Capital adequacy under basel ii and its impacts on profitability evidence on commercial banks in vietnam,khoá luận tốt nghiệp

BANKING ACADEMY OF VIETNAM BANKING FACULTY GRADUATION THESIS SUMMARY Topic: CAPITAL ADEQUACY UNDER BASEL II AND ITS IMPACTS ON PROFITABILITY: EVIDENCE ON COMMERCIAL BANKS IN VIETNAM Student: Student ID: Class: Instructor: NGUYEN HAI NGOC 18A4000520 K18 CLCC Dr NGUYEN BAO HUYEN Hanoi, 2019 i DECLARATION This graduation thesis is my original work and has not been presented for the award of any degree in any university Signature: Date: Name: NGUYEN HAI NGOC i ACKNOWLEDGEMENT I would like to acknowledge the invaluable guidance of my supervisor, Dr Nguyen Bao Huyen for her assistance throughout the stages of the graduation thesis Without her tireless efforts in guidance, this graduation thesis would not have come to its conclusion I also thank all my lecturers for sharing with me their knowledge during this course I also thank my family and friends for providing me with mental support to complete this graduation the ii TABLE OF CONTENTS INTRODUCTION 1.Rationale of the study Literature Review 3 Objectives of the Study Structure of the Study CHAPTER ONE: BACKGROUND OF THE STUDY 1.1 New Basel Capital Acord (Basel II) overview 1.1.1 Brief history of Basel Acord 1.1.2 Basel II .8 1.2 Theoretical background of risk management and Bank profits 1.2.1 Risk and risk management in commercial banks .9 1.2.2 Bank profitability measures 13 1.3 Basel II implementation and its impacts on Global Banking system 14 1.3.1 Japan .14 1.3.2 China 16 1.4 Basel II implementation in Viet Nam Banking system 18 1.4.1 Basel II implementation process of SBV .18 1.4.2 The implementation of Basel II in Vietnamese commercial banks .20 CHAPTER TWO: METHODOLOGY 23 2.1 Qualitative Method 23 2.2 Quantitative Method 23 2.2.1 Empirical model and hypothesis 23 2.2.2 Data collection .24 2.2.3 Study period 24 CHAPTER THREE BANK CAPITAL ADEQUACY IN VIETNAM 25 3.1 Overview of Banks piloting Basel II 25 3.1.1 State-owned commercial banks 25 3.1.2 Private commercial banks 27 3.2 Capital safety in Vietnamese commercial banks 29 3.2.1 Regulations on Capital Adequacy in Vietnam .29 iii 3.2.2 Capital adequacy in Vietnam commercial banks 32 3.3 Relationship between Capital Adequacy and Profitability 41 3.3.1 Empirical results 41 3.3.2 Discussion 44 CHAPTER FOUR: CONCLUSION, AND RECOMMENDATION 45 4.1 Conclusion 45 4.2 Recommendations for ensuring capital safety of commercial banks 45 4.3 Limitations of the Study 47 REFERENCE 48 iv LIST OF ABBREVIATION BCBS The Basel Committee on Banking Supervision CAR Capital Adequacy Ratio NPLs Non-performing Loans ROE Returm on Equity ROA Return on Asset SBV State bank of Vietnam LIST OF TABLES Table 3-1 Capital adequacy in Vietnam in 2010 Table 3-2 Capital adequacy in State-owned banks Table 3-3 ANOVA for ROE Table 3-4 Regression statistics for ROE Table 3-5 Coefficients for ROE Table 3-6 ANOVA for ROA Table 3-7 Regression statistics for ROA Table 3-8 Coefficients for ROA LIST OF FIGURES Figure 1-1 Risk governance framework Figure 1-2 The Three Lines of Defense Model Figure 3-1 Total assets of State-owned commercial banks Figure 3-2 Earning before tax of State-owned commercial banks Figure 3-3 Total assets of Private commercial banks Figure 3-4 Banking Profits Figure 3- Earnings before tax of Private commercial banks Figure 3-6 Capital Adequacy ratio of the Banking system in 2010 - 2013 Figure 3-7 Capital Adequacy ratio in State-owned commercial banks in 2010-2013 Figure 3-8 Capital Adequacy ratio in Private commercial banks in 2010-2013 Figure 3-9 Capital Adequacy ratio in the Banking system Figure 3-10 Capital Adequacy ratio in State-owned commercial banks in 2015 - 2018 v Figure 3-11 Capital Adequacy ratio in Private commercial banks in 2015 - 2018 Figure 3-12 Charter Capital Growth Figure 3-13 Owner’s Equity vi INTRODUCTION 1.Rationale of the study Since the beginning of the 1980s, the effects of the relaxation of banking rules, innovation in banking technology and the greater international integration have made the operating environment of banks increasingly complex and pose potential risks with more frequency and severity (Sahajwala and Van den Bergh, 2000) In order to prevent the systematic collapse of banks in the 1980s and to facilitate the stabilization of global finance, banks and other financial institutions had agreed that it was necessary to establish the general rules of capital With the aim of strengthening the stability of the international banking system and to establish a unified and equal banking system to reduce unfair competition among banks, in 1988 the Basel Committee decided to introduce a capital measurement