The Impact Of Liquidity Risk On Bank Profitability Empirical Evidence From Listed Commercial Banks In Vietnam.pdf

GRADUATE THESIS

THE IMPACT OF LIQUIDITY RISK ON BANK

PROFITABILITY: EMPIRICAL EVIDENCE FROM LISTED COMMERCIAL BANKS IN VIETNAM

MAJOR: FINANCE – BANKING CODE: 7340201

BUI THI DIEM MI

HO CHI MINH CITY, 2024

GRADUATE THESIS

THE IMPACT OF LIQUIDITY RISK ON BANK

PROFITABILITY: EMPIRICAL EVIDENCE FROM LISTED COMMERCIAL BANKS IN VIETNAM

MAJOR: FINANCE – BANKING CODE: 7340201

Student name: BUI THI DIEM MI Student code: 050608200090

Class: HQ8 – GE19 ADVISER

Dr NGUYEN TRUNG HIEU

HO CHI MINH CITY, 2024

ABSTRACT

This study aims to examine the relationship between liquidity risk and bank profitability of listed commercial banks in Vietnam and consider additionally the impact of the COVID-19 pandemic during 2020-2021 on the relationship between liquidity risk and profitability of listed commercial banks in Vietnam The data in this study is balanced panel data from the FiinPro-X platform of 26 listed commercial banks in Vietnam over the period 2012-2022 The System Generalized Method of Moments (SGMM) is used to analyze this relationship

To examine the impact of liquidity risk on the profitability of listed commercial banks in Vietnam, the dependent variable is bank profitability, which is measured by return on equity (ROE) Independent variable is liquidity risk, which is measured by loan to deposit ratio (LTD) Besides that, the study also uses other control variables such as equity to total assets (ETA), bank size (SIZE), and macroeconomic variables, including GDP growth rate (GDP) and inflation rate (INF) In addition, the study also uses an interaction variable (LTDCOVID) to examine the research problem in the context of the COVID-19 pandemic

The findings suggest a positive correlation between liquidity risk and the profitability of listed commercial banks in Vietnam under normal conditions Moreover, during the COVID-19 pandemic, the positive impact of liquidity risk on profitability increases Additionally, other factors such as the lag of bank profitability, ETA, GDP, and INF significantly affect bank profitability, whereas SIZE shows an insignificant impact across both models Based on the research findings, the author discusses the impact of liquidity risk on bank profitability of 26 listed commercial banks in Vietnam during 2012-2022 and proposes recommendations for relevant parties

Keywords: liquidity risk; bank profitability; commercial banks; COVID-19;

Vietnam; System GMM

The author undertakes to take full responsibility for this statement Sincerely

Ho Chi Minh City, April, 2024

Author

Bui Thi Diem Mi

ACKNOWLEDGEMENTS

First of all, I would like to sincerely thank the teachers who are lecturers at Ho Chi Minh University of Banking with profound gratitude and sincerity These dedicated individuals have provided unwavering support, guidance, and imparted invaluable knowledge throughout my years of study at the university I am also grateful for the opportunities they have created for me to undertake this research

I extend my deepest thanks to Dr Nguyen Trung Hieu, who has assisted me directly, offering meticulous guidance in choosing my research topic, supporting research, and offering invaluable suggestions and encouragement, enabling me to complete my graduation thesis to the best of my abilities

Finally, I sincerely thank my family, friends, and those who have consistently been by my side, offering encouragement, sharing, and providing additional resources to ensure my peace of mind in completing the graduation thesis

Due to my limited experience and knowledge, this thesis cannot avoid shortcomings I sincerely hope to receive more valuable comments and help from teachers so that I can further improve this study

TABLE OF CONTENT

ABSTRACT I DECLARATION II ACKNOWLEDGEMENTS III TABLE OF CONTENT IV LIST OF ABBREVIATIONS VIII LIST OF TABLES X LIST OF FIGURES XI

CHAPTER 1 INTRODUCTION 12

1.1 REASONS FOR CHOOSING THE STUDY 12

1.2 STUDY OBJECTIVES 17

1.3 STUDY QUESTIONS 17

1.4 THE SUBJECT AND SCOPE OF STUDY 18

1.4.1 Subject of the study 18

1.4.2 Scope of the study 19

1.5 RESEARCH METHODOLOGY AND DATA SOURCES 20

1.5.1 Data sources 20

1.5.2 Research methodology 21

1.6 CONTRIBUTIONS OF THE STUDY 22

1.7 DISPOSITION OF THE STUDY 23

CONCLUSION OF CHAPTER 1 25

CHAPTER 2 THEORETICAL FRAMEWORK AND REVIEW OF RELEVANT EMPIRICAL STUDIES 26

2.1 REVIEW OF COMMERCIAL BANK LIQUIDITY 26

2.2 REVIEW OF COMMERCIAL BANK LIQUIDITY RISK 26

2.2.1 The definition of liquidity risk 26

2.2.2 Bank liquidity risk measurement methods 28

2.3 REVIEW OF COMMERCIAL BANK PROFITABILITY 33

2.3.1 The definition of bank profitability 33

2.3.2 Bank profitability measurement 34

2.4 REVIEW OF RELEVANT THEORIES ABOUT THE IMPACT OF LIQUIDITY RISK ON BANK PROFITABILITY 37

2.4.1 Market – Power theory (MP) 38

2.4.2 Efficient - Structure theory (ES) 39

2.4.3 Trade-off theory 39

2.5 A REVIEW OF RELEVANT EMPIRICAL STUDIES 41

2.5.1 Review of international studies 41

2.5.2 Review of studies in Vietnam 48

3.2.1 The variables in the model and the research hypotheses 61

3.2.2 The proposed research model 68

3.3 THE RESEARCH DATA 69

3.3.1 Description of data collection source 69

3.3.2 Characteristics of the research sample 70

3.3.3 Descriptive statistics of research sample 70

3.4 RESEARCH METHODOLOGY 76

3.4.1 Regression model estimation method 76

3.4.2 Regression defect testing 77

3.4.3 GMM method (Generalized Method of Moments) 78

3.4.4 Testing the appropriation of the GMM method 80

CONCLUSION OF CHAPTER 3 82

CHAPTER 4 RESEARCH RESULTS AND DISCUSSION 83

4.1 CORRELATION MATRIX ANALYSIS 83

4.2 REGRESSION DEFECT TESTING OF RESEARCH MODEL 85

4.2.1 Autocorrelation testing 85

4.2.2 Heteroscedasticity testing 86

4.2.3 Endogenous and exogenous variables testing 87

4.3 THE RESULT OF THE SGMM REGRESSION ANALYSIS 88

4.3.1 The impact liquidity risk on profitability of listed commercial banks in Vietnam 88

4.3.2 The impact of COVID-19 on the relationship between liquidity risk and bank profitability of listed commercial banks in Vietnam 90

