The effect of credit risk management on the financial performance of commercial banks in vietnam

BANKING ACADEMY ADVANCED PROGRAM ================= GRADUATION THESIS THE EFFECT OF CREDIT RISK MANAGEMENT ON THE FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN VIETNAM STUDENT NAME: ZNGUYEN VIET THANH CLASS: K21CLCA COURSE: 2018-2022 STUDENT ID: 21A4010948 INSTRUCTOR: zMS PHAM HONG LINH (MSc) Hanoi, May, 2022 Tai ngay!!! Ban co the xoa dong chu nay!!! 17014129036601000000 GUARANTEE STATEMENT The author certifies that the research findings in the thesis are the result of my efforts and have not previously been published in any other research program The research findings and other documents (citations, tables, formulas, graphs, and other papers) utilized in this work have been agreed upon and fully cited by the authors If this is a crime, I would wish to undertake complete responsibility for the foregoing commitments in front of the Thesis Defense Council, the Faculty of Banking, and the law Hanoi, May 𝟐𝟏𝒕𝒉 2022 Author Nguyen Viet Thanh i ACKNOWLEDGEMENTS It gives me great pride to be able to study a high-quality bachelor's program at Banking Academy since it encourages young students to widen their thought and advanced abilities in a variety of highly practical disciplines, allowing for future selfdevelopment After months of hard work, my research is complete, and it is now time for me to express my gratitude to everyone who has eagerly supported me I'd like to express my appreciation and sincere thanks to Ms Pham Hong Linh, Master in Banking and Finance, who has committed all of her time and passion to provide students with important knowledge and constructive ideas Because of her unconditional support, I've learned new approaches, broadened my critical and logical thinking, and developed advanced abilities that will be highly valuable in my future profession and life Furthermore, I'd want to thank all of the Banking Academy's teachers and lecturers who actively aided me in finishing this thesis Sincere Thanks ii TABLE OF CONTENT GUARANTEE STATEMENT i ACKNOWLEDGEMENTS ii LIST OF TABLES vii LIST OF CHARTS .viii INTRODUCTION 1 The urgency of the research Research objectives Research questions Objects, Scope and Limitation of Research Research method Research structure CHAPTER 1: GENERAL THEORY AND BACKGROUND ON CREDIT RISK MANAGEMENT AND BANK FINANCIAL PERFORMANCE 1.1 Introduction on the bank financial performance 1.1.1 Bank financial performance 1.1.2 Measures of bank financial performance 1.2 Credit risk management in commercial Banks 1.2.1 Credit risk in commercial Banks 1.2.2 Concept of credit risk management in commercial banks 1.2.3 Measures of Credit Risk Management 1.3 Literature review of credit risk management on banks financial performance 11 1.4 Other factors affect the bank financial performance 12 1.4.1 Bank Specific Factors 12 iii 1.4.2 Macroeconomic Factors 14 CHAPTER RESEARCH METHOD 16 2.1 Variables Definition and Measurement 16 2.1.1 Dependent Variable 16 2.1.2 Independent Variables 16 2.2 Model Specification Error! Bookmark not defined 2.3 Sample Study 22 2.4 Data Processing and Analysis 23 CHAPTER 3: THE OVERVIEW OF THE FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN VIETNAM AND CREDIT RISK MANAGEMENT 24 3.1 The current state of commercial banks' business activity in Vietnam from 2011 to 2021 24 3.1.1 Overview of Vietnamese commercial banking system in the research period 24 3.1.2 Commercial Banking System Size 26 3.1.3 Loan Outstanding Balance 28 3.1.4 Deposit Mobilization 30 3.2 The current state of the financial performance of commercial banks in Vietnam 32 3.3 The current state of credit risk management in Vietnamese commercial banks 33 3.3.1 Non-performing Loan Ratio 33 3.3.2 Capital Adequacy Ratio (CAR) 35 CHAPTER 4: RESULTS OF THE EXPERIMENTAL MODEL ON EFFECTS OF CREDIT RISK MANAGEMENT ON THE THE FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN VIETNAM 36 iv 4.1 Summary Descriptive Statistics of Study Variables 36 4.2 Correlation Analysis and Multicollinearity Check 36 4.2.1 Correlation Analysis 36 4.2.2 Multicollinearity Check 37 4.3 Model Selection 38 4.3.1 Breush – Pagan Test 38 4.3.2 Likelihood Test 38 4.3.3 Hausman Test 39 4.3.4 Heteroskedasticity Test 39 4.3.5 Autocorrelation Test 39 4.4 Model Fix 40 4.5 Result of The Model 40 4.6 Result Analysis 41 4.6.1 The effect of credit risk management on the