Factors Influencing Profitibility Of Joint - Stock Commercial Banks In Viet Nam.pdf

SUPERVISOR

ASSOC PRO.PHD LE PHAN THI DIEU THAO

HO CHI MINH CITY, 2024

This study focuses on analyzing the factors influencing ROA, a critical indicator in the financial system of a country ROA plays a vital role in stimulating economic activities while also potentially posing risks and issues regarding financial stability The research synthesizes and utilizes secondary data collected from the audited financial reports of 25 commercial banks in Vietnam during the period of 2013 - 2022, combined with statistics published by the General Statistics Office of Vietnam and other reputable sources The study adopts a mixed-method approach, incorporating both qualitative and quantitative analysis supported by Stata 17 software Pooled OLS, FEM, REM, and FGLS methods are employed to identify the most suitable models The results from the models indicate that two macroeconomic factors, inflation rate and economic growth, do not significantly affect ROA in Vietnamese commercial banks Regarding microeconomic variables, all five factors show statistical significance and impact on the dependent variable, ROA Specifically, bank size (SIZE), liquidity (LIQ), Equity Capital (CAP), and Operational cost (OPR) demonstrate positive effects on ROA, whereas Credit risk (CR) has a negative impact Based on the findings of this study, bank leaders need to focus on and improve internal factors under their control while also considering the impacts brought by GDP growth and inflation The study provides recommendations and suggestions for bank leadership and policymakers to enhance the credit activity mobilization capability for commercial banks in Vietnam

Keywords: credit growth, commercial banks, factors influencing credit growth

I affirm that the thesis presented “Factors influencing profitability of Joint-Stock Commercial Banks in Vietnam” is entirely my own creation, developed under the supervision of Ms Le Phan Thi Dieu Thao, and has not been submitted for evaluation elsewhere Proper acknowledgment has been given to all data and sources referenced in the thesis

I accept full accountability for this declaration

Ho Chi Minh City, … / /2024

Author

I express my profound appreciation and heartfelt gratitude to my supervisor, Ms Le Phan Thi Dieu Thao, at Ho Chi Minh City University of Banking Her patience, motivation, enthusiasm, and extensive knowledge have been invaluable throughout the process of writing this thesis I am deeply grateful for her wholehearted assistance and guidance, which have played a pivotal role in achieving the objectives of this study At this juncture, I would like to acknowledge her significant contribution and unwavering support Additionally, I extend my sincere thanks to all my friends who have consistently supported and assisted me during our shared journey of study

1.6 Significance of the research 4

1.7 Structure of the research 4

CHAPTER 2 THEORETICAL BASIS AND LITERATURE REVIEW 6

2.1 Overview of commercial bank 6

2.2 Theoretical basis about commercial bank profitability 7

2.2.1 Definition of bank profitability 7

2.2.2 The indicators reflect the profitability of commercial banks 8

2.3 Empirical research overview 10

2.3.1 International research 10

2.3.2 Domestic research 12

2.4 Factors affecting commercial bank profitability 14

CHAPTER 3 RESEARCH METHODOLOGY 26

3.1 Hypothesis of the research 26

3.2 The research model 30

3.3 Data 35

3.4 Research process 37

CHAPTER 4 RESULTS AND DISCUSSION 44

4.1 Descriptive statistics 44

4.2 Correlation analysis and multicollinearity diagnostics 46

4.3 Analysis of factors affecting ROA 48

4.3.1 Regression result 48

4.3.3 Testing the hypothesis violations of the FEM 50

4.4 Discuss the influence of individual factors on ROA 52

CHAPTER 5 CONCLUSION AND RECOMMENDATION 56

5.1 Conclusion 56

5.2 Recommendation 57

5.3 Limitation of the study 61

REFERENCE 64

Abbreviation Meaning

FEM Fixed effect model

JSCB Joint Stock Commercial Bank

ROCE Return on Capital Employed

POOLED OLS Pooled Ordinary Least Squares

NIM Net Interest Margin

Std Dev Standard Deviation

VIF Variance Inflation Factors

Table 2.1 Summary of empirical researches 19

Table 3.1 Independent variable and dependent variable of the research model 32

Table 3.2 List of 25 commercial banks 36

Table 4.1 Descriptive statistics of variables in the regression model 44

Table 4.2 Correlation matrix between variables 46

Table 4.3 Multicollinearity diagnostics 47

Table 4.4 Regression result 48

Table 4.5 F-test, Breusch - Pagan and Hausman model selection for variable ROA 49

Table 4.6 Autocorrelation test and Heteroskedasticity test 50

Table 4.7 ROA regression model results after fixing 51

The first chapter of this thesis lays the foundation for exploring the factors influencing the profitability of joint-stock commercial banks in Vietnam It begins with an overview of the research area, emphasizing its significance within the context of the Vietnamese banking sector Through a review of relevant literature, including historical perspectives and current research, the chapter identifies gaps and limitations in understanding profitability determinants

1.1 The necessity of the research

In the context of the increasingly volatile global economy, Vietnam is not exempt from facing various crises However, in order to stabilize and develop the economy amidst the world's tense situation, the State consistently makes efforts in macroeconomic regulation, issuing numerous policies to support businesses In this process, the banking sector plays a crucial role in the operation chain of the economy To optimize the effectiveness of banking activities, profitability is one of the key indicators given top priority