4.4 SUMMARIZING AND DISCUSSING RESEARCH RESULTS 92

CONCLUSION OF CHAPTER 4 101

CHAPTER 5 CONCLUSIONS AND RECOMMENDATIONS 102

5.1 CONCLUSIONS 102

5.2 RECOMMENDATIONS 104

5.3 LIMITATIONS OF THIS THESIS AND FUTURE RESEARCH DIRECTION 109

5.3.1 Limitations of this thesis 109

5.3.2 Future research direction 110

CONCLUSION OF CHAPTER 5 112

CONCLUSION 113 REFERENCES I APPENDIX 1: 26 LISTED COMMERCIAL BANKS IN THE THESIS IX APPENDIX 2: SUMMARY OF RELEVANT EMPIRICAL STUDIES I APPENDIX 3: STATISTICS OF EXPECTED SIGNS OF VARIABLES IN THE RESEARCH MODEL XV APPENDIX 4: DESCRIPTIVE STATISTIC AND CORRELATION XVIII APPENDIX 5: TESTING MODEL LIMITATIONS XX APPENDIX 6: RESULTS OF SGMM METHOD XXX APPENDIX 7: LIST OF FIGURES XXXIII APPENDIX 8: RESEARCH DATA XXXV

LIST OF ABBREVIATIONS

1 BCBS The Basel Committee on Banking Supervision

4 FGLS Feasible Generalized Least Squares

16 SGMM System generalized method of moments 17 UPCOM Unlisted Public Company Market

18 VIF Variance Inflation Factor

LIST OF TABLES

Table 3.2 Statistical results of variables used in the research model 71

Table 4.1 Correlation coefficients between variables of research model 83

Table 4.2 Multicollinearity test of model 3.1 and model 3.2 84

Table 4.3 Wooldridge test of model 3.1 and model 3.2 85

Table 4.4 Modified Wald test of model 3.1 and model 3.2 86

Table 4.5 Endogenous and exogenous variables in model 3.1 87

Table 4.6 Endogenous and exogenous variables in model 3.2 87

Table 4.7 The impact liquidity risk on profitability of listed commercial banks in Vietnam 88

Table 4.8 The impact of COVID-19 on the relationship between liquidity risk and bank profitability of listed commercial banks in Vietnam 90

Table 4.9 Comparison expectation result, the models before and after including interaction variables 93

LIST OF FIGURES

Figure 3.1 Research process 58 Figure 3.2 Synthesize the research hypotheses within the model 67

CHAPTER 1 INTRODUCTION

Chapter 1 introduces the reasons for choosing the study and the study problem of the thesis From the study problem, the thesis establishes specific study objectives and formulates study questions to address these objectives This chapter also presents the scope of the study, study methodology, contributions of the study, and the structure of this study

1.1 REASONS FOR CHOOSING THE STUDY

Banks hold the most influential position in the financial sector and are essential in driving economic development worldwide through their multifaceted roles as financial intermediaries, funds facilitators, and supporters (Malik, Awais and Khursheed 2016; Mohanty and Mehrotra 2018) The banks are not only the storehouses of the economy’s wealth but also provide funds for resource mobilization for the businesses (Salim and Bilal 2016) Besides, the bank plays a crucial role in engaging in significant activities on both sides of the balance sheet On the asset side, they strengthen the flow of funds by providing essential cash to short-term users through lending Simultaneously, on the liability side, they accumulate liquidity from savers, meaning the bank will both mobilize and receive deposits with an appropriate deposit rate to source capital from various customer bases, thereby playing a role in influencing how the overall financial system operates (Arif and Anees 2012; Diamond and Rajan 2001; Golubeva, Duljic and Keminen 2019) In summary, this indicates that banks play an important role in efficiently transferring capital from surplus economic units to deficit economic units (Tesfaye 2012) and is heightened significant attention from policymakers, leadership, and investors

Due to the multifaceted roles of the banking sector, which involves maintaining the balance between money supply and demand, diversifying its functions, and fulfilling its tasks by providing a wide range of products and services to different entities on various scales, banks may be exposed to various risks such as credit risk, liquidity risk, interest rate risk, market risk, and operational risk, all of

which impact the banks' profitability (Arif and Anees 2012; Chen et al 2018) Among these risks, liquidity risk stands out as one of the most influential risks, a significant risk in banking operations and liquidity management that has received considerable attention worldwide, mainly from regulators and policy-makers or most institutions involved in global economic fluctuations (Alalade, Ogbebor and Akwe 2020; Hacini, Boulenfad and Dahou 2021) Effective liquidity risk management ensures the bank has enough cash and resources to meet customer payment and withdrawal demands in all situations Liquidity shortages pose a significant threat not only to individual banks but also to the overall stability of the financial system When a bank experiences a liquidity shortfall, it may be unable to meet its obligations to depositors and other creditors, leading to a domino effect of financial distress This can have far-reaching consequences, including a decline in asset prices, increased market volatility, and even a systemic crisis, impacting the bank's profitability Therefore, banks must prioritize effective liquidity risk management, ensuring they conserve enough liquidity and are prepared to navigate various challenges, potential losses, or vulnerabilities in funding sources (Hlebik and Ghillani 2017)

According to Khan and Ali (2016) and Mohanty and Mehrotra (2018), liquidity and profitability are fundamental concepts in the corporate domain For banks, liquidity holds immense significance because it will impact on their profitability (Charmler et al 2018; Hacini, Boulenfad and Dahou 2021), with liquidity risk serving as a crucial determinant impacting bank's profitability (Almazari 2014; Chen et al 2018) As presented above, the primary function of banks is to gather funds from the public through deposits and then utilize these funds, along with their resources, to promptly meet customers’ demands (Malik, Awais and Khursheed 2016; Mohanty and Mehrotra 2018) To achieve this, banks must strike a delicate balance between adequate liquidity and maximizing profits Profitability is crucial for the sustainability of any commercial entity, and it reflects the relationship between the amount of profit earned and various other factors However, compared to other businesses, banks must emphasize on balancing profitability and liquidity

(Mohanty and Mehrotra 2018) The liquidity and profitability can be likened to opposing forces with different goals, constantly applying pressure that may strain the bank's stability (Malik, Awais and Khursheed 2016) On the one hand, banks need to maintain a sufficiently high level of liquidity to ensure they have enough cash reserves to meet short-term customer needs and payment obligations On the other hand, banks must also enhance profitability by efficiently using assets and optimizing business operations Therefore, the relationship between liquidity and profitability can be seen as two contrasting factors, the balancing of which can sometimes be challenging and create pressure for banks (Malik, Awais and Khursheed 2016; Mohanty and Mehrotra 2018)

