Topic the impacts of capital requirements on banks’ profitability evidence in vietnam commercial banks

BANKING ACADEMY OF VIETNAM BANKING FACULTY THESIS OF GRADUATION TOPIC: THE IMPACTS OF CAPITAL REQUIREMENTS ON BANKS’ PROFITABILITY: EVIDENCE IN VIETNAM COMMERCIAL BANKS Student name : Nguyen Thi Nhung Lớp : K21CLCA Faculty : Banking Student Code : 21A4010917 Supervisor & Instructor : Assoc.Prof PhD Nguyen Thuy Duong Tai ngay!!! Ban co the xoa dong chu nay!!! 17014129182231000000 i ABSTRACT When the global economy is on the way to globalization and the trend of liberalization is becoming more and more popular, the role of banks, including commercial banks, is increasingly asserted and has become more important to the economy than ever before It is crucial to consider the essentials of banks in the economy and how they can impact the financial system Through its important functions, it is pointed out that a resilient and profitable bank can contribute to the soundness and development of the country’s economy (Nguyen, 2020; Demirguc-Kunt & Huizinga, 1998; Elbannan, 2017; Levine, 1997; Vo, 2018a) Thus, to understand how to sustain the financial system, it is vital to determine factors that impact banks’ profitability, which can lead to economic resilience In Vietnam, given that Basel II Accord is in the process of implementation in banking system, it is compulsory to apply capital adequacy ratio (CAR) for all commercial banks before 1/1/2023 according to the amendment in 2019 to Circular 41/2016/TTNHNN In a meantime, bank capital can be deemed as one of the significant determinants affecting the banks’ profitability (TH Nguyen, 2020; Batten and Vo, 2019; Lee and Hsieh, 2013; Vo and Nguyen, 2018b) In the context of adjusting regulations about bank capital, updating CAR tends to have effects on banks’ profitability This paper would like to examine the possible mentioned influence between CAR and banks’ profitability The scope of this study is limited to 21 listed Vietnam commercial banks from 2006 to 2021 and the chosen period covers crisis time By employing ROE, ROA, and NIM to present the profitability of banks, the findings show the positive impact of CAR on ROA, negative impact on ROE, and not significant impact on NIM The extended regression model, moreover, investigates the impact of Basel framework implementation is different in state-owned and private-owned commercial banks under the long period covering the GFC and uncertainty during the Covid-19 pandemic i In general, the empirical findings contribute to current research about the relationship between profitability and CAR in terms of the participation of micro and macro variables The result is up-to-date and helpful for current internal management in developing and enhancing working efficiency and applying Basel II and Basel III frameworks in the coming years ii ACKNOWLEDGEMENT During my time at Banking Academy, I would like to express my gratitude for the assistance and attention provided by the Banking faculty in particular, as well as the entire school's professors in general, as well as all friends and relatives I would like to express my sincere and profound gratitude to Assoc Prof Ph.D Nguyen Thuy Duong, who passionately leads and advises me throughout the research process, for helping me accomplish the research and implementation of this thesis Moreover, I also would like to thank the organizations, individuals, and businesses that shared information and provided supportive materials to assist me in finishing this work For the first time in the application of the essay, with limited practical experience and confusion As a result, the essay is unable to overcome its flaws Through this, I look forward to receiving feedback and contributions from the audience in order to improve this research Thank you sincerely! Hanoi, day 23 month 05 year 2022 Student Nguyen Thi Nhung iii LIST OF ACRONYMS Abbreviations Definition AR Arellano-Bond ASE Amman Stock of Exchange ASEAN Association of Southeast Asian Nations CAR Capital Adequacy Ratio FEM Fixed Effects Model GDP Gross domestic product GFC Global Financial Crisis GMM Generalized Method of Moments NIM Net interest margin OLS Ordinary Least Squares REM Random Effects Model ROA Return on Assets ROE Return on Equity LOG(TA) The natural logarithm of total assets LLP Loan loss provision NII Non-interest income CI Cost-to-income ratio LIQUID Liquidity ratio LEV Financial leverage IncDiver Income diversification GDPG Gross domestic production growth iv INF Inflation STATE Ownership status of commercial banks REG Basel II implementation in banks CRISIS GFC period and the Covid-19 pandemic outbreaks years v LIST OF TABLES No Table Title Figure Research process Table List of commercial banks in the sample Table Variables description Table Descriptive statistics Table Baseline regression results – Dependent Variable: ROA Table Baseline regression results – Dependent Variable: ROE Table Baseline regression results – Dependent Variable: NIM Table Extended regression results – Dependent variable: ROA Table Extended regression results – Dependent variable: ROE Table Extended regression results – Dependent variable: NIM Table 10 Correlation matrix among variables vi TABLE OF CONTENTS ABSTRACT i ACKNOWLEDGEMENT iii LIST OF TABLES vi TABLE OF CONTENTS vii INTRODUCTION 1.1 Background of the research 1.2 Objectives of the thesis 1.3 Research object and scope 1.4 Research methodology 1.5 Thesis structure 1.6 Thesis contribution Chapter 1: Literature review and research gap 1.1 The review of previous studies 1.1.1 Foreign studies 1.1.2 Domestic studies 13 1.2 Research gap 17 Chapter 2: Research method and process 22 2.1 Research process 22 2.2 Methodology 25 2.2.1 Overview of previous research methodology 25 2.2.2 Research model 27 2.2.3 Dataset 28 Table List of commercial banks in sample 29 2.2.4 Hypothesis development 29 Chapter 3: Results and Discussion 39 3.1 Descriptive statistics 39 3.2 Baseline regression results 40 3.3 Extended regression model 47 3.4 Discussion 53 vii Chapter 4: Recommendation 56 For Vietnamese commercial banks 56 For the Governor 58 REFERENCE 61 APPENDIX: Correlation matrix among variables viii INTRODUCTION 1.1 Background of the research In terms of the rise of the global economies, especially emerging markets, commercial banks have proved their critical role in leading the growth of the financial system In general, every commercial bank provides the financial market with top-3 significant functions, which can be named as: payment system, financial intermediation, and financial services (Hersugondo et al., 2021; Al-Qudah, 2020; Shah et al., 2020) To be more specific, this kind of financial institution is mainly organized by receiving deposits from idle money or unemployed funds and using them to lend out to individuals or businesses which are in need of money (Dao & Nguyen, 2020; Hersugondo et al., 2021) In the position of intermediating funds and financial resources, banking systems are able to allocate money in a rational way, based on the necessity and capital demand of elements in the economy that can reduce costs and bring more benefits to both borrowers and lenders Serving as a bridge among a variety of individuals and organizations in the global economy, banks can generate capital and thus contribute to the economic growth of a nation (Hersugondo et al., 2021; Dao & Nguyen, 2020) Since the significant participation of the banking sector in developing the financial industry, it is vital for authorities to consider both negative and positive impacts of banks on the economy On the one hand, the core feature of commercial banks lies in credit extension and how they utilize loans to not only get profit for them but also fulfill their clients’ needs of capital (Lotto, 2018; Fungacova et al., 2014) Upon their financial services offering, banks bring opportunities for the development of every sector in the global economy overall However, on the other hand, these helpful functions are only executed in case bank organizations are running efficiently and have proper management (Lotto, 2018; Fungacova et al., 2014) Fungacova et al (2014) pointed out in their research about the primary important factors for the growth