Ho & Saunders (1981) profitability is a criterion related to the profit-generating ability used to assess the effectiveness of a bank's business activities It is not only a financial source needed for expanding production but also a source of finance for the state, contributing to national income growth and encouraging workers to be committed to their jobs Profitability is always considered a key factor in affirming the existence and development of banks A bank with growing profits helps improve the bank's financial strength, reflects the circulation of capital in the economy, and contributes to the financial stability of a nation

Worldwide, there is significant research interest in this issue Specifically, the study "Factors Influencing the Profitability of Commercial Banks in Ethiopia" focuses on evaluating and examining macroeconomic factors and measuring their impact on the profitability of banks Meanwhile, some studies only utilize internal factors within banks to assess their impact on profitability, as seen in the research "The Impact of Capital Structure on the Efficiency of Financial Institutions in Palestine" by Abbadi

Experimental Evidence from Palestine" by (Abugamea, 2018)

Recognizing the significant role of banks in the economy, especially the importance of profitability in the operation and development of a bank, the author has chosen the topic "Factors Influencing the Profitability of Joint Stock Commercial Banks in Vietnam" for the research, considering it highly necessary The purpose is to investigate which factors have an impact on the profitability of these banks Through this research, the author aims to provide recommendations and suggest relevant policy implications to help banks manage potential risks, identify optimal and effective solutions to enhance profitability

1.2 Research Objectives

According to general objectives, this study aims to identify the factors affecting, the extent of their impact, and the direction of their influence on the profitability of Vietnamese Joint Stock Commercial Banks (JSCBs) Based on the results, recommendations will be provided to enhance the profitability of JSCBs

Building upon the general objectives, the author outlines the specific objectives Firstly, to systematize the theoretical foundation regarding factors influencing the profitability of JSCBs to select an appropriate research model for the system of Vietnamese JSCBs Secondly, to determine the factors, their direction, and the extent of their impact on the profitability of Vietnamese JSCBs Thirdly, to propose managerial implications to improve the profitability of JSCBs in Vietnam

1.3 Research questions

From the specific research objectives above, the author formulates the following research questions:

i What factors impact the profitability of JSCBs in Vietnam?

ii What is the extent of each factor's impact on the profitability of JSCBs in Vietnam?

iii What recommendations can help Vietnamese JSCBs increase their profitability?

In this study, the research focuses on factors influencing the profitability of commercial joint-stock banks in Vietnam

Spatial Scope is 25 commercial joint-stock banks in Vietnam The reason the author chose this timeframe is that it offers a comprehensive dataset that accurately reflects recent economic conditions, ensures data reliability, and aligns with the research objectives, thereby facilitating a thorough analysis of the factors influencing the profitability of commercial banks in Vietnam

Time Frame is Data used for the study is secondary data covering the period 2013–2022 The data source used in the study is cited and synthesized from the financial statements of the consolidated financial statements audited by the JSCBs in the period 2013 – 2022, the website of the General Statistics Office of Vietnam, and the website of World Bank

1.5 Research methodology

The data used is secondary data, collected from historical data published in the media and sampled within the timeframe from 2013 to 2022 The collected data is presented in tabular form, a combination of cross-sectional and time series data on Excel Integrated and combined to perform synthesis, analysis, comparison, and correlation with the results of variable models from relevant previous studies, thereby drawing conclusions about the factors influencing profitability, as well as proposing recommendations and solutions for the research problem

The thesis employs regression analysis of tabular data along with the Pooled Ordinary Least Squares (Pooled OLS), Fixed-Effects Model (FEM), and Random-Effects Model (REM) Based on the regression results of tabular data, the author conducts tests such as F-test, Hausman test to choose the most suitable model, with the support of Stata software to identify the factors influencing the profitability of JSCBs in Vietnam Additionally, the author will perform descriptive statistics, synthesis, comparison, and analysis to achieve the stated objectives

In theoretical terms, the research proposes a model to assess the factors influencing the profitability of JSCBs in Vietnam, simultaneously examining the extent of the impact of these factors Through a review of previous studies, the author has constructed Pooled OLS, FEM, and REM models based on scientific theory to enhance the practical significance of the model

In practical terms, the author measures the direction and degree of influence of these factors on the profitability of JSCBs in Vietnam at the present time The author will develop the model, analyze the effects, and refine the model From the analysis results, the author will provide some new managerial implications that can be applied to enhance the profitability of JSCBs in Vietnam

1.7 Structure of the research

Chapter 1 is Introduction, which presents an overview of the topic, discusses its significance, outlines the research objectives, scope, and methodology

Chapter 2 is Theoretical Basis and Literature Review This chapter introduces profitability and its metrics for commercial joint-stock banks It also provides a literature review of relevant studies conducted in Vietnam and globally

Chapter 3 is Research Methodology This section details the steps involved in the research process It encompasses hypothesis formulation, model design and selection, data collection methods, and analysis techniques

Chapter 4 is Research Results and Discussion This chapter will focus on presenting, commenting on, and analyzing the research model introduced in Chapter 3

Chapter 5 is Conclusion and Recommendation This chapter serves to summarize the research findings It proposes suggestions for enhancing the profitability of Vietnamese commercial joint-stock banks, and suggests new avenues for future development