In Vietnam, the study of Doan Thanh Ha et al (2022) indicated that the commercial banking system had undergone two system restructuring times from 2012 to 2015, with several banks facing liquidity challenges The commercial banking system decreased by 5 joint-stock commercial banks due to mergers and acquisitions (MandA), including Ficom Bank, TinNghia Bank, Habu Bank, Western Bank, and DaiA Bank Additionally, the SBV acquired 3 commercial banks - VNC Bank, OceanBank, and GPBank - at the price of zero dong This adversely affected the operational efficiency of Vietnam’s entire banking system Moreover, Tran Quoc Thinh, Le Xuan Thuy and Dang Anh Tuan (2022) also indicated that in Vietnam, the banking sector has been experiencing financial crises recently, with several commercial banks collapsing due to non-performing loans Therefore, these commercial banks were acquired and merged by SBV with state-owned commercial banks The SBV has had to step in to address these issues The main reason for these failures has been a lack of liquidity in business operations (State Bank of Vietnam 2018) This has been worsened by commercial banks aggressively expanding credit, especially in real estate investments, putting strain on the banking and financial sectors The COVID-19 pandemic from 2020 to 2021 exacerbated challenges, notably liquidity risks, for commercial banks These risks threatened the safety of individual banks and the overall banking system (Le Ngoc Thuy Trang et al 2021)

In summary, these fluctuations have negatively impacted on the profitability of listed commercial banks in Vietnam

Furthermore, Vietnam must adhere to international banking standards of the Basel Accords of the BCBS Currently, over 20 credit institutions in Vietnam are implementing Basel II by the SBV’s requirements under Circular No 41/2016/TT-NHNN dated December 30, 2016, which stipulates capital adequacy ratios for banks and foreign bank branches The development strategy for the banking sector of Vietnam until 2025, with a vision towards 2030, aims to ensure that bare commercial banks will achieve capital levels compliant with Basel II standards by 2020 By 2025, all commercial banks will adopt Basel II using standardized approaches and implement Basel II on an advanced basis (Quynh Trang 2022) Currently, no regulation mandates Vietnam’s commercial banks to adhere to the Basel III standards However, some commercial banks have voluntarily adopted Basel III due to its need for development This is because the SBV prioritizes credit approval for banks with ample levels of shareholders' equity, high capital adequacy ratios (CAR), and robust risk management capabilities Moreover, this helps banks improve credit ratings and enhance competitiveness in the international market (Nguyen Thi Anh Ngoc and Nguyen Thi Diem 2023) Meeting these standards is challenging, especially in effectively achieving banking regulatory standards related to liquidity These measures aim to promote the growth and stability of Vietnam's banking sector as it matures Therefore, understanding the relationship between liquidity and bank profitability is crucial for navigating economic challenges, especially amid the current global economic uncertainties characterized by complexities and unpredictable developments (Le Ngoc Thuy Trang et al 2021)

There have been numerous relevant empirical studies on the impact of liquidity risk on the profitability of commercial banks, and this is a topic that is gaining attention from various economic stakeholders worldwide, including those in Vietnam However, the research results have been inconsistent The findings indicated that there existed a relationship between liquidity risk and bank

profitability, although the relationship varied depending on the specific indicator utilized to measure bank profitability For instance, several studies showed that there was a significant relationship between liquidity risk and profitability (Alalade, Ogbebor and Akwe 2020; Charmler et al 2018; Hacini, Boulenfad and Dahou 2021; Ishari and Fernando 2023; Muriithi and Waweru 2017; Le Ngoc Thuy Trang et al 2021; Nguyen Thanh Phong 2020; Ren 2022; Saleh and Afifa 2020; Salim and Bilal 2016; Tang My Sang 2019; Tram Thi Xuan Huong, Tran Thi Thanh Nga and Tran Thi Kim Oanh 2021; Tran Quoc Thinh, Le Xuan Thuy and Dang Anh Tuan 2022) The results of each study revealed that the relationship varied depending on the specific indicator utilized to represent bank profitability, so that this relationship could be positive or negative On the other hand, Golubeva, Duljic and Keminen (2019) and Dong (2021) considered that there was an unclear relationship or an insignificant impact between liquidity risk and profitability

From the analysis above, the author has provided an overview of the practical situation regarding liquidity risk issues and their impact on the profitability of listed commercial banks in Vietnam It is acknowledged that liquidity risk is a challenge faced by banks, and striking a balance between liquidity risk and profitability remains a constant challenge Additionally, the banking system has undergone various fluctuations, with the most recent notable event being the COVID-19 pandemic Besides, studies across different areas and timeframes yield provided inconsistent results on the relationship between liquidity risk and bank profitability, both internationally and in Vietnam, because it depended on the measurement of the dependent variable, which led to numerous continuous debates among researchers Therefore, the author sees the need for continuously updated studies to reflect the evolving context and to reexamine the relationship between liquidity risk and profitability of the banking system in the current Vietnam context This is the main reason the author has chosen the topic "The impact of liquidity risk on bank profitability: Empirical evidence from listed commercial banks in Vietnam” as the author’s study Furthermore, in investigating this relationship, the author will also

consider the impact of the COVID-19 pandemic during the period of 2020-2021 on the relationship between liquidity risk and profitability of listed commercial banks in Vietnam to provide a broader perspective when Vietnam’s economy had fluctuations

1.2 STUDY OBJECTIVES

The general objective of this study is to analyze the impact of liquidity risk on bank profitability of 26 listed commercial banks in Vietnam, alongside examining the impact of COVID-19 on the relationship between liquidity risk and bank profitability To address the general objective, this study needs to focus on four specific objectives Firstly, the study will analyze the impact of liquidity risk on the profitability of listed commercial banks in Vietnam Secondly, the study will determine the extent of liquidity risk’s impact on the profitability of listed commercial banks in Vietnam Thirdly, the study determines the extent to which the COVID-19 pandemic has impacted the effect of liquidity risk on bank profitability The final specific objective is to discuss the findings based on the research results regarding the impact of liquidity risk on the profitability of listed commercial banks in Vietnam, both with and without the impact of the COVID-19 pandemic, including a comparison with results from other relevant empirical studies

1.3 STUDY QUESTIONS

To achieve specific objectives, the study needs to address the following questions The first question is whether liquidity risk affects the profitability of listed commercial banks in Vietnam? In response to the second objective, the study has the second question: what is the extent of the impact of liquidity risk on the profitability of listed commercial banks in Vietnam? The third question is, what is the extent of the COVID-19 pandemic on the relationship between liquidity risk and bank profitability of listed commercial banks in Vietnam? The final question is, what are the conclusions regarding the impact of liquidity risk on the profitability of listed commercial banks in Vietnam based on the research results in the context of having and not having the impact of the COVID-19 pandemic? The completion of this study

in addressing all the above study questions will fulfill the objectives set for this study topic

1.4 THE SUBJECT AND SCOPE OF STUDY 1.4.1 Subject of the study

The study subject of the topic is similar to the author's studies (Alalade, Ogbebor and Akwe 2020; Charmler et al 2018; Golubeva, Duljic and Keminen 2019; Hacini, Boulenfad and Dahou 2021; Muriithi and Waweru 2017; Ren 2022; Saleh and Afifa 2020; Salim and Bilal 2016) internationally or the studies in Vietnam (Le Ngoc Thuy Trang et al 2021; Nguyen Thanh Phong 2020; Tang My Sang 2019; Tram Thi Xuan Huong, Tran Thi Thanh Nga and Tran Thi Kim Oanh 2021; Tran Quoc Thinh, Le Xuan Thuy and Dang Anh Tuan 2022) These studies of numerous authors conducted their study focusing on the impact of liquidity risk on bank performance or profitability of commercial banks in numerous countries Especially in Vietnam, the author recognizes that the study of Tran Quoc Thinh, Le Xuan Thuy and Dang Anh Tuan (2022) also conducted their study on the impact of liquidity on the profitability of listed commercial banks in Vietnam