system, referred as Capital Agreement Basel I To overcome the limitations of Basel I, in 2004 the new Basel Capital accord (Basel II) was officially issued Besides the initial goals, another key target of Basel II is to promote compliance with more stringent standards in risk management In September 2010, the Committee and its members reached an agreement on new standards in Basel III The Basel III roadmap began in January 2013 and was expected to be completed by the end of 2018 Until now, the Basel Capital Agreement has been considered the most effective regulation in monitoring banking operations and is a powerful tool to bring stability to the banking system It helps managers detecting and assessing risks, eliminating or alleviating the impacts of risk, and build a process of risk management for their organizations The banking sector in G10 member countries has successfully overcame and survived two financial crises in the period of 1992 - 2007, which proved the effectiveness of the Basel Capital Agreement In Asia, most baking supervisors support the common goals of Basel II and agree that Basel II is a supportive tool for banking risk monitoring and management Some countries in Asia such as Thailand and Singapore have made their first movements to approach to Basel III In Vietnam, the banking supervisory agency – State bank of Viet Nam (SBV) is also actively conducting the banking system restructure of with the aim of consolidating and reorganizing the system of financial institutions; improving operational capacity to ensure the development of a modern, sustainable and efficient banking system in accordance with international practices; ensuring the banking system to facilitate the socio-economic development, create a diversified banking system in terms of type, ownership, size which can rival other banks in the region and the world Although Viet Nam is not the member of Basel Committee nor under pressure to apply Basel Accord, the application Basel II in banking management is fundamentally essential By complying with Basel II, the Vietnam's banking system will be increasingly safe and sound, its competitiveness will be enhanced For that reason, since before 2015, Vietnamese banks have implemented the regulations on capital requirement, managing and handling bad debts, and provisioning based on the principles of Basel I In the restructuring plan, the SBV has approved the application of Basel II since the end of 2015 However, unlike in the developed countries, Vietnam's banking system is at an early stage of development, hence the application of Basel II is a challenging task, due to the lack of technique, huge investment and time consuming, especially for private joint stock commercial banks More importantly, the impact of adopting Basel II standards on profitability - one of the major concerns of bank managers, is unclear, making private banks with limited resources hesitant and unwilling to comply with Basel II standards But the fact remained that there is a very limited number of studies analyzing capital adequacy and including it as an explanatory variable for bank profitability in Viet Nam To my knowledge, there is no existing empirical work directly focusing on the specific question: whether capital adequacy have a significant impact on their profitability, leaving the research gap for this article Basel II Therefore, a quantitative research on the relationship between capital and profit at Vietnamese commercial banks in the period of 2010-2018 is essential 2 Literature Review From an accounting point of view, bank capital is equal to the value of bank’s assets less its liabilities In the other words, it represents its equity value to investors or the net worth of the bank that can cushion against losses According to Basel II, regulatory bank capital is divided into tiers: - Tier capital includes shareholder’s equity and retained earnings, and it is the main source that banks use to absorb losses without interrupting business operations - Tier and tier capital is a supplemental source to the Tier with lower reliability such as revaluation reserves, capital surplus, general loss provisions, additional capital from other instruments such as convertible bonds or preferred shares, short-term debt Regarding to the level of capital sufficiency, CAR is one of the key indicators to determine the ability to cope with the risks encountered by commercial banks, thus reflecting the bank's financial capacity In Vietnam, CAR is also an important target that banks must achieve to ensure the soundness in business operations, thereby establishing mechanisms for enhancing risk tolerance against market shocks as well as increasing bank profitability