financial performance of commercial banks 41 4.6.2 Other Variables 43 CHAPTER 5: SOLUTIONS AND RECOMMENDATIONS 45 5.1 Development orientation of the banking industry from the Government and The State Bank of Vietnam 45 5.2 Solutions for Vietnam commercial banks 46 5.2.1 Controlling bad debt and non-performing loan ratio 46 5.2.2 Increasing owner’s equity proportion 47 5.2.3 Managing operating costs and expenses 47 5.3 Recommendations for the government and The State Bank of Vietnam 48 5.3.1 Effective monetary and fiscal policy implementation 48 5.3.2 Improving the capacity of forecasting indicatore 49 v 5.3.3 Continuing to closely monitor bad debt and other safety indicators 49 CONCLUSION 51 REFERENCES 52 APPENDIX 55 vi LIST OF TABLES Table Page Table 2.1: Variables use in research 21 Table 3.1: Structure of Vietnam's commercial banking system 2011-2021 25 Table 4.1: Statistical table of variables 36 Table 4.2: Correlation matrix between independent variables 37 Table 4.3: Multicollinearity test 37 Table 4.4: Breush – Pagan test 38 Table 4.5: Likelihood test 38 Table 4.6: Hausman test 39 Table 4.7: Wald test 39 Table 4.8: Wooldrige test 39 Table 4.9: Estimated results of factors affecting ROA 40 Table 4.10: Comparison between initial expectations and results 41 vii LIST OF CHARTS Chart Page Chart 3.1: The total assets of 24 Vietnamese commercial bank from 2011 to 26 2021 Chart 3.2: The proportion comparison of total assets of state-owned 27 commercial banks and joint-stock commercial banks in the period 20112021 Chart 3.3: Loan outstanding balance of 24 Vietnamese commercial banks 28 during the research period Chart 3.4: Loan outstanding balance proportion 29 Chart 3.5: Deposit mobilization of 24 Vietnamese commercial banks in the 30 period 2011-2021 Chart 3.6: Deposit proportion 31 Chart 3.7: ROA of Vietnamese commercial bank groups from 2011 to 2021 32 Chart 3.8: Average NPL ratio of Vietnamese commercial banks from 2011- 33 2021 Chart 3.9: Non-performing loans proportion distribution between group 34 Chart 3.10: Capital adequacy ratio between two group 35 viii INTRODUCTION The urgency of the research The spectacular economic improvement of recent years is a significant milestone in Vietnam's development in the globalization trend In which the banking industry plays an undeniable role in the local financial system, although facing numerous obstacles since many countries' previous financial crises Banks provide financial services to all members of society and maintain the cash flow, facilitating payment, manufacturing, and trading between countries in the area and globally Bank managers are always concerned about efficiency in banking operations because efficient banks contribute to long-term earnings, bank stability, and increased competitive advantages, boosting the development of Vietnamese banks in an international integration environment Because competition is fierce not only between banks, but also between financial intermediaries, financial institutions, and foreign banks with significant financial capacity and international experience, the competitive environment in Vietnam's financial market is becoming extremely competitive As a result, it is critical to assess the factors affecting these banks' financial performance, especially their profits, since recommendations will be provided based on statistical analysis to assist managers in orienting and reorganizing their operations Credit extension is the primary source of revenue for commercial banks, but it also results in financial losses if the consumers fail to meet their debt payback obligations The bank's income will improve if it promotes credit activities, which may lead to an increase in profitable assets, but the risks associated with this activity will also rise As a result, administrators, researchers, and policymakers are always interested in the relationship between profit and credit risk, as well as credit risk management in the banking sector Credit risk management not only directly affects the financial performance and reputation of the bank but also determines the sustainable development of the bank in the future When credit risk management is not good, it will increase credit risk, customers will not be able to repay, and banks will suffer enormous losses, especially banks that are still poor in business and financial services Credit is the main profitable business When bank