Basing on the impacts of inadequate liquidity can be significant, affecting both individual banks and the entire banking system In Vietnam, the banking sector has been experiencing financial crises recently, with several commercial banks collapsing due to non-performing loans and the COVID-19 pandemic Besides that, numerous relevant empirical studies provided inconsistent results on the relationship between liquidity risk and bank profitability The author acknowledges this is a significant issue, so the main factor studied throughout this study is the impact of liquidity risk on the profitability of listed commercial banks in Vietnam This study will clarify the impact of liquidity risk on the profitability of listed commercial banks in Vietnam in a specific direction

1.4.2 Scope of the study

About the scope of time, this research data will be collected from 2012 to 2022 (11 years) The banking system in Vietnam experienced structural changes from 2012 to 2015 Specifically, from 2012 to 2015, the commercial banking system had significant structural changes, marked by the reduction of five commercial banks through M&A (Mergers and Acquisitions) such as Ficom Bank (First Joint Stock Commercial Bank), TinNghia Bank (Vietnam Tin Nghia Joint Stock Commercial Bank), Habu Bank (Hanoi Building Commercial Joint Stock Bank), Western Bank, DaiA Bank (DaiA Commercial Joint Stock Bank) At the end of 2015, the SBV acquired three struggling banks at the price of 0 dong, including VNCB Bank (The Vietnam Construction Bank), OceanBank (Ocean Commercial One Member Limited Liability Bank), and GPBank (Global Petro Commercial Joint Stock Bank) (Doan Thanh Ha et al 2022) Moreover, according to Le Ngoc Thuy Trang et al (2021), this period had policy changes that impacted liquidity operations This means that regulatory policy changes during the research period significantly impacted liquidity operations The adoption of the international Basel III agreement, the latest version of Basel standards, aimed to enhance regulations on bank liquidity, improving the banking sector's resilience to financial risks and preventing future economic crises The COVID-19 pandemic happened from 2020 to 2021, which is a crisis period due to the global COVID-19 pandemic, this event also had impact on the profitability of listed commercial banks in Vietnam In other words, under various impactful events, the profitability of listed commercial banks in Vietnam experienced fluctuations Relevant empirical studies such as (Alalade, Ogbebor and Akwe 2020; Muriithi and Waweru 2017; Le Ngoc Thuy Trang et al 2021; Nguyen Thanh Phong 2020), etc have also conducted on a relatively similar or shorter timeframe By combining events related to the impact of liquidity risk on bank profitability and the length of the relevant studies’s period, the author chooses the timeframe (2012-2022) as the official scope of time for this study

About the scope of the space, this study will be conducted at 26 listed commercial banks in Vietnam, which are listed on the HNX, HOSE, and UPCOM exchanges There are a total of 27 listed banks in the Vietnam’s stock market To collect data within the timeframe from 2012 to 2022, data from 26 listed commercial banks have been collected One bank does not meet the criteria, the author excludes Viet Nam Thuong Tin Commercial Joint Stock Bank - Vietbank as this bank lacks sufficient research data for 2012, 2013, and 2014 Besides, relevant empirical studies within the scope of research in Vietnam (Nguyen Thanh Phong 2020; Tang My Sang 2019; Tran Quoc Thinh, Le Xuan Thuy and Dang Anh Tuan 2022) also conducted research involving 25, 19, and 18 joint-stock commercial banks in Vietnam respectively Given the inconsistency in the number of banks studied, this thesis will be conducted from the author’s standpoint, involving 26 listed commercial banks (as mentioned above) to compare the objectives of this research and those of previous authors Therefore, the official study scope of this study is limited to 26 listed commercial banks to ensure the representativeness of the entire banking system in Vietnam, which is presented in detail in Appendix 1

1.5 RESEARCH METHODOLOGY AND DATA SOURCES 1.5.1 Data sources

With microdata, the data is used to investigate the impact of liquidity risk on bank profitability is secondary data that will be collected from audited financial statements of 26 listed commercial banks in Vietnam from 2012 to 2022 (11 years) All the collected data were taken from the FiinPro-X platform After that, the author verified it against primary financial data from the bank’s published and audited financial statements With macrodata, the author collects macroeconomic data from the official announcement of the General Statistics Office of Vietnam

(https://www.worldbank.org/vi/country/vietnam)

1.5.2 Research methodology

To solve the study objectives, this study uses a quantitative research method The author conducts the study based on the data collected from 26 listed commercial banks in Vietnam from 2012 to 2022, totaling 286 observations The research data are organized into balanced panel data, and Microsoft Excel 2021 is used for data synthesis and processing Additionally, Stata software version 15 is also utilized to analyze and test regression models, aiming to address the study questions presented at the listed commercial banks in Vietnam and achieve the study objectives The estimation method used for the study model is the GMM method To assess how liquidity risk influences the profitability of listed commercial banks in Vietnam It will also discuss its findings regarding the impact of liquidity risk on the profitability of listed commercial banks in Vietnam Therefore, the regression method (GMM) is an appropriate approach

In the literature review aspect, the author observed that the method which is used in this study (GMM) is also similar to most relevant empirical studies (Muriithi and Waweru 2017; Nguyen Thanh Phong 2020; Saleh and Afifa 2020; Tram Thi Xuan Huong, Tran Thi Thanh Nga and Tran Thi Kim Oanh 2021) when they conducted their study about the relationship between liquidity risk and bank profitability in Vietnam and various countries Additionally, there are several other methods, such as OLS, FEM, and REM which are also used in some other studies (Alalade, Ogbebor and Akwe 2020; Charmler et al 2018; Dong 2021; Golubeva, Duljic and Keminen 2019; Hacini, Boulenfad and Dahou 2021; Ishari and Fernando 2023; Le Ngoc Thuy Trang et al 2021; Ren 2022; Salim and Bilal 2016; Tang My Sang 2019; Tran Quoc Thinh, Le Xuan Thuy and Dang Anh Tuan 2022)

