating income to determine the net profit of commercial banks The ratio of operating expenses to total assets serves as a key indicator of non-operating efficiency.
40 interest input costs of commercial banks (Fries and Taci, 2005), which shows the efficiency of the management of commercial banks
While a negative relationship between operating costs and commercial bank profitability is commonly anticipated, these costs can also positively impact profitability by enhancing human capital productivity For instance, higher salaries may boost employee motivation and effectiveness, ultimately leading to increased profits for commercial banks Drawing from the research of Fries and Taci (2005) and Molyneux and Thornton (1992), the author identifies the Cost-to-Income (CI) ratio as an independent variable, supporting this hypothesis.
H5: "Operating costs harm operational efficiency." f Bank’s Size (SIZE)
Research consistently demonstrates the positive impact of scale on the efficiency of commercial banks Mitchell and Onvural (1996) analyzed data from U.S commercial banks with assets over $100 million from 1986 to 1990, employing a cost-effective frontier model using Fourier Flexible functions Their findings indicate that larger banks tend to be more cost-effective Similarly, Wheelock and Wilson (2012) utilized a non-parametric approach to examine U.S banks from 1984 to 2006, confirming the presence of economies of scale across various bank sizes Stever (2007) noted that larger commercial banks benefit from diversified asset portfolios and operations, whereas smaller banks face challenges in risk management, often necessitating higher collateral or targeting lower-risk borrowers.
Research indicates a negative correlation between the size and efficiency of commercial banks Pasiouras and Kosmidou (2007) analyzed balance sheet data from 584 commercial banks across the European Union, covering the period from 1995 to 2001, revealing significant insights into this relationship.
The size of commercial banks negatively affects the Return on Average Assets (ROAA) for both foreign and domestic institutions, highlighting the economic implications tied to the scale of smaller banks, while larger banks experience the opposite effect.
Other studies show that the size of total assets does not have a statistically significant effect on business performance like Fukuyama (1993); McKillop et al
In various studies, including those by Sufian (2011) on Korean commercial banks and Öhman and Yazdanfar (2018) on Swedish commercial banks, the impact of bank size on profitability has been highlighted Based on these findings, the author hypothesizes that bank size significantly influences the profitability of commercial banks in Japan.
H6: "Bank size has a positive correlation with the performance of commercial banks." g Economic Growth (GDP )
Descriptive statistics of the variables in the model
Table 3.3: Descriptive statistics of the variables
Variable Obs Mean Std Dev Min Max
Source: Calculation results from Stata software
Obs: number of observations; Mean: mean value, std.Dev: standard deviation; Min: minimum value; Max: maximum value
The average Return on Assets (ROA) and Return on Equity (ROE) for the banks analyzed is 0.897% and 10.3%, respectively, indicating a strong efficiency in capital and asset utilization The standard deviations for ROA and ROE are 0.008 and 0.096, respectively, which are within acceptable limits Notably, Tpbank recorded the lowest ROA and ROE values in 2010 at -0.0599 and -0.5633, reflecting its early operational challenges following its establishment in 2008 Conversely, Viettinbank achieved the highest ROA of 0.048 in 2018, while BIDV reported the highest ROE of 0.89 in 2020.
In 2011, the average equity to total assets ratio for banks was 9.9%, with a standard deviation of 0.08 Among these banks, SGB reported the lowest equity ratio at 2.67%, whereas An Binh Bank achieved the highest equity ratio, reaching 47.94%.
The ratios of deposits to total assets and loans to total assets vary among banks, with standard deviations of 0.13 and 0.14, respectively.
The deposit-to-total-assets ratio ranges from a high of 89.87% to a low of 5.25%, averaging 69.84% Meanwhile, the loan-to-total-assets ratio varies significantly, with a peak of 85.14% and a minimum of 8.47%, resulting in an average of 54.76%.
NPL: The average NPL ratio of 2.12% is a pretty good number, the standard deviation of 0.0108 shows that the bad debt ratio of banks is not too big The
In 2012, SHB experienced its highest non-performing loan (NPL) ratio of 8.8%, coinciding with a significant consolidated loss of 95.5 billion dongs This sharp increase in the NPL ratio, which quadrupled compared to the end of 2011, was largely attributed to SHB's merger with Habubank, necessitating the assumption of Habubank's financial losses.
The ratio of operating expenses to total mean income stands at 77.012%, with a standard deviation of 37% The maximum recorded value is 185.48%, while the minimum is 29.08% Notably, this ratio has shown a decreasing trend over the years, indicating that banks are increasingly implementing effective strategies for managing operating costs.
The average logarithmic size of banks is 18.4629, with a standard deviation of 1.53 The largest recorded size is 21.13979, while the smallest is 1.7625 Additionally, the size of banks shows a consistent year-over-year increase.
Vietnam's GDP growth has been impressive, averaging 6.018% over the years, with some years exceeding 7% However, in 2020, the Covid pandemic caused a significant decline, resulting in a GDP growth of just 2.91%, the lowest in years Despite this setback, Vietnam remains one of the few countries in the region to achieve positive economic growth during challenging times.
The average inflation rate is currently 5.93%, with a standard deviation of 0.047, indicating a trend of decreasing inflation over the years In 2020, the inflation rate reached 3.2%, reflecting a rise of 2.31% from 2019, yet it remains below the National Assembly's target of under 4%.
Regression method used
Research data is typically organized in tabular form, capturing the characteristics of variables across both space and time This data format offers numerous advantages, making it increasingly popular in various studies Among the favored regression techniques for analyzing such data are the Pooled model based on the OLS method, the fixed-FEM regression model, and the random-REM regression model To determine the most appropriate model for analysis, this article employs the Hausman test.
Table 3.4: Selection test for model 1 (ROA)
Test Pooled OLS and FEM FEM and REM
Conclusion Choose FEM Choose REM
Table 3.5: Selection test for model 2 (ROE)
Test Pooled OLS and FEM FEM and REM
Conclusion Choose FEM Choose FEM
Source: Results from STATA a Comparing Pooled and FEM models
Use the F-test to choose the appropriate model between the Pooled OLS and FEM models with the hypotheses given as follows:
H0: The Pooled model is more efficient than the FEM model
H1: The Pooled model is less efficient than the FEM model
Model 1: P-value in the F-test = 0.0001