CONCLUSION OF CHAPTER 1

This chapter sets the stage for exploring factors impacting the profitability of stock commercial banks in Vietnam It underscores the research's significance, identifies gaps in understanding, outlines research objectives, formulates questions, defines scope, and discusses methodology and structure.

joint-CHAPTER 2 THEORETICAL BASIS AND LITERATURE REVIEW

Chapter 2 delves into the theoretical framework and empirical studies related to the profitability of joint-stock commercial banks in Vietnam This chapter provides an overview of profitability metrics, explores relevant literature from both local and global perspectives, and discusses theoretical underpinnings Additionally, it examines empirical studies conducted in Vietnam and internationally to identify trends, gaps, and key findings in the field

2.1 Overview of commercial bank

A bank is a type of credit institution that can carry out all banking activities as regulated by this Law Based on the nature and objectives of their operations, types of banks include joint-stock commercial banks, management-focused banks, and cooperative banks Joint-stock commercial banks are a type of bank that conducts all banking activities and other specified business activities according to this Law with the goal of profitability Joint-stock commercial banks function to primarily mobilize capital through deposit attraction, issuance of certificates of deposit, bonds, and subsequently utilize these funds for business and production loans, as well as consumer loans Additionally, they offer various services such as payment, fund transfers, guarantees, trust services, etc (Guru, 2002)

Allen (2015) defines a commercial bank as organizations engaged in lending and issuing various term deposit certificates Banks possess a variety of assets, different types of liabilities, and may participate in off-balance-sheet activities, including financial guarantees and derivative instruments These financial institutions play a significant role in foreign exchange operations and are consistently subject to rigorous management Commercial banks are considered the earliest form of banks, closely associated with the emergence of banking activities (Dang, 2020) The profit-generating activities of

commercial banks are typically diverse and involve a synthesis of various transactions and services Therefore, commercial banks are defined as financial intermediary institutions holding a significant position in the economy and the entire market

In summary, commercial banks are among the oldest existing credit institutions, with close relationships and impacts not only on individuals and other businesses but also on the national economy and the international monetary market Commercial banks also have other economic tasks, such as contributing to the effective implementation of monetary policies, interest rate adjustments, and inflation stabilization

2.2 Theoretical basis about commercial bank profitability 2.2.1 Definition of bank profitability

According to Rose (1999), the profitability of a bank is defined as the net income after taxes or the net profit of the bank Financial balance is achieved through monetary efficiency Monetary efficiency is measured by profitability Evaluating profitability must be based on a reference period

According to Grene (2018), profitability is the key factor and serves as a cushion for banks to cope with unexpected risks or losses in emergency situations Profitability enables banks to supplement their own capital with significant amounts of capital at low capital utilization costs High profitability of banks enables them to have proactive resources for investing in modern equipment, improving infrastructure, enhancing customer services, and generating profits from these services Therefore, high profitability provides investors with confidence in investing, as banks can compensate for any losses incurred in the event of risks

According to Clews (2019), the profitability of commercial banks is the measure reflecting the efficiency of their operations in business From a macroeconomic perspective, banks with high operational profits can overcome instability and risks

during their operations, thereby contributing to the stability of the overall economy At the microeconomic level, when banks generate good profits, they create retained earnings as a form of self-capitalization, which serves as a secure source of capital at the lowest cost

In summary, the profitability of a commercial bank shares similarities with other businesses as it represents the difference between income and expenses However, for banks, income is interest earned and expenses include interest payments The profitability reflects the entire labor process of the entire banking system throughout the year It demonstrates the capacity and financial scale of commercial banks When considering, evaluating investment opportunities, or making decisions regarding the use of financial services, the profitability indicators become a primary concern for shareholders and customers Therefore, achieving profit growth alongside maintaining a stable and secure system is a consistently prioritized and pursued goal for banks

2.2.2 The indicators reflect the profitability of commercial banks

When evaluating the business performance of a bank, various metrics are of interest, such as Return on Capital Employed (ROCE), Risk-Adjusted Return on Assets, etc However, within the scope of this thesis, the author focuses on commonly used metrics in both domestic and international literature related to bank profitability The key profitability metrics for commercial banks are:

Return on Assets – ROA

ROA, as defined by (Phuoc & Bui, 2016) measures the efficiency of a bank in utilizing its assets to generate post-tax profits, regardless of whether the assets are created from borrowed funds or equity capital The formula for ROA is:

𝑹𝑶𝑨 = 𝐍𝐞𝐭 𝐏𝐫𝐨𝐟𝐢𝐭 𝐚𝐟𝐭𝐞𝐫 𝐓𝐚𝐱𝐓𝐨𝐭𝐚𝐥 𝐀𝐬𝐬𝐞𝐭𝐬

ROA is a crucial financial metric used to assess the profitability and efficiency of a bank's asset management It is calculated by dividing the net income after taxes by the average total assets of the bank This formula represents how effectively a bank generates profits from its assets

The relationship between ROA and a bank's profitability is pivotal A higher ROA indicates that the bank is generating more profit per unit of assets, suggesting efficient asset utilization Banks with higher ROA tend to have better profitability, as they are maximizing returns from their investments in assets ROA reflects the bank's ability to generate earnings relative to its asset base, thereby serving as a key indicator of its financial health and operational efficiency