However, in this author’s study, the author is going to give lagged effects and interaction variables between the COVID-19 pandemic and liquidity risk in the proposed research model Due to the limitations of the pooled OLS model in estimating panel data, which may introduce bias due to variance, autocorrelation, or

endogeneity (Kiviet 1995), FEM and REM estimates are employed to control individual effects However, as FEM and REM fall short in addressing endogeneity issues (Ahn and Schmidt 1995), the GMM method is utilized to overcome these challenges (Arellano and Bond 1991; Hansen 1982; Hansen, Heaton and Yaron 1996) GMM estimators is another technique to address the endogeneity, heteroscedasticity, and serial correlation problem among variables in econometrics introduced by Arellano and Bond (1991) Firstly, this approach rectifies heteroscedasticity, autocorrelation, and endogeneity issues within the context of panel data analysis Secondly, it uses lagged values for dependent variables while addressing concerns regarding instrumental variable incorporation Lastly, this technique offers an estimator capable of capturing correlations among explanatory variables (Arellano and Bond 1991) Anderson and Hsiao (1981) propose using lagged values of dependent variables as instruments, ensuring that these lags are not correlated with the residuals This study’s analysis also utilizes alternative profitability measures as instrumental variables in instrumental variable estimation Additionally, certain exogenous variables serve effectively as instruments in dynamic panel data analysis The research employs dynamic panel data methodology following the framework outlined (Arellano and Bond 1991; Hansen 1982; Hansen, Heaton and Yaron 1996) The GMM technique yields reliable, standardized, and efficient coefficient distributions

1.6 CONTRIBUTIONS OF THE STUDY

The author's study combines with other relevant empirical studies on the topic in Vietnam and internationally to reexamine the extent of the impact of liquidity risk on the profitability of listed commercial banks in Vietnam from 2012 to 2022, considering the impact of the COVID-19 pandemic The thesis provides more detailed and reliable results by utilizing the GMM estimation method, which helps address endogeneity issues In terms of practical application, the study aims to verify the impact of liquidity risk on the profitability of listed commercial banks in Vietnam The study findings will provide further empirical evidence of the extent of this

relationship and valuable information for other researchers in the finance and banking sector and various relevant parties Based on these results, recommendations will also be made to enhance banks' liquidity risk management effectiveness

1.7 DISPOSITION OF THE STUDY

Korrapati (2016) proposed a general idea for a quantitative study thesis, suggesting it should consist of five chapters Therefore, this study will be structured according to the five-chapter framework recommended by Korrapati (2016) Moreover, the author observed that the five-chapter structure is commonly used in quantitative studies within the scientific study field

Chapter 1 Introduction This chapter provides readers a comprehensive and concise overview, offering a general perspective on the issues the study aims to address Specifically, chapter 1 presents an overview of the thesis content, the reasons for choosing the topic, study objectives, outlines the study questions, study scope and objectives, and study methodology Additionally, the chapter highlights the contributions of the selected topic and concludes by presenting the overall structure and organization of the study

Chapter 2 Theoretical framework and review of relevant empirical studies Chapter 2 presents concepts related to the study problems Specifically, the study will first offer the theoretical basis of liquidity risk and bank profitability In addition, the theoretical basis and relevant empirical studies from international and Vietnam Therefore, the author identifies the study gaps, which will be a foundation for building the study model in the next chapter

Chapter 3 Research model and methodology This chapter establishes a study model based on the proposal for choosing a model Then, the study will explain the chosen variables within the model, detail the method employed for collecting research data, and outline the sequence for implementing the model

Chapter 4 Research results and discussion Chapter 4 outlines procedures for conducting quantitative analysis on a secondary dataset comprising observed samples

obtained from listed commercial banks through econometric methods The results of the data analysis will be discussed, focusing on comparing these results with those obtained in other relevant empirical studies

Chapter 5 Conclusions and recommendations Based on the results obtained in Chapter 4, Chapter 5 will provide some recommendations designed for relevant parties aiming to maintain the liquidity risk but still achieve a stable profitability of listed commercial banks This section will also address the study limitations and propose some future study directions

CONCLUSION OF CHAPTER 1

Chapter 1 of this study highlights the importance of the study subject and clarifies both general and specific objectives that will be addressed through corresponding study questions about the topic “The impact of liquidity risk on bank profitability: Empirical evidence from listed commercial banks in Vietnam” Additionally, the study identifies the subject, scope of the study, and the study methodology and data sources during the 11 years from 2012 to 2022, involving 26 listed commercial banks in Vietnam, building upon the foundation inherited from and extending previous relevant empirical studies, this study also considers the interaction effects of COVID-19 pandemic and liquidity risk on bank profitability of listed commercial banks in Vietnam After affirming the scientific significance and practical contribution of the study topic, the final section of the chapter provides an overview of the structure of the thesis, which will consist of 5 main chapters Therefore, the following Chapter 2 will need to identify relevant theories and relevantempirical studies to make a foundation for this study and address this study objective

CHAPTER 2 THEORETICAL FRAMEWORK AND REVIEW OF RELEVANT EMPIRICAL STUDIES

Chapter 2 will detail the definitions, measurement method, relevant theories, and relevant empirical studies published internationally and in Vietnam regarding the impact of liquidity risk on the profitability of listed commercial banks in Vietnam This chapter will serve as the scientific foundation for this thesis

2.1 REVIEW OF COMMERCIAL BANK LIQUIDITY

Regarding assets, liquidity reflects the ability to quickly convert assets into cash at a low cost and vice versa An asset is considered highly liquid if it simultaneously satisfies two characteristics: having a trading market and maintaining a relatively stable price that is not affected by the volume and timing of transactions (Rose 2001)

According to Duttweiler (2011), liquidity represents the ability to meet all payment obligations as they come due, to the fullest extent, and in a specified currency Since liquidity is essentially cash, it is solely related to cash flows Failure to meet these payment obligations will result in insolvency

In summary, liquidity is the ability to quickly and stably convert assets into cash, as well as the capacity to meet payment obligations as they come due

2.2 REVIEW OF COMMERCIAL BANK LIQUIDITY RISK 2.2.1 The definition of liquidity risk

According to Basel Committee on Banking Supervision (2008), liquidity

refers to a bank’s ability to fund increases in assets and meet obligations when they mature without suffering unacceptable losses The fundamental role of banks in transforming short-term deposits into long-term loans makes them vulnerable to liquidity shortages, which is precisely liquidity risk This risk can arise from the bank's operations or general market fluctuations

Duttweiler (2011) argued that liquidity risk is the risk that arises when a financial institution is unable to make payments in time or has to mobilize capital at high costs to meet payment demands Besides that, there are also other reasons which impair the ability of the financial institution to make payments This can lead to adverse consequences for the commercial banks Liquidity risk occurs when a bank does not have sufficient financial resources to fulfill its debt obligations at maturity Commercial banks have to use high-cost financial sources, even though the bank can

still make payments (Vento and Ganga 2009)

Decker (2000) and Pham Thi Hoang Anh (2015) defined liquidity risk as a

type that can be categorized into market liquidity risk and funding liquidity risk Market liquidity risk arises when banks face risks that are not easily settled without market price adjustments due to incomplete market information or disruptions In other words, market liquidity risk is the risk that a bank can not sell its assets in the market quickly and at the lowest cost Funding liquidity risk is a situation where a bank does not have enough capital to meet its requirements for available funds As market liquidity risk and funding liquidity risk interact through the financial market, they can significantly impact credit institutions in the market, especially during periods of financial market volatility To meet their capital needs, commercial banks often conduct the following measures such as borrowing on the interbank money market, selling financial market assets, engaging in foreign exchange swaps, and ultimately resorting to discounting or capital restructuring transactions with other financial institutions A particular bank may still receive support from other banks relatively quickly if financial markets continue to operate normally and temporary liquidity difficulties just happen in a bank However, suppose the financial market is experiencing a period of volatility In that case, the liquidity shortfall of a bank will likely lead to numerous difficulties for other banks due to the tight interconnectedness of banks within the system This situation could result in multiple banks attempting to sell their assets in the financial market, creating a liquidity risk