Many theoretical and empirical studies have been conducted to examine the relationship between capital and performance of banks Previous research results show indistinct (often positive and negative) relationship between risk (or profitability) and capital (Aggarwal and Jacques, 2007) (Aggarwal and Jacques, 2007) According to the Basel accord, banks need to hold a minimum level of capital based on its financial condition BIS believes that these types of capital regulation are friendly to economy as these bolster banks’ scenario against losses generating from different exposures like credit, operation, market etc The accord is also considered as a mean to enhance the safety and soundness of banking industry by Dowd (1999), Choi et al (2000), Mpuga (2002), (Angelini, 2015) They identified it is helpful for banks to increase the safety through holding minimum capital and face the probable financial crisis with more diligence Figure 3-8: Capital Adequacy ratio in Private commercial banks in 2010-2013 Source: Banks’ Annual Reports For private commercial banks, despite the gap in size of asset and equity, CAR of this group is higher than that of state-owned banks Particularly, the CAR of the large private commercial banks such as VIB, MSB and TCB is from 12% to above 19%, far higher than 9% as regulated under the Circular 36 To conclude, formally, most of commercial banks in Vietnam have made great efforts to maintain their CAR at 9% However, compared with the calculation of Basel II, which includes the market risks and operational risks, it is likely that very few commercial banks in Vietnam can fulfil the capital requirement in this period c Period of 2014-2018 Figure 3-9: Capital Adequacy ratio of the Baking system in 2014-2017 Source: SBV Website 35 In the period of 2014-2017, the economy recovery along with the effort to restructure and handle bad debts over time have helped to reduce credit risk, the NPLs of the whole system have been curbed, bringing NPL ratio in the balance sheet back to 1.99% of the total credit outstanding at the end of 2017, the profitability ratios of the whole system also improved compared to the previous period By the end of December 2017, total assets of the whole system reached VND 10,001.8 trillion, up 17.6% compared to the end of 2016; equity capital reached 714.1 trillion VND, up 11, 6% compared to the end of 2016 However, the capital adequacy ratio has decreased steadily over time, both in terms of state-owned commercial banks and private commercial banks According to SBV statistic, the CAR of the whole system as of December 2018 is 11.8% Most worrisomely, CAR of state-owned banks is just above the minimum requirement of 9%, CAR of joint-stock commercial banks is slightly higher, reaching 10.76% From now until the end of 2020, the NFSC estimates that banks must increase their owner’s equity by 1.8 to times compared to the present to meet the requirements of Circular 41 and Basel II Currently, out of ten piloting banks, only four banks including VCB, VIB, VPB and MBB have successfully raised the capital as required, thus being approved to apply Circular 41 ahead of time In case the other banks cannot improve their capital, it will be challenging for them to maintain CAR at 8% according to Circular 41 ❖ State-owed commercial banks Figure 3-10: Capital Adequacy ratio in State-owned commercial banks in 2015 - 2018 Source: Banks’ Annual Reports 36 Since 2014, after assessing the operational capacity of Vietnamese banks, the SBV has selected ten banks to pilot Basel II standards Circular 41 will come into effect from January 1st, 2020 or be applied sooner if the bank meets the standards and propose to the Central Bank At the end of November 2018, the SBV allowed two banks including Vietcombank and VIB to apply Circular 41 ahead of time These are the two leading banks in risk management and operational efficiency with top asset quality, no outstanding bonds at VAMC and healthy liquidity and profitability ratios According to the 2018 Annual Report recently announced by Vietcombank, CAR of this bank continues to improve, reaching 12.46% It is due to the increase in after-tax profit as well as retained earnings which largely contributed to increase the capital tier 1, thus improving CAR In addition, after being approved to apply Circular 41 ahead of time, Vietcombank has realculated and disclose their CAR under Circular 41 is 8.77%, which means that the bank has already fulfilled the capital requirement of the latest circular Whilst Vietcombank's CAR increased steadily over the years, CAR of Vietinbank and BIDV have been in a downward trend These two banks are struggling to increase their CAR to meet Circular 41 due