ROA is a variable representing bank profitability, commonly used in many studies and calculated by dividing the total after-tax profit for the year by the average total assets of the bank (Grene, 2018) This is a measure of the efficiency of asset utilization by the bank, implying that all assets are investments

Return on Equity – ROE

ROE is defined as the return on a bank's equity capital According to Phuoc & Bui, (2016) ROE indicates how much profit each unit of equity capital will yield after deducting corporate income tax The formula for ROE is:

𝑹𝑶𝑬 =𝐍𝐞𝐭 𝐏𝐫𝐨𝐟𝐢𝐭 𝐚𝐟𝐭𝐞𝐫 𝐓𝐚𝐱𝐄𝐪𝐮𝐢𝐭𝐲 𝐂𝐚𝐩𝐢𝐭𝐚𝐥

ROE reflects the bank's ability to leverage its capital and the influence of financial leverage in generating income A high ROE makes a bank more attractive to investors as it indicates efficient financial management, optimal utilization of shareholders' capital, and satisfactory profitability

Net Interest Margin – NIM

NIM is a measure of efficiency and profit-generating ability The NIM is defined as the difference between the average interest rate on deposits and the average interest rate on loans The calculation of NIM is expressed as:

𝑵𝑰𝑴 = 𝑵𝒆𝒕 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑰𝒏𝒄𝒐𝒎𝒆𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑬𝒂𝒓𝒏𝒊𝒏𝒈 𝑨𝒔𝒔𝒆𝒕𝒔

Net interest income is the line item reflecting on the financial statements earning assets include deposits at the State Bank, deposits at other credit institutions, loans to other credit institutions (excluding risk provisions), loans to customers (excluding risk provisions), purchased debt (excluding risk provisions), and investment securities (excluding discounted provisions) on the balance sheet

Interest-A higher NIM corresponds to larger bank income, reflecting the capabilities of the Board of Directors and employees in sustaining income growth primarily from lending and investments compared to the rising cost of paying interest on deposits and borrowed funds in the market

These profitability metrics play a crucial role in assessing the financial health, making processes, and investment attractiveness of commercial banks

decision-2.3 Empirical research overview 2.3.1 International research

Bogale (2019) conducted a study on the factors influencing the profitability of private commercial banks in Ethiopia during the period 2008–2017 The article utilized the Fixed Effects Model (FEM) and collected data from 14 private commercial banks in Ethiopia from 2008 to 2017 The author used ROA as the dependent variable representing profitability, and 9 independent variables including capital adequacy ratio,

bank size, liquidity risk, credit risk, operational efficiency, lending interest rate, inflation, GDP growth, and exchange rate The results of the study showed that two variables (capital adequacy ratio, bank size) had a positive impact, while three variables (operational efficiency, lending interest rate, exchange rate) had a negative impact The remaining variables (liquidity risk, credit risk, inflation, GDP growth) did not affect profitability in this study

Abate & Mesfin (2019) analyzed the internal factors of banks and macroeconomic factors affecting the profitability of commercial banks Data were collected from 9 commercial banks in Ethiopia during the period 2007–2016, and were using the FEM and REM The results of the study indicated that capital adequacy, leverage, liquidity, and ownership had a positive and statistically significant relationship with bank profitability On the other hand, GDP, inflation, and interest rates had a negative and statistically significant relationship with bank profitability However, the relationship between bank size and branch network size was found to be statistically insignificant Abugamea (2018) conducted a research on the impact of internal and external factors on the profitability of commercial banks in Palestine from 1995 to 2015 The experimental results showed that factors such as size, capital, and lending positively influenced both ROA and ROE, while deposit factors had no effect on ROA and ROE Additionally, the study revealed that internal and external factors had no significant impact on Net Interest Margin (NIM) External factors such as inflation and GDP also did not significantly affect the profitability of banks

Noman (2015) collected data from 35 banks in Bangladesh from 2003 to 2013 to explore the factors affecting profitability measures such as ROA, ROE, and NIM The research model was based on independent variables including Non-performing loans to total loans, Equity capital to total assets, Loans to total assets, Cost to income ratio, Asset size, Real interest rate, Inflation, and GDP The study concluded that the ratio of non-

performing loans to total loans and inflation had a positive impact on ROA and ROE, while GDP had a contrasting effect Additionally, the two factors of Cost to income ratio and Asset size positively affected ROA and NIM but negatively affected ROE Equity capital to total assets positively influenced ROA and NIM, while Loans to total assets positively affected NIM

Islam (2016) conducted a study on the determinants of Net Interest Margin (NIM) for 230 banks in four South Asian countries: Bangladesh, India, Nepal, and Pakistan, from 1997 to 2012 The report utilized a Fixed Effects Model (FEM) and relied on diverse independent variables including Size, Non-performing loans to total loans ratio, Liquidity, Equity capital to total assets ratio, Loans to deposit ratio, Non-interest income, Statutory reserves to total assets ratio, Operational expenses to total assets ratio, Operational expenses to operational income ratio, Market concentration, Inflation, and GDP The scientific conclusion drawn from the research was that Liquidity, Equity capital to total assets ratio, Statutory reserves, and Operational expenses to total assets ratio had a positive impact on NIM Conversely, Size, Market concentration, and GDP had a negative impact on the independent variable