Thus, liquidity risk is an inherent and inevitable risk commercial banks face Liquidity risk appears when a bank cannot fund its assets or fulfill obligations when they come due at a reasonable cost or when it can't sell assets at a fair price to meet liquidity requirements A bank will be exposed to liquidity risk if it fails to raise enough capital by increasing borrowing or immediately converting assets at a reasonable price

2.2.2 Bank liquidity risk measurement methods

2.2.2.1 Method based on the regulation of the Basel Committee

To measure the liquidity risk of the entire banking system, relevant empirical studies have often employed traditional methods However, since the global financial crisis, banking institutions have increasingly focused on liquidity risk, prompting the Basel Committee to introduce the third version, Basel III agreement In this version, there is a greater emphasis on liquidity risk at both the individual bank level and the overall banking system (Pham Thi Hoang Anh 2015) The studies of Golubeva, Duljic and Keminen (2019) and Muriithi and Waweru (2017) proposed a research method based on Basel III regulations, which include two ratios LCR (Liquidity Coverage Ratio) aims to enhance banks' resilience by ensuring they have high-quality liquidity sources to withstand short-term difficulties and NSFR (Net Stable Funding Ratio) aim to strengthen banks' long-term liquidity resilience by creating incentives for banks to raise funds from more stable sources while ensuring that banks continue their normal operations

According to Basel Committee on Banking Supervision (2010), LCR consists of two components, which are stock of high-quality liquid assets and total net cash outflows over the next 30 calendar days The following formula specifies this

𝑆𝑡𝑜𝑐𝑘 𝑜𝑓 ℎ𝑖𝑔ℎ − 𝑞𝑢𝑎𝑙𝑖𝑡𝑦 𝑙𝑖𝑞𝑢𝑖𝑑 𝑎𝑠𝑠𝑒𝑡𝑠

𝑇𝑜𝑡𝑎𝑙 𝑛𝑒𝑡 𝑐𝑎𝑠ℎ 𝑜𝑢𝑡𝑓𝑙𝑜𝑤𝑠 𝑜𝑣𝑒𝑟 𝑡ℎ𝑒 𝑛𝑒𝑥𝑡 30 𝑐𝑎𝑙𝑒𝑛𝑑𝑎𝑟 𝑑𝑎𝑦𝑠 ≥ 100%

(2.1)

The objective of this ratio is to guarantee that a bank sustains a sufficient amount of unencumbered, high-quality liquid assets that can be transformed into cash This is crucial for addressing its liquidity requirements over a 30-day calendar period, particularly in the face of a notably severe liquidity stress situation outlined by supervisors At the very least, the supply of liquid assets should allow the bank to endure until the 30th day of the stress scenario During this period, it is assumed that suitable corrective measures can be implemented by management and supervisors or that the bank can resolve the issue systematically (Basel Committee on Banking Supervision 2010)

Regarding NSFR, NSFR is specified in the following formula 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑠𝑡𝑎𝑏𝑙𝑒 𝑓𝑢𝑛𝑑𝑖𝑛𝑔

𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑠𝑡𝑎𝑏𝑙𝑒 𝑓𝑢𝑛𝑑𝑖𝑛𝑔 > 100%

(2.2) This ratio was introduced in 2018, the NSFR is the ratio between the available stable funding and the required stable funding over a one-year period (in contrast to the 30-day horizon of the LCR) Basel III requires the NSFR must reach a minimum of 100% Available stable funding refers to capital expected to remain stable over a specific period, typically one year To calculate the NSFR, banks must categorize the book value of all types of capital and debt assets into one of five groups (as defined by the Basel Committee) based on maturity and withdrawal capabilities The required stable funding depends on (i) the liquidity characteristics and remaining term of the assets held by the organization and (ii) the liquidity characteristics and remaining term of the value of off-balance sheet items The NSFR ratio ensures banks maintain a stable capital structure, reducing reliance on short-term funding for long-term assets Together with the LCR ratio, this ratio supports the transformation of the liquidity risk structure of organizations, shifting from short-term capital to more stable, longer-term sources The goal of the NSFR is to limit dependence on short-term funding, promote a better assessment of liquidity risk, and reduce incentives for

reserve-financing institutions with short-term capital maturing just beyond the day period This contributes to the overall stability of the financial system by aligning the maturity profiles of the bank’s assets and liabilities (Basel Committee on Banking Supervision 2010)

30-2.2.2.2 Method based on liquidity ratios

Basel III introduces increased capital, liquidity, and debt standards compared to Basel I and II (Basel Committee on Banking Supervision 2010) Additionally, in response to regulatory inefficiencies observed during the 2007-2009 financial crisis, Basel III tackles business cycles and systemic risk concerns Specifically, banks must maintain capital reserves during economic expansion phases to mitigate potential losses from economic downturns (Basel Committee on Banking Supervision 2010) However, the disadvantage of this method is the lack of data Studies in emerging markets such as Vietnam often lack sufficient data to conduct methods based on the Basel Committee’s regulations

Moreover, there are other methods, such as the sources and uses of funds approach, the structure of funds approach, the liquidity indicator approach, and the market signals (or discipline) approach However, in this study, the author focuses on presenting the liqudity ratios method because (i) it is one of the most common and widely used methods for measuring bank liquidity; (ii) the ratio method has been studied and applied in many relevant empirical studies of Salim and Bilal (2016), Charmler et al (2018), Golubeva, Duljic and Keminen (2019), Alalade, Ogbebor and Akwe (2020), Saleh and Afifa (2020), Hacini, Boulenfad and Dahou (2021), Dong (2021), Ren (2022), Ishari and Fernando (2023), Tang My Sang (2019), Nguyen Thanh Phong (2020), Tram Thi Xuan Huong, Tran Thi Thanh Nga and Tran Thi Kim Oanh (2021), Le Ngoc Thuy Trang et al (2021) or Tran Quoc Thinh, Le Xuan Thuy and Dang Anh Tuan (2022), demonstrating its reliability and accuracy in measurement; (iii) the ratio method is simple and easy to understand, helping to assess the liquidity of banks based on metrics The liquidity ratios method may be simplistic and not very accurate Nevertheless, its strength lies in the availability of data and

existing relevant empirical studies which have been studied Many studies advocate for the use of liquidity ratios as an appropriate method of analysis Hence, the primary measurement approach in this study is liquidity ratios

The first ratio is L1, representing the proportion of liquid assets to total assets This metric assesses liquidity by dividing total liquid assets by total assets, demonstrating the percentage of a bank's assets readily convertible into cash This ratio has been used in several studies (Alalade, Ogbebor and Akwe 2020; Charmler et al 2018; Saleh and Afifa 2020; Salim and Bilal 2016; Tang My Sang 2019; Tram Thi Xuan Huong, Tran Thi Thanh Nga and Tran Thi Kim Oanh 2021; Tran Quoc Thinh, Le Xuan Thuy and Dang Anh Tuan 2022)