to difficulties in raising owners’ capital For BIDV, the CAR of this bank is only 9%, just above the requirement of Circular 36, whereby BIDV needs to raise its capital to meet Basel II requirement Although this bank has submitted a number of capital-raising plans approved by shareholders, it has just been given SBV permission to issue shares to foreign investors in February 2019 This is considered a positive move towards Basel II Accordingly, BIDV will issue 603 million shares which equivalent to 17.65% of the current capital for KEB Hana Bank, by which BIDV's charter capital will increase from VND 34,187 billion to VND 40,220 billion The capital increase, if successful, is believed to eliminate the bottleneck for credit growth and bank profits of BIDV For VietinBank, the bank's CAR is currently approaching the minimum ratio required by Circular 36 and just below the Basel II standards According to the BOD of 37 Vietinbank, increasing the reserve fund will partly support in improving CAR but it not enough but the increase in charter capital still hold the key role However, Vietinbank are likely to be in a disadvantage in raising capital due to the finite for VietinBank to increase its equity and charter capital has been exhausted Accordingly, the State's ownership rate at VietinBank is at 64.46%, the lowest level approved by the government, and the foreign ownership is also at a maximum threshold of 30% In the last resort, Vietinbank can only increase its capital through stock dividends or retained earnings Above all, while attempting to raise capital, BIDV and VietinBank will continue to find a comprehensive and optimal solution to improve their CAR by restructuring the asset portfolio focusing on lower risk assets, along with enhancing debt management and general provision ❖ Join-stock commercial banks Figure 3- 11: Capital Adequacy ratio in Private commercial banks in 2015 - 2018 Source: Banks’ Annual Reports Joint-stock commercial banks have still consistently outperformed their larger rivals in term of capital adequacy ratio Compared to the previous period, private banks' CAR during this period was more stable, ranging from about 10% to 14% The capital adequacy ratios of these banks are also higher than the regulated level of 9% as in Circular 36 by far MSB is an outstanding example when the bank's CAR in 2016 remained at a high level of above 24% since its stockholder’s equity is still maintained 38 at a high level, accounting for 15% of the total liabilities and stockholder’s equity of the Bank However, the considerable, rapid fluctuation of CAR is considered a warning sign in the bank's operation which can imply the absence of an effective business model or the need for a larger capital buffer to protect against risks (Kornyliuk R., Kornyliuk A.,2018) In this case, it is necessary to carefully clarify the instability of CAR Figure 3-12: Charter Capital Growth Source: Banks’ Annual Reports As the effect date of Circular 41 is coming nearer, commercial banks hasten to increase their charter capital in 2018 to meet the new requirement According to data collected from Banks’ Annual Reportss, as of December 31st, 2018, TCB has the most significant capital increase in the system, three times higher than the previous year, raising the figure to 34,966 billion dong by successfully issued more than 2.3 billion shares for 4,262 existing shareholders at the rate of 200% Next, VPB’s equity growth of 61% over the same period, up to VND 25,300 billion, VIB charter capital ranked third when it increases by 39% to 7,835 billion As the result, in April 2019, MBBank and VPBank were just allowed to apply Circular 41 from May 1st, 2019 by the State Bank Surprisingly, Orient Commercial Bank (OCB) and most recently Tienphong Bank (TPB) which were not in the group of ten pilot banks voluntarily applied regulations on capital requirement according to Basel II method After one year of implementing Basel II, OCB and TPB were officially approved by the SBV to apply Circular 41 ahead of 39 time In the period of two years from 2017 to 2018, these two banks have successfully increased their capital and achieved significant capital growth of 32% and 53% respectively Additionally, OCB and TPB made great efforts to improve their risk management, becoming a shining example for other commercial banks to follow, especially the small-scale private banks which still hesitate about complying with international standards Conclusion For the banking and financial sector, profitability and asset quality have been greatly improved but capital adequacy remains a matter of concern The average CAR of the industry has been declining over the years However, selected banks still