2.3.2 Domestic research

Vo Phuong Diem (2016) conducted a study titled: Analysis of factors influencing the profitability of Vietnamese commercial banks Data from 22 Vietnamese commercial banks were collected for the period 2008–2015 The dependent variables were Return on Assets (ROA) and Return on Equity (ROE) Independent variables included the capital adequacy ratio, bank size, liquidity ratio, operational expense ratio, provision for credit risk ratio, loan-to-deposit ratio, and bank development level The results revealed that bank size, loan-to-deposit ratio, and liquidity ratio positively impact bank profitability However, the operational expense ratio and bank development level have a negative

impact Additionally, the capital adequacy ratio positively affects ROA but negatively affects ROE The provision for credit risk ratio showed no statistically significant impact Phuoc & Bui (2016) conducted a study on the factors influencing profitability in Vietnamese commercial banks Data were collected from the financial reports of 20 commercial banks during the period 2007–2012 The article employed Ordinary Least Squares (OLS), Fixed Effects Model (FEM), and Random Effects Model (REM) The authors selected Net Interest Margin (NIM) as the dependent variable, and independent variables included capital adequacy ratio, loan-to-deposit ratio, GDP, and inflation rate The results indicated that GDP positively affects NIM, while the capital adequacy ratio and loan-to-deposit ratio exert a negative impact on NIM However, inflation rate showed no significant effect in the model

Nguyen Thi Thu Hien (2017) conducted a study on the characteristic factors affecting the profitability of Vietnamese commercial banks The research utilized regression analysis to identify internal factors influencing the Return on Assets (ROA) and Return on Equity (ROE) of Vietnamese commercial banks during the period 2006 to 2015 The results indicated that lending as a percentage of total assets, provisions for credit risk on lending, interest expense on debt, and non-interest income on assets positively correlate with the profitability of banks Conversely, non-performing loans, operational expenses to income, and the size of the board of directors exhibit a negative correlation with profitability The study did not find statistically significant evidence regarding the impact of variables representing risk management, liquidity, capital structure, cost control, and scale

Le Dong Duy Trung (2020) investigated the factors affecting the profitability of commercial banks in Vietnam: An empirical approach The author utilized data from 30 banks, including 4 state-owned commercial banks, 25 domestic private joint-stock commercial banks, and 1 foreign bank, spanning the period from 2009 to 2017,

employing the Generalized Method of Moments (GMM) model The dependent variables chosen were Return on Assets (ROA) and Return on Equity (ROE) The results indicated that asset size and equity capital positively impact profitability However, the ratios of operational expenses to total assets, liquidity risk, credit risk, and operational costs negatively influence profitability

Le Van Hop (2021) conducted a study on the impact of equity capital on the profitability of Vietnamese commercial banks, utilizing data from 24 Vietnamese commercial banks spanning the period from 2008 to September 2020 The study employed the Ordinary Least Squares (OLS) method and Hausman test to select between Fixed Effects Model (FEM) and Random Effects Model (REM) The dependent variables chosen were Return on Assets (ROA) and Return on Equity (ROE) The independent variables included the ratio of equity capital to total assets, the ratio of total loans to total assets, the ratio of provisions for credit risk to total loans, the ratio of deposits to total assets, bank size, state ownership, GDP, and inflation The results indicated that the ratio of equity capital to total assets has a positive impact on ROA but a negative impact on ROE The ratio of total loans to assets negatively affects both ROA and ROE The ratio of provisions for credit risk to total loans negatively affects both ROA and ROE Bank size positively influences profitability State ownership does not have statistically significant effects Regarding macroeconomic factors, inflation has a positive impact on both ROA and ROE However, GDP only positively and significantly affects ROE and seemingly has no impact on ROA

2.4 Factors affecting commercial bank profitability Bank Size

Abugamea (2018) argued that banks have a better position compared to other businesses in leveraging the advantage of asset size in transactions and are likely to enjoy higher profits Similarly, this was demonstrated in the study by Allen (2015) where the bank

size variable positively influenced the competitiveness of the observed units, growth potential, and revenue generation in profit-oriented activities

In another study by Islam (2016), it was found that the asset size variable had an opposite effect on the ability of commercial banks to generate surplus The research illustrated the viewpoint that excessively large scale may result in additional costs and inefficient bank management practices, leading to decreased profitability Therefore, large-scale banks can help enhance profitability, increase lending, expand investment portfolios, diversify financial products and services, better develop new customer segments, and attract high-quality human resources to their systems

However, these large credit institutions must make intelligent management decisions to effectively control asset size to achieve optimal operational results

Liquidity

Some studies have shown the negative impact of liquidity risk on the business efficiency of commercial banks, such as Satria (2018) with Malaysian commercial banks However, this was only true for ROA measured by after-tax profit, with results showing no statistical significance when ROA was measured by pre-tax profit as well as ROE (pre- and post-tax) Similarly, Ngweshemi (2021) also found the negative impact of liquidity risk on both ROA and ROE of commercial banks in the United States