L1 = Liquid assets

Total assets x 100 (%)

(2.3) Commercial banks maintain liquidity as a solution to mitigate the risk of bankruptcy by reducing costs and increasing profits However, increasing holdings of numerous liquid assets may decrease the ROE and reduce profitability While holding liquid assets can make banks more resilient to liquidity shocks, having too much can incur significant costs in conditions of reduced business efficiency High-liquidity assets do not generate high profits, so it is necessary to reconsider asset ownership and optimize asset management to improve liquidity while simultaneously optimizing profitability In summary, a higher ratio would indicate an increased capacity to absorb shocks (AlAli 2020; Salim and Bilal 2016)

L2 = Liquid assets

𝑇𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 x 100 (%)

(2.4) L2 ratio is used in several studies (Charmler et al 2018; Ren 2022; Salim and Bilal 2016; Tram Thi Xuan Huong, Tran Thi Thanh Nga and Tran Thi Kim Oanh 2021; Tran Quoc Thinh, Le Xuan Thuy and Dang Anh Tuan 2022) The L2 ratio measures liquidity risk in dealing with high demands for short-term liquidity When

the L2 ratio is higher, the bank possesses sufficient liquid assets to deal with term liquidity Therefore, the bank has liquidity in the short term (Salim and Bilal 2016)

short-L3 = Liquid assets

𝐷𝑒𝑝𝑜𝑠𝑖𝑡𝑠 x 100 (%)

(2.5) L3 ratio is used in studies (Salim and Bilal 2016; Tram Thi Xuan Huong, Tran Thi Thanh Nga and Tran Thi Kim Oanh 2021; Tran Quoc Thinh, Le Xuan Thuy and Dang Anh Tuan 2022) The L3 ratio compares a bank's liquid assets (including cash and assets easily convertible to cash) to the amount of customer deposits When this ratio is high, it means the bank has more liquid assets compared to the amount of customer deposits This indicates that the bank is better equipped to manage long-term liquidity risk (AlAli, 2020; Salim and Bilal, 2016) It signifies that the bank can meet customers' withdrawal demands and other payment obligations without relying heavily on borrowing from other banks Therefore, a high L3 ratio indicates the bank’s liquidity is good

L4 = Loan

𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 x 100 (%)

(2.6) The L4 liquidity ratio of loans to total assets This ratio is used in studies (Salim and Bilal 2016; Tang My Sang 2019; Tram Thi Xuan Huong, Tran Thi Thanh Nga and Tran Thi Kim Oanh 2021; Tran Quoc Thinh, Le Xuan Thuy and Dang Anh Tuan 2022) A low L4 ratio indicates that the bank has more liquid assets in its total assets, indicating good liquidity Conversely, a high L4 ratio means that the total loans of the bank account for a high proportion of total assets In summary, the higher this ratio, the lower the liquidity of the bank, and vice versa (AlAli 2020; Salim and Bilal 2016)

𝐿5 = 𝐿𝑜𝑎𝑛𝑠

𝐷𝑒𝑝𝑜𝑠𝑖𝑡𝑠 𝑎𝑛𝑑 𝑠ℎ𝑜𝑟𝑡 𝑡𝑒𝑟𝑚 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

(2.7) This L5 ratio is used in studies (Alalade, Ogbebor and Akwe 2020; Dong 2021; Golubeva, Duljic and Keminen 2019; Hacini, Boulenfad and Dahou 2021; Ishari and Fernando 2023; Le Ngoc Thuy Trang et al 2021; Salim and Bilal 2016; Tang My Sang 2019; Tram Thi Xuan Huong, Tran Thi Thanh Nga and Tran Thi Kim Oanh 2021; Tran Quoc Thinh, Le Xuan Thuy and Dang Anh Tuan 2022) to measure the relationship of illiquid assets and liquid liabilities (Salim and Bilal, 2016) If the L5 ratio is high, it indicates that the bank lends out more than the funds it has, meaning the bank has utilized short-term funding for long-term loans A low ratio could lead to a decline in bank profitability This implies that the lower the L5 ratio, the higher the liquidity

𝐿6 = 𝐵𝑎𝑛𝑘

′𝑠 𝑙𝑜𝑎𝑛𝑠 − 𝑐𝑢𝑠𝑡𝑜𝑚𝑒𝑟 𝑑𝑒𝑝𝑜𝑠𝑖𝑡𝑠𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

(2.8)This ratio is used in researches (Golubeva, Duljic and Keminen 2019; Nguyen Thanh Phong 2020; Salim and Bilal 2016) L6 assesses the level of liquidity risk exposure, represented by the disparity between a bank's loans and customer deposits, referred to as the financing gap, in relation to total assets A greater ratio suggests reduced liquidity available to the bank (AlAli 2020)

Therefore, the liquidity ratios mentioned above will serve as the basis for examining their inclusion in the proposed model of the thesis, thereby assessing the impact of liquidity on the profitability of listed commercial banks in Vietnam in the context of having and not having the COVID-19 pandemic

2.3 REVIEW OF COMMERCIAL BANK PROFITABILITY 2.3.1 The definition of bank profitability

According to Rose (2001), bank profitability is the difference between the interest rates on deposits and loans plus the profit from other investment activities

minus associated costs These costs are the expenses incurred corresponding to the revenue generated by the bank

The study by Mendoza and Rivera (2017) has presented that profitability is the ability to earn money for a business entity This is one of the crucial factors in creating value for the bank and is a significant step in maximizing shareholders’ wealth

According to the Xu, Hu and Das (2019), bank profitability refers to generating profit or income from the bank's activities and investments This is an essential measure of the financial efficiency of the bank and is calculated by comparing the bank's revenue to its costs, losses, and other expenses A profitable bank will generate enough income to cover operating expenses, loan losses, taxes, and other costs while still providing profits to shareholders Various factors, such as interest rates, economic conditions, competition, and the quality of the loan portfolio can influence bank profitability

Thus, the profitability of a bank refers to its ability to generate profit or income from its activities and investments This is a crucial metric for assessing the financial performance of the bank and is calculated by comparing the bank's revenue with its expenses, losses, and other costs A profitable bank will generate enough income to cover its operating expenses, loan losses, taxes, and other costs while still providing profits to its shareholders Profitability is one of the key metrics used to determine financial efficiency and provide early warnings for investors

2.3.2 Bank profitability measurement

Many indicators can be used to measure the profitability of a bank According

to Tram Thi Xuan Huong, Tran Thi Thanh Nga and Tran Thi Kim Oanh (2021), the

analysis of profitability of banks usually use three main financial ratios which are ROA, ROE, and NIM

Studies (Alalade, Ogbebor and Akwe 2020; Charmler et al 2018; Dong 2021; Golubeva, Duljic and Keminen 2019; Ishari and Fernando 2023; Le Ngoc Thuy Trang et al 2021; Nguyen Thanh Phong 2020; Ren 2022; Saleh and Afifa 2020; Salim and