maintain their CAR at a relatively stable level In recent years, the capital adequacy ratio of many commercial banks has been higher than the State Bank's regulations and at the same time, CAR of commercial banks tends to increase This is increasingly critical since the capital adequacy ratio is one of Basel II principle for risks management Outstandingly, Vietcombank are recognized to meet the Basel II standards of capital adequacy During the period of 2010-2018, Vietcombank capital adequacy ratio has always exceeded the level of 8% of Basel II and 9% of the SBV regulations Accordingly, robust capital adequacy ratio has showed that financial capacity of Vietcombank is healthy and stable, consistent with the standards set by Basel committee Moreover, CAR of Vietnam commercial banks has a clear differentiation between the state-owned commercial banks and private commercial banks Particularly, CAR of the state-owned banks is usually lower than CAR of joint stock banks It is noticeable that, there are some special cases with abnormally high CAR such as MSB and VIB have announced their CAR nearly reached 20% and even higher than 20% in several years Meanwhile, large commercial banks like BIDV and CTG have CAR of only around the required level of 9% 40 Regarding charter capital, the charter capital of ten piloting banks accounts for above 38% of the total charter capital of the whole system and also stood in the top of the banking industry, ranging from about VND 7835 billion to VND 37,234 billion Regarding owner’s equity: Compared to the other banks in the system, shareholders’ capital of these banks is relatively high, ranging from about 10.667 billion VND, the largest is 67.455 billion VND of Vietinbank Total equity of 10 banks applying Basel II accounted for more than 42% of the total equity of the banking sector Figure 3-13: Owner’s Equity Source: Banks’ Annual Reports Raising capital is one of the challenges for entire banking system in implementing Basel II in order to improve CAR to comply with the capital requirements for operational risks and market risks Therefore, it is vitally essential for commercial banks to raise their capital, especially the group of state-owned commercial banks 3.3 Relationship between Capital Adequacy and Profitability 3.3.1 Empirical results ❖ The regression model with ROE 𝑅𝑂𝐸𝑡 = 𝛼 + 𝛽1 𝐶𝐴𝑅𝑡−1 + 𝛽2 𝑅𝑂𝐸𝑡−1 + 𝜀𝑡 (1) Table 3-3: ANOVA for ROE 41 Regression Residual Total df 65 67 SS MS 906.674 453.337 2050.867 31.552 2957.541 F 14.368 Sign F 0.000 F distribution 3.138 The statistics in the table above shows that there is a perfect model fit with an Fstatistics of 14.37 greater than F-distribution at 95% confidence level This shows that the selected variables of lagged capital ratio and ROE are relevant determinants of ROE It also shows that variables with a p-value of lower than 0.05 have a significant relationship with ROE Table 3-4: Regression statistics for ROE Multiple R 0.554 R Square 0.307 Adjusted R Square 0.285 Standard Error 5.617 Observations 68 The table of model summary above shows that the R square is 0.31 This indicates that the model explains up to 31% of the variations in the ROE of the banks, the remaining 69% is due to random factors and other factors not in the model The beta coefficient table below shows the individual effect of the independent variables Table 3-4: Coefficients for ROE Coefficients Intercept 8.613 CAR (t-1) -0.193 ROE (t-1) 0.500 Standard Error 4.061 0.246 0.118 t Stat 2.121 -0.786 4.228 Pvalue 0.038 0.005 0.000 Lower 95% 0.502 -0.685 0.264 Upper 95% 16.723 0.298 0.736 The table shows that the lagged CAR has a significantly negative impact of above 19% ROE (β= -0.19, p = 0.005) In other words, if banks’ capital level increases by 1%, the ROE will experience a decrease by 0.19% on average, holding other variables constant It also shows that lagged ROE has a significant positive effect of up to 0.50% on ROE (β = 0.50, p = 0.000) 42 ❖ The regression model with ROA 𝑅𝑂𝐴𝑡 = 𝛼 + 𝛽1 𝐶𝐴𝑅𝑡−1 + 𝛽2 𝑅𝑂𝐴𝑡−1 + 𝜀𝑡 (2) Table 3-6: ANOVA for ROA Regression Residual Total df 65 67 SS 8.112 14.476 22.588 MS 4.056 0.223 F 18.212 Sign F 0.00 F distribution 3.138 The statistics in the table above shows that there is a perfect model fit with an Fstatistics of 18.21 greater than F-distribution at 95% confidence level This means that the model is appropriate, and the selected independent variables are determinants of return on assets It also indicates that variables with p-value greater than 0.05 have no significant relationship with ROA The extent of the impact is discussed in the next paragraph Table 3-7: Regression statistics for ROA Multiple R 0.599 R Square 0.359 Adjusted R Square 0.339 Standard