On the other hand, some studies have yielded opposite results, indicating that liquidity risk has a positive impact on business efficiency For example, Shahara (2020) with European commercial banks, or demonstrating that high liquidity capability negatively affects the profitability of commercial banks in the United States (Ho & Saunders, 1981) In summary, liquidity is a sensitive issue that every bank needs to be cautious about because it reflects the ability to meet the immediate needs of customers such as deposit withdrawals, granting credit loans, repaying debts on time, and covering operational

expenses If a bank lacks the ability to meet these demands or loses liquidity, its credibility will significantly decline

Credit risk

According to Abate & Mesfin (2019), they argue that as credit risk increases, profitability tends to decrease Similarly, Satria (2018) also indicates that credit risk has an inverse impact on the profitability of commercial banks Conversely, (Yaffee, 2003) suggest that credit risk and bank profitability have a positive relationship However, Bogale (2019), the results show that credit risk is not correlated with the profitability of commercial banks

In conclusion, credit risk is considered the most significant risk in the banking business Therefore, to mitigate credit risk, managers need to promptly identify, analyze, measure the level of risk, and implement management solutions to minimize that risk

Equity Capital

According to the studies conducted by Vo Thi Phuong (2020), Abugamea (2018), Guru (2002), and Kassem (2023), they argue that the scale of equity capital has a positive impact on profitability Conversely, some studies have found a negative impact of equity capital scale, such as Yaffee (2003) with results showing no statistical significance, as seen in (Abbadi, 2022)

In summary, the scale of equity capital plays a crucial and indispensable role in the business activities of every enterprise For commercial banks, it reflects the scale and efficiency of business operations Through equity capital, banks not only support the sustainability and profitability of their operations but also contribute to economic stability and efficient capital distribution in the economy (Hinduru, 2017)

Operational Cost

Ngweshemi (2021) argue that banks with low operational cost have a positive impact on bank profitability On the other hand, Ramadan (2019) did a research about an inverse relationship between operational cost and bank profitability The authors suggest that excessive operational cost negatively affects bank profitability

Gross Domestic Product

Gross Domestic Product (GDP) is the market value of all final goods and services produced within a specific territory during a certain period GDP is one of the key indicators to assess the economic development of a particular region Economic growth of a country in one year compared to the previous year indicates that the economy of that country is expanding, with many business opportunities being extended, leading to growth across all sectors of the economy, including the banking sector, thereby creating conditions for increased profitability for banks However, when this indicator decreases, the economy weakens, and business activities face many difficulties, then the financial and banking sector will not be immune to the risk of reduced profitability because GDP is one of the macroeconomic factors that can directly impact the operations of banks, specifically affecting profitability

Satria (2018), in their study on the most important factors influencing the profitability of the 10 largest banks in Asia during the period 2012 – 2016, showed a significant correlation between the economic growth rate and bank profitability This is consistent with the findings of two other studies by (Shahara, 2020) On the other hand, the research conducted by Abate & Mesfin (2019) demonstrated that the economic downturn led to a decrease in deposit and lending demand, resulting in a reduction in the banking service activities and subsequently decreasing bank profitability Clews (2019) also suggested that GDP has an inverse relationship with the profit potential of banks According to

studies by Ngweshemi (2021), Bogale (2019), and Abugamea (2018) GDP does not have a significant impact on the profitability of non-bank financial institutions

Inflation

Inflation is the sustained increase in the general price level of goods and services over time The rise in the overall price level of goods reduces the purchasing power of the currency, meaning that with the same amount of money, consumers can buy fewer goods than before When comparing different countries, inflation can also be understood as the depreciation of the domestic currency relative to foreign currencies Inflation is one of the macroeconomic factors that affect bank profitability High inflation leads to higher borrowing interest rates and improves bank profitability Therefore, banks need to predict the level of inflation to benefit from it and increase profitability

According to the study by Allen (2015) inflation has a positive impact on profitability In cases where key factors affecting banks remain unchanged, banks may include inflation in interest rates to ensure profitability Abate & Mesfin (2019) found that inflation has an inverse relationship with bank profitability The research by Shahara (2020) also yielded similar results, indicating that bank management may fail to predict future inflation and may be slow in adjusting interest rates, affecting customer sentiment and transaction difficulties, thereby reducing the bank's profit potential However, according to Ngweshemi (2021), inflation has no impact on profitability

Table 2.1 Summary of empirical researches

SUMMARY Author Research

Methodology

Research Data

Dependent Variables

Independent Variables

Efficiency ROA- Lending

FEM REM

9 banks 2007–2016

ROA ROE

Capital adequacy

ROA+ Leverage ROA+ Liquidity ROA+ Ownership ROA+

Inflation ROA- Interest rates ROA- Abugamea,

(2018) OLS FEM REM

(2015) OLS FEM REM

35 banks in Bangladesh 2003-2013

ROA ROE NIM

Non-performing loans to total loans

ROA+ ROE+

Did not affect NIM

ROA+

Equity capital to total assets

Did not affect ROE

NIM+ Loans to

total assets Did not affect ROA Did not affect ROE

NIM+ Cost to

income ratio

ROA+ ROE– NIM+ Asset size ROA+

ROE– NIM+ Real interest

Did not affect NIM

ROE- Islam,

(2016)

in four South Asian countries: Bangladesh, India,

Nepal, and Pakistan, 1997-2012

Liquidity NIM+ Equity

capital to total assets ratio

Statutory reserves to total assets ratio

NIM+

Operational expenses to total assets ratio

NIM+

Operational expenses to operational income ratio

OLS FEM REM

22 banks 2008–2015

Did not affect

deposit ratio

Loan-to-ROA+ Bank

development level

ROA-

Phuoc & Bui

(2016) OLS FEM REM

Nguyen Thi Thu Hien (2017)