Bilal 2016; Tang My Sang 2019; Tram Thi Xuan Huong, Tran Thi Thanh Nga and Tran Thi Kim Oanh 2021; Tran Quoc Thinh, Le Xuan Thuy and Dang Anh Tuan 2022) use ROA ratios to measure profitability of banks The ROA is viewed as an essential indicator of the profitability of an entity and its overall total assets

ROA = Net income

Total assets x 100 (%)

(2.8) ROA measures a bank’s management effectiveness, illustrating its capacity to transform assets into net income (Rose and Hudgins 2012) ROA provides analysts insight into the management's efficiency in utilizing its assets to generate earnings (Do Hoai Linh, Ngo Thanh Xuan and Phung Quoc Anh 2020) The higher the ROA, the greater the bank’s profitability and the flexibility in managing assets in response to economic fluctuations This means that the bank is earning more on less spending Nevertheless, a high ROA doesn’t always indicate that a bank knows how to use its assets effectively, it could result from insufficient investment in assets, leading to a decline in asset values and affecting the long-term business performance of the bank When comparing this ratio with historical data and other enterprises in the same industry, it reveals whether the enterprise’s ability to generate profit from its assets is favorable or not When comparing two enterprises in the same sector, if one enterprise has a larger asset base, it is likely to generate higher revenue and profit than the remaining enterprise (economies of scale is explained that the cost advantage of this business increases) Moody’s financial strength assessment standards for the banking industry consider ROA ≥1% as indicative of good profitability CAMEL shows banks are most efficient when ROA is greater than or equal to 1.5% (Rozzani and Rahman 2013)

ROE is much similar to the ROA and is widely used in numerous relevent empirical studies (Alalade, Ogbebor and Akwe 2020; Charmler et al 2018; Golubeva, Duljic and Keminen 2019; Hacini, Boulenfad and Dahou 2021; Ishari and

Fernando 2023; Muriithi and Waweru 2017; Le Ngoc Thuy Trang et al 2021; Nguyen Thanh Phong 2020; Ren 2022; Saleh and Afifa 2020; Salim and Bilal 2016; Tang My Sang 2019; Tram Thi Xuan Huong, Tran Thi Thanh Nga and Tran Thi Kim Oanh 2021; Tran Quoc Thinh, Le Xuan Thuy and Dang Anh Tuan 2022) This ratio also represents the bank profitability

ROE = Net income

Total equity x 100 (%)

(2.9) ROE is a gauge of evaluating the profitability generated per dollar of equity By looking at the ROE ratio, investors can know how much profit the bank earns with the amount of money that shareholders have invested The ROE is the most helpful ratio when comparing the profitability of two or more firms within the same industry (Do Hoai Linh, Ngo Thanh Xuan and Phung Quoc Anh 2020) The higher the ROE, the greater the effective use of equity by the bank ROE also provides a signal of financial success because it indicates whether the entity is gaining profit without pouring new equity capital into the business and is used by fund managers to estimate the level of growth that a business can achieve in the future (Do Hoai Linh, Ngo Thanh Xuan and Phung Quoc Anh 2020) However, an increased ROE may not solely be attributed to the efficient use of equity by the bank, it could result from the bank reducing the equity proportion and increasing the proportion of loan capital, which leads to liquidity risk When comparing ROE, it is essential to conduct horizontal and vertical comparisons, comparing with other enterprise in the same industry to get the most comprehensive view of the enterprises situation According to Moody’s financial strength assessment standards for the banking industry, an ROE ranging from 12% to 15% indicates good profitability Moreover, according to CAMEL, banks operate optimally when ROE is greater than or equal to 22% (Rozzani and Rahman 2013)

In addition, NIM can be also used as a metric to assess the bank’s profitability of a commercial bank

NIM = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑒𝑣𝑒𝑛𝑢𝑒− 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒

Total assets x 100 (%) (2.10) NIM is an intermediary that contributes to collecting savings and providing loans (Do Hoai Linh, Ngo Thanh Xuan and Phung Quoc Anh 2020) NIM illustrates how effectively a bank manages the performance of mobilization and lending by controlling profitable assets and finding sources of capital at low cost A high NIM can stem from a combination of low deposit interest rates and high-interest rates on loans This situation reduces the incentive for saving, increases the cost of borrowing for potential borrowers, and consequently leads to a decreased investment However, a low NIM should not be considered a good indicator This complexity has resulted in fewer studies incorporating the NIM rate than the other two above profitability indicators (Do Hoai Linh, Ngo Thanh Xuan and Phung Quoc Anh 2020) However, study by Salim and Bilal (2016), Saleh and Afifa (2020), Tram Thi Xuan Huong, Tran Thi Thanh Nga and Tran Thi Kim Oanh (2021), Tran Quoc Thinh, Le Xuan Thuy and Dang Anh Tuan (2022), Le Ngoc Thuy Trang et al (2021) has still demonstrated that NIM remains a reliable indicator of profitability

2.4 REVIEW OF RELEVANT THEORIES ABOUT THE IMPACT OF LIQUIDITY RISK ON BANK PROFITABILITY

Referring to relevant empirical studies of Tram Thi Xuan Huong, Tran Thi Thanh Nga and Tran Thi Kim Oanh (2021), and Le Ngoc Thuy Trang et al (2021) when researching the impact of liquidity risk on the profitability of commercial banks, it typically relies on two fundamental theories: the Market – Power theory and the Efficiency - Structure theory

2.4.1 Market – Power theory (MP)

The MP theory also has two main approaches: SCP (Structure - Conduct - Performance) and RMP (Relative market power) SCP theory was developed by Edward Mason and his doctoral student Joe S Bain (Lee 2007), this theory analyzes and provides a general overview of the relationship between market structure, market behavior, and market performance According to SCP, market structure determines the behavior of firms, which in turn determines their performance Thus, the environment dictates the existence and operations of businesses, with their primary mission being to respond and adapt Overall, banking markets become more concentrated, loan interest rates typically increase, while deposit interest rates tend to decrease An increase in loan interest rates can result in higher income for banks, while a decrease in deposit interest rates helps reduce the costs banks have to pay for customers Therefore, the spread between loan and deposit rates may increase, creating favorable conditions for banks to enhance profitability Furthermore, as the market becomes more concentrated, competition among banks decreases This can make it difficult for other entities to compete, as they may lack the opportunity or resources to compete with large banks that have a significant market share and influence This also increases the opportunity for large banks to control the market and increase profits This contributes to an improvement in bank profitability as competition among banks diminishes and it becomes difficult for other units to compete

Beyond SCP, there is also the RMP theory, a theory of relative market power This theory suggests that firms with a large market share and differentiated products can execute market power and earn non-competitive profits (Berger 1995) Banks with brand, product quality, and scale advantages may increase prices for their products and services, leading to higher profits To sum up, each aspect of the theory focuses on a different aspect of market power, with SCP concentrating on market structure and RMP focusing on market control through market share and unique product, service characteristics, and quality