Error 0.472 Observations 68 The table of model summary above shows that the R square is 0.36 This implies that the model explains up to 36% of the variations in the ROA of the banks, the remaining 64% is due to random factors and other factors not in the model The beta coefficient table below shows the individual effect of the independent variables Table 3-8: Coefficients for ROA Coefficients Intercept 0.286 CAR (t-1) 0.005 ROA (t-1) 0.659 Standard Error 0.303 0.019 0.115 t Stat 0.946 0.252 5.729 P-value 0.348 0.387 0.000 Lower 95% -0.318 -0.034 0.429 Upper 95% 0.891 0.043 0.888 43 When lagged Capital as independent variable is regressed against the dependent variable ROA, the p value is 0.387 which is significantly greater than 0.05, hence at 95% confidence level there is no significant relationship between the variables Thus, from the observations, lagged capital has no relationship effect on ROA over the observed period It also shows that the lagged ROA has a significant positive effect of up to 66% on ROA (β = 0.659, p = 0.000) In detailed, if the banks’ lagged ROA increases by 1%, the return on assets is expected to rise by 0.659% on average, holding the other variables constant 3.3.2 Discussion It is possible that the minimum capital requirements may have compromised the performance of the banking industry Theoretically, any sort of external factors that intervene the operation of a business can be detrimental to company profits or growth in the short run and may reduce the company's long-term viability Indeed, if banks are forced to hold the equity in excess of the capital they voluntarily hold or exceed their actual needs for capital, these regulations may constitute a constraint to banking operations Besides, some banks want to increase their profits and boost credit activities as much as possible, making inadequate provisions, making credit quality to sink and bad debt increasing In addition, some banks tend to hold more profitable albeit riskier assets profits to maximize their earnings Consequently, this would expose the whole banking system to the increase of the risk weighted assets, leading to a decrease in capital adequacy ratio going forward Moreover, in order to meet the capital minimum requirement, most Vietnamese banks choose to raise new equity The issuance of shares or other papers are, however, not simple but need a lot of time, human resources and incurs significant one-off costs for issue agencies, service providers etc The increase of cost would consequently lead to the decrease in bank’s earnings 44 CHAPTER FOUR: CONCLUSION, AND RECOMMENDATION 4.1 Conclusion After 11 years since Basel I was issued, international standards for banking management were first studied and applied in Vietnam So far, CAR coefficient has been widely recognized in Vietnam as an economic indicator, an important measure to measure the soundness of banking operations The good news is that more commercial banks are increasingly aware of the importance of having enough capital as a solid shield to protect the bank against risks in their operations As a result, commercial banks have more sense of self-awareness and endeavor to abide by the government and SBV regulations, and constantly improve their own capabilities to be rival to international banks As a result, the CAR of both the banking system in general and of each commercial bank, although with differentiation by scale of assets and profits, has improved However, the regulations on calculating CAR of commercial banks in Vietnam are gradually approaching international standards but there are still gaps Therefore, the value of CAR does not reflect the true risk level of banks In the coming time, the State Bank should continue to amend and supplement regulations and standardize safety standards according to international standards Regarding the relationship between bank capital and profitability, capital adequacy is one of several determinants to earnings ROE model of this study has found inverse relationship between CAR and ROE The interesting finding is that different profitability variables have different results on the persistence of profit To be more detailed, there was a significant negative relationship found between capital and ROE whereas there is an insignificant relationship between capital and ROA 4.2 Recommendations for ensuring capital safety of commercial banks Firstly, commercial banks themselves need to develop carefully their roadmap to mobilize capital in the short and medium to long term to enhance the scale of equity The additional source that must be mentioned first is from the banks themselves Banks with 45 low CAR (less than 9%, or even over 9% but less than 11%) need