OLS FEM REM

ROA+

Interest expense on debt

ROA+

Non-interest income on assets

ROA+

Non-performing loans

ROA+

Operational expenses to income

ROA-

Size of the board of directors

Duy Trung (2020)

Generalized Method of Moments (GMM)

operational expenses to total assets

ROA-

ROE-

Liquidity

risk ROA- ROE- Credit risk ROA- ROE- Operational

costs ROA- ROE- Le Van Hop

(2021)

OLS FEM REM

24 banks, 2008- 2020

ROA

Ratio of equity capital to total assets

ROA+

The ratio of provisions for credit risk to total loans

ROA-

The Ratio of Deposits to Total Assets

ROA-

The Ratio of Total Loans to Total Assets

Discussion of research gaps

These existing research on factors influencing bank profitability has provided valuable insights into the complex dynamics of the banking sector However, several gaps and opportunities for further investigation have been identified

Firstly, while many studies have focused on internal factors such as capital adequacy, liquidity, and operational efficiency, there is a need to explore a broader range of internal and external variables Factors such as technological innovation, regulatory environment, market competition, and geopolitical risks could significantly impact bank profitability but have received limited attention in the literature

Moreover, the majority of studies have been conducted within specific regions or countries, limiting the generalizability of findings Comparative studies across different regions could provide a more comprehensive understanding of how banking sector dynamics vary in diverse economic, regulatory, and market environments

Additionally, extending the timeframe of the study through longitudinal analysis would allow researchers to capture longer-term trends and changes in the banking industry, providing deeper insights into the evolving relationship between variables and bank profitability over time

In this study, data were collected from 25 out of 31 Vietnamese joint-stock commercial banks during the period from 2013 to 2022 The dataset is more updated and comprehensive compared to previous articles Therefore, the topic can assist bank managers and governmental agencies in establishing timely policies to guide the development of Vietnamese commercial banks, aiming to increase profitability

CHAPTER 3 RESEARCH METHODOLOGY 3.1 Hypothesis of the research

Bank Size (SIZE)

Bank size refers to the scale or magnitude of a bank's operations, typically measured by its total assets, deposits, loans, or the number of branches It reflects the overall financial capacity, market presence, and scope of activities of a bank within the financial system

𝑺𝑰𝒁𝑬 = 𝑳𝑵(𝑻𝒐𝒕𝒂𝒍 𝒂𝒔𝒔𝒆𝒕𝒔)

According to Abugamea (2018) a larger bank size may indicate greater financial stability, market influence, and ability to serve a broader customer base However, Islam (2016) argued that the increase in the scale of the bank will lead to increased operational costs, reducing profit potential

H1: SIZE has a positive impact on commercial banks' profitability

Liquidity (LIQ)

Liquidity ratios are financial metrics used to assess a company's ability to meet its term financial obligations with its liquid assets These ratios measure the company's ability to convert its assets into cash quickly without incurring significant losses in value

short-𝑳𝑰𝑸 =𝑪𝒂𝒔𝒉 & 𝒄𝒂𝒔𝒉 𝒆𝒒𝒖𝒊𝒗𝒂𝒍𝒆𝒏𝒕𝒔𝑻𝒐𝒕𝒂𝒍 𝒂𝒔𝒔𝒆𝒔𝒕𝒔

Liquidity ratios are important indicators of a company's financial health and its ability to withstand short-term financial challenges, such as unexpected expenses or fluctuations in cash flow According to Abate & Mesfin (2019) a higher liquidity ratio generally indicates a stronger financial position and better ability to meet its obligations However,

Le Dong Duy Trung (2020) believed that excessively high liquidity ratios may suggest underutilization of assets, which could impact profitability

H2: LIQ ratio has a negative impact on commercial banks' profitability

Credit Risk (CR)

Credit risk ratio, also known as the loan loss reserve ratio or provision for credit losses ratio, is a financial metric used to assess the level of risk associated with a bank's loan portfolio It measures the adequacy of the bank's provision for potential losses from loans that may default

The credit risk ratio is calculated by dividing the total amount of provisions for credit losses by the total amount of loans outstanding It represents the percentage of loans that the bank has set aside as provisions for potential credit losses relative to its total loan portfolio

𝑪𝑹 = 𝐏𝐫𝐨𝐯𝐢𝐬𝐢𝐨𝐧 𝐟𝐨𝐫 𝐂𝐫𝐞𝐝𝐢𝐭 𝐋𝐨𝐬𝐬𝐞𝐬𝑻𝒐𝒕𝒂𝒍 𝑳𝒐𝒂𝒏𝒔 𝑶𝒖𝒕𝒔𝒕𝒂𝒏𝒏𝒅𝒊𝒏𝒈

A higher credit risk ratio indicates that the bank has allocated a larger portion of its earnings to cover potential loan losses, which may suggest a more conservative approach to risk management, (Bogale, 2019) On the other hand, a lower credit risk ratio may indicate that the bank is taking on more risk by not setting aside sufficient provisions for potential loan defaults, (Le Van Hop, 2021)

