The determinants of commercial banks performance in vietnam

BANKING ACADEMY BANKING FACULTY – ADVANCED PROGRAM  GRADUATION THESIS Topic: The Determinants of Commercial Banks Performance in Viet Nam Student : Tran Thi Thao Class : K20 CLCB Course : 2017 - 2021 Student ID : 20A4010550 Advisor : Ph.D Nguyen Hong Yen Hanoi, May 2021 Tai ngay!!! Ban co the xoa dong chu nay!!! 17014129086281000000 DECLERATION  I hereby declare that the graduation thesis with the topic “The determinants of commercial banks performance in Vietnam" is my research work, with the support of my supervisor Ph.D Nguyen Hong Yen The data and results in the thesis are honest and have never been published in any other works I will be responsible for the content I have presented in this thesis Hanoi, May, 19th, 2021 Student Tran Thi Thao i ACKNOWLEDGEMENTS  First of all, I would like to sincerely lectures and tutors in Banking Academy, Faculty of Banking advanced program who has dedicated teaching and impart knowledge, valuable experience during my school years I would like to express special grateful to Ph.D Nguyen Hong Yen, for her valuable guidance, encouragement, correction and detailed comments from the preparation to the completion of this study Last but not least, my thanks are given to my family and friends for all their encouragement and intellectual supported that has made this report possible Hanoi, May, 19th, 2021 Tran Thi Thao ii TABLE OF CONTENTS  DECLERATION ACKNOWLEDGEMENTS ABBREVIATION LIST OF TABLES AND FIGURES INTRODUCTION 1 The relevance of the topic Literature review Research problem and objectives 3.1 Research problem 3.2 Research objectives Research question Research method Structure of the study 11 CHAPTER 1: THEORETICAL BASIS OF BANK PERFORMANCE 12 1.1 Overview of commercial banks 12 1.1.1 Commercial bank and the role of commercial banks in the economy 12 1.1.2 Basic operations of commercial banks 13 1.2 The determinants of commercial bank performance 15 1.2.1 The efficiency and nature of the performance of commercial banks 15 1.2.2 Factors affecting the performance of commercial banks 17 1.2.3 Methods of evaluating the performance of commercial banks 25 CHAPTER 2: THE CURRENT STATUS OF THE VIETNAMESE BANKING SYSTEM 29 2.1 An overview of the development of the Vietnam commercial bank system 30 2.2 The current status of operational efficiency of the system of Vietnam's commercial banks in the period 2010-2020 31 2.2.1 The NPLs 32 2.2.2.The industry average of the ROE and ROA 33 2.2.3 Credit growth and economic growth in Vietnam 34 CHAPTER 3: RESEARCH METHODS 37 iii 3.1 Object range, timing and data collections 37 3.2 Research model building 37 3.2.1 Determine the variables of the model 37 3.2.2 Research models 42 3.3 Descriptive statistics of the variables in the model 44 3.4 Regression method used 46 3.5 Check for defects in the model 48 3.5.1 Heteroskedasticity Test 48 3.5.2 Autocorrelation Phenomenon Test 49 CHAPTER 4: RESULTS AND DISCUSSION 51 4.1 Research results 51 4.2 Discuss research results 54 4.2.1 Equity Ratio - ETA 54 4.2.2 Funding Efficiency-DTA 55 4.2.3 Loan to Assets -LTA 55 4.2.4 Non-performing Loan - NPL 56 4.2.5 Operating Costs - CI 57 4.2.6 Bank Size - SIZE 57 4.2.7 Inflation - INF 58 4.2.8 Economic Growth - GDP 58 CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 59 5.1 Conclusions 59 5.2 Trends in the banking industry 2021-2030 60 5.3 Recommendations 62 5.3.1 For State Bank and Government 62 5.3.2 For Commercial Banks 64 5.4 Limitations of topic 68 5.5 Suggestions for next research 68 REFERENCES 69 APPENDIX 72 iv ABBREVIATION Abbreviation Completed scripts NPLs Non-performing loans ratio OLS Ordinary Least Square FEM Fixed Effects Mode REM Random Effects Mode GDP Gross Domestic Product GLS Generalized Least Squares DEA data envelope analysis method FDH Hull Free Factor TFA Thick Frontier Approach DFA Distribution Free Approach CBs Commerial Banks SBV State Bank Vietnam SGB Saigon Bank For Industry And Trade BVB Viet Capital Commercial Joint Stock Bank NAB Nam A comercial Join Stock Bank PGB Petrolimex Group Commercial Joint Stock Bank ABB An Binh Commercial Joint Stock Bank LPB LienViet Post Joint Stock Commercial Bank VIB Vietnam International Commercial Joint Stock Bank MSB Vietnam Maritime Commercial Join Stock Bank ACB Asia Commercial Bank SHB Saigon Hanoi Commercial Joint Stock Bank OCB Orient Commercial Joint Stock Bank HOSE Ho Chi Minh City Stock Exchange v LIST OF TABLES AND FIGURES Chart &Table Caption Page Chart 2.1 Non-performing loan ratio from 2010 to 2019 32 Chart 2.2 The Average ROA and ROE ratio of CBs from 2010 to 2019 33 Chart 2.3 The GDP and Credit growth from 2010 to 2019 34 Table 3.1 Calculation and expected sign of variables 43 Table 3.2 Variance inflation factor-VIF 44 Table 3.3 Descriptive statistics of the variables 44 Table 3.4 Selection test for model (ROA) 47 Table 3.5 Selection test for model (ROE) 47 Table 3.6 Wooldridge test for Autocorrelation Phenomenon Test 49 Table 4.1 Research results 51 Table 4.2 Table 4.3 Summary of model results and comparison with model expectations Summary of model results and comparison with model expectations vi 52 53 INTRODUCTION 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, 2014) Commercial banks play an important role in linking the savings and investment sectors of the economy Not only that, but commercial banks also have an important and positive role