to retain all profit after tax, are not allowed to pay dividends nor buy back shares This measure is perfectly reasonable because shareholders must be the first ones who take responsibilities to ensure the sufficiency of capital for their banks, when the bank is short of capital, shareholders cannot distribute profits In addition, it is possible to supplement capital by other sources such as from existing shareholders, domestic and foreign investors Apart from continuing to mobilize capital from outside by issuing shares (to increase capital tier 1) and issuing bonds (in order to increase Tier capital), the bank itself can increase its capital by reviewing and upgrading the quality of their financial services in the direction of gradually increasing service revenues, reducing operating costs Secondly, state-owned commercial banks still have plenty of room to attract capital from foreign investors, which should continue to promote the seek for potential strategic investors as what Vietcombank and BIDV have done Raising capital through selling shares to foreign strategic investors are very beneficial, because foreign investors have strong financial potential and management experience When banks' capitalization can become a risk because if banks cannot raise enough capital by 2020, the Government may have to pump capital into these banks This increase in capital may reduce 1-1.5% of GDP consequently (IMF) Attracting more capital investment, especially from foreign strategic investors, therefore, plays an important role in raising capital for state-owned banks However, the selection of foreign strategic investors also depends on the conditions of each bank, market and government policies, requiring banks to improve the quality and transparency of the banking books Thirdly, commercial banks should take advantage of international integration to raise new capital Capital Tier of Vietnamese commercial banks may increase by issuing bonds on the international market However, this method may only be suitable for large commercial banks with high reputation and robust financial capacity due to huge bond issuance costs In addition, Merge and Acquisitions plans can help increase 46 equity In the past, according to the roadmap to restructure the banking system, some banks were selected to merge with another bank to increase capital, leading to an increase in However, the merge plan is only feasible when a large bank merges with a smaller bank and two banks with low CAR could not increase their CAR even though the charter capital increased According to international practice, to ensure the banking system sustainability, banks themselves need abundant capital, then CAR would act as a "risk buffer" when banks encounter difficulties However, a sustainable banking management strategy is a strategy that minimizes the credit risk ratio of assets to ensure a safe and stable CAR Therefore, many experts have suggested that the bank can apply appropriate asset structure strategy, and thereby meet the quantitative requirements of Basel II In the long run, for banks with pressure on capital adequacy requirements, it is necessary to focus on the process of restructuring the assets of the Bank by focusing on areas with low capital requirements and have more growth potential within limited capital 4.3 Limitations of the Study The study period was based on years, it would have been better if the period was longer so as to capture the effect of the lagged variables over a longer period of time The study should have captured the effects of other control variables, including the internal factors such as NPL ratio, Size, Deposits, etc and the the macro-economic environment such as inflation and GDP as these affect bank earnings In terms of data, as the regulations on calculating CAR of commercial banks in Vietnam are gradually approaching international standards, but there are still gaps, the value of CAR has not reflected the actual level of risk of banks Some banks have not published their profitability indicators correctly, thus reducing the reliability of the regression results 47 REFERENCE Aggarwal, R and Jacques, K T (2007) ‘Assessing the Impact of Prompt Corrective Action on Bank Capital and Risk’, Economic Policy Review, 1(3), pp 23– 32 doi: 10.2139/ssrn.1024839 Ahmed, S U et al (2015) ‘Impact of Basel II Implementation on the Financial Performance of Private Commercial Banks of Bangladesh’, European Journal of Economics, (77) doi: 10.2139/ssrn.2644108 Angelini, P et al (2015) ‘Basel III: Long-term impact on economic performance and fluctuations’, Manchester School, 83(2), pp 217–251 doi: 10.1111/manc.12056 Berger, 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