H3: CR ratio has a negative impact on commercial banks' profitability

Equity Capital (CAP)

The "Scale of Equity Capital ratio" is not a standard financial term or ratio commonly used in finance or accounting However, it seems to refer to a metric that assesses the

proportion of equity capital relative to other financial metrics, such as total assets, liabilities, or revenue

In general, equity capital ratio or equity-to-assets ratio is a common financial ratio used to evaluate a company's financial health and risk It measures the proportion of a company's assets that are financed by equity capital rather than debt

𝐂𝐀𝐏 =𝑬𝒒𝒖𝒊𝒕𝒚 𝑪𝒂𝐩𝐢𝐭𝐚𝐥𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔

A higher equity-to-assets ratio suggests that a larger portion of the company's assets is financed by equity capital, which can indicate a lower financial risk and greater financial stability, (Noman, 2015)

H4: CAP has a positive impact on commercial banks' profitability

Operational cost (OPR)

The Operational Cost (OPR), also known as the Operational Expense Ratio, is a financial metric used to assess a company's efficiency in managing its operational expenses in relation to its revenue It measures the percentage of revenue that is consumed by operational expenses

𝐎𝐏𝐑 = 𝑻𝒐𝒕𝒂𝒍 𝒐𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐞𝐱𝐩𝐞𝐧𝐬𝐞𝑻𝒐𝒕𝒂𝒍 𝒂𝒔𝒔𝒆𝒕𝒔

A lower Operational Cost ratio indicates that the company is more efficient in managing its operational expenses relative to its revenue, which is generally favorable as it implies higher profitability Conversely, a higher ratio suggests that a larger portion of revenue is being consumed by operational expenses, which may indicate inefficiencies in cost management, (Islam, 2016)

H5: OPR has a negative impact on commercial banks' profitability

GDP growth (GDP)

Every financial institution is inherently linked to the GDP growth rate of the country's economy In analyzing the operational efficiency of commercial banks, Noman (2015) concluded that GDP has a positive impact on the profitability metrics of ROA and ROE

𝐆𝐃𝐏 𝐠𝐫𝐨𝐰𝐭𝐡 =𝐆𝐃𝐏𝐭– 𝐆𝐃𝐏𝐭– 𝟏𝐆𝐃𝐏𝐭– 𝟏

This demonstrates that a high economic growth rate provides an environment conducive for banks to conduct business more effectively in certain specific aspects

Note: The data were collected from the World Bank and have been pre-calculated

H6: GDP has a positive impact on commercial banks' profitability

Inflation (INF)

The inflation rate is a macroeconomic factor expected to correlate positively with banking activities Research findings demonstrate that the inflation rate has a positive impact on all three profitability metrics: ROA, ROE, and NIM This signifies that transparent inflation control policies enable commercial banks to benefit from actively adjusting credit and deposit interest rates, resulting in profitability Vo Thi Phuong (2020) Conversely, Abugamea (2018), in their study focusing on banks in Palestine, proves that inflation has a negative impact on both ROA and NIM

𝑰𝑵𝑭 =𝑪𝐏𝐈𝐭 – 𝐂𝐏𝐈𝐭– 𝟏𝐂𝐏𝐈𝐭– 𝟏

Note: The data were collected from the World Bank and have been pre-calculated

H7: INF has a positive impact on commercial banks' profitability

3.2 The research model

In studies concerning the profitability of commercial joint-stock banks, researchers mainly focus on key indicators representing profit variables such as ROA, ROE, and NIM Within the scope of this thesis, the author only utilizes a single profitability indicator for banks, which is the Return on Assets (ROA) Selected research works that have employed ROA as the dependent variable include those by Le Van Hop (2021), Le Dong Duy Trung (2020), Bogale, (2019), Abugamea, (2018) and Nguyen Thi Thu Hien (2017)

Therefore, based on the theoretical foundations as well as the indicators impacting bank profitability outlined in Chapter 2, the thesis introduces 7 independent variables applied in the paper, which are: Bank Size (SIZE), Liquidity (LIQ), Credit Risk (CR), Equity Capital (CAP), Operational cost (OPR), GDP growth (GDP), Inflation (INF)

In terms of the testing method, the thesis will adopt the multivariate regression model approach for the dataset after observing its similarity with the study conducted by Dang Van Dan (2020), Le Van Hop, (2021), Bogale (2019), Abate & Mesfin (2019), Abugamea (2018)

After outlining the foundations in the preceding section, the study will be conducted using the following model:

𝑅𝑂𝐴 = 𝛽0 + 𝛽1𝑆𝐼𝑍𝐸𝑖𝑡 + 𝛽2𝐿𝐼𝑄𝑖𝑡 + 𝛽3𝐶𝑅𝑖𝑡 + 𝛽4𝐶𝐴𝑃 + 𝛽5𝑂𝑃𝑅𝑖𝑡 + 𝛽6𝐺𝐷𝑃𝑖𝑡+ 𝛽7𝐼𝑁𝐹𝑖𝑡 + 𝜇𝑡

Where: β0: constant term

Β1, , β7: Regression coefficients for the independent variables i: bank; t: year of observation;

μi: error term/ residual term