in the economic development of a country If the banking system is operating effectively and disciplined, it brings about the rapid growth in different sectors of the economy According to Mat-Nor et al (2006), efficiency is one of many factors affecting changes in the economy With the trend of globalization of the world economy, today's Vietnamese commercial banks are being fiercely competed by non-bank financial intermediaries and foreign banks Banks that cannot compete will be eliminated and replaced by more efficient banks In the study of bank failure prediction, Barr, Seifor & Siems (1994) stated that operating efficiency is always the factor affecting the failure of a bank Thus, operational efficiency becomes a core criterion for assessing the existence of a bank in an increasingly fiercely competitive international environment Improving operational efficiency is a vital issue for commercial banks A lot of research both at home and abroad has been carried out to study the factors that affect the performance of banks To measure the economic efficiency of a unit or firm, Farrel (1957) was the first to use the DEA method Charnes, Cooper, and Rhodes (1978) and later researchers have based on Farrel's research to continue researching and developing this method With the selection of input and output variables, the DEA method is fairly popular and is used by many authors to measure banks' performance (Grigorian and Manole, 2002) the specific characteristics of the banking industry that the output factors and the inputs have a multidimensional impact, so the correlation of the research variables will give results that reflect the reality and help the reader take a comprehensive view to evaluate the performance of commercial banks However, the selection of input and output variables for each study is different due to the specificity of the banking industry Thus, for Vietnamese banking system, research on factors affecting operational efficiency is extremely necessary It is the basis for bank managers to find out, consider, find the cause and come up with suitable policies to improve the operational efficiency of their banks Therefore, the topic " The determinants of commercial banks performance in Vietnam " is given to meet the current urgent needs Literature review As mentioned in the urgency of topic, banking is essentially a business for profit However, to measure factors such as how much output, how technology changes, or how productivity growth is difficult questions for the following three reasons: (1) Inequality about what services banks provide and how to measure them (2) Banking services are often not publicly priced but rather through market interest rates below the deposit balance, making the observed revenue stream inaccurate to select the critical outputs to include product (3) Banking is a tightly regulated industry in which significant inefficiencies have been shown to exist As a result, the technical innovations that increase the productivity of the most efficient banks may not be well reflected across the industry The purpose of the article is to synthesize methods and apply methods to measure the performance of commercial banks in Vietnam in the period 2010-2020 Accordingly, efficiency and efficiency measurement are gradually becoming popular and used for many different types of organizations Banks are the object of interest to many authors to research efficiency There are currently two widely used efficiency measurement approaches: structured and nonstructural approaches (Hughes & Mester (2008) In a nonstructural approach, researchers will use indicators like ROE (return on equity), ROA (return on assets), C/I (cost ratio) However, this method has two major disadvantages: Firstly, it is impossible to assess the market value of assets, the level of risk; Second, the method is only suitable when the bank uses one input or produces a single output As for the structural approach, researchers will rely on the cost, revenue, and/or profit functions to analyze banking efficiency Up to now, most studies have only used this method to measure banking efficiency because of its optimization, ease of comparison, and suitability for banks Accordingly, the non-restructuring approach includes two main approaches: 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 Farrell (1957) can be considered the father of this approach when given a measure of technical efficiency to reflect a bank's ability to achieve maximum output from a given set of inputs Following that, Charnes et al A Charnes, W.W Cooper, and E Rhodes (1978) based on Farrell's suggestion to develop into a DEA model, the idea is to apply the Production Possibility Frontier (PPF) as a criterion for efficiency evaluation (with relative nature) among companies in the same industry (DMUs - Decision-Making Units, decision-making units) DEA method was then developed in many different models and widely applied as Banker, Charnes, and Cooper (1984), Berger et al (1987) examining economies of scale Of 413 branches of State Bank Viet Nam (SBV) and 241 stateowned commercial banks, Fukuyama (1993) studied the scale efficiency of 143 commercial banks in Japan, Zaim (1995) used the DEA method to evaluate the effectiveness of commercial banks before and after the self Kasman (2002) focuses on research on cost efficiency, economies of scale and technological advancement of the Turkish banking system