Consequently, the factors influencing the performance of banks have garnered the attention of researchers, bank executives, financial markets, and regulatory authorities alike.. A stable
INTRODUCTION
Over the last two decades, the global banking industry has experienced substantial transformations influenced by both internal and external factors, impacting bank structures and performance While many countries are reducing their reliance on banks, these institutions remain vital for financing economic activities across various sectors A robust banking sector is essential for resilience against adverse events and for maintaining financial stability, drawing interest from researchers, executives, and regulators In Vietnam, the banking system features major government-controlled banks alongside numerous smaller private and foreign banks, creating a segmented market that primarily relies on intermediation This environment is conducive to exploring banking theories in emerging economies and assessing how regulatory changes impact competition and profitability With limited stock and bond market influence, financial intermediation is crucial for credit provision, yet the Vietnamese banking sector faces challenges such as undercapitalization and sluggish loan demand, prompting banks to improve internal capital generation and manage credit-related expenses.
On June 8, 2022, Decision No 689/2022/QD-TTg was issued, endorsing the project “Restructuring the system of credit institutions associated with bad debt settlement for the period 2021 – 2025.” This initiative marks the third restructuring project since 2012, following two previous approvals: Decision No 254/2012/QD-TTg for 2011-2015 and Decision No 1058/2016/QD-TTg for 2016-2020 The restructuring efforts from 2011 to 2020 yielded significant successes, including the prevention of bank failures and improved liquidity However, key goals, such as effectively resolving bad debts and creating a robust banking system that adheres to international standards and embraces technological advancements, remain largely unmet Despite these achievements, the Vietnamese banking system faces ongoing challenges in executing the current restructuring project.
The restructuring tools in the Vietnamese banking system face several limitations, particularly for state-owned banks struggling with financial resources to manage bad debts and lacking specific legal frameworks for restructuring The primary goal of maintaining stability means that issues like bankruptcy or bank closures are not directly addressed, and the proposed solutions, such as mandatory mergers and consolidations during the 2016-2020 phase, have reduced the market-oriented nature of mergers and acquisitions However, the approach has evolved in the 2021-2025 phase to promote voluntary mergers and acquisitions among credit institutions Additionally, there is a strong focus on improving bank management, which distinguishes Vietnam from developed countries that emphasize market orientation and corporate governance in banking operations To succeed in line with Decision No 689/2022/QD-TTg, the Vietnamese banking system needs further in-depth research to develop measures that enhance operational efficiency.
The challenges faced by the Vietnamese banking system highlight the importance of a stable and resilient banking sector for financial stability and effective economic shock management Researchers have increasingly focused on the factors affecting bank profitability, especially in emerging economies like Vietnam Over the past decade, the Vietnamese banking industry has restructured significantly to meet the demands of foreign competition and Basel II standards, which has prompted banks to enhance their financial resilience A major concern is the high level of non-performing loans, adversely impacting bank performance Additionally, the reporting frequency of bank profitability, primarily available quarterly for larger institutions, limits transparency Banks with lower profits may be more inclined to pursue riskier, non-traditional activities, while bank-specific factors are often monitored more closely due to regulatory and accounting standards Thus, a thorough examination of the elements influencing bank performance is essential.
6 profitability within the Vietnamese context offers valuable insights for maintaining a stable financial system
This research empirically analyzes the impact of bank-specific, industry-specific, and macroeconomic factors on the profitability of Vietnamese banks from 2010 to 2022, utilizing data from 32 banks The primary objective is to identify the key determinants that significantly influence bank profitability in this context, while also exploring how different ownership types uniquely affect bank profits in Vietnam, contributing to the academic discourse in the field.
To achieve our objectives, we begin with a thorough literature review focusing on individual bank risk and market power, which are critical factors influencing bank returns We also integrate macroeconomic variables into our regression analyses, reflecting recent research on their impact on bank risk Next, we assess our dataset for stationarity and other potential issues We then apply regression analysis to explore the relationships among variables, comparing our results with existing literature Finally, we conduct tests to evaluate the robustness and validity of our model.
This article presents a thorough empirical analysis of bank profitability determinants in the Vietnamese context, contributing valuable insights into emerging markets Utilizing a comprehensive dataset that includes detailed attributes of commercial banks along with various industry and macroeconomic factors, we aim to enhance understanding in this area Furthermore, identifying the factors that influence bank profitability provides essential information for regulatory authorities conducting prudential analysis.
This article is structured as follows: Section 2 reviews relevant literature and presents our research hypotheses In Section 3, we discuss the main features of the Vietnamese banking system Section 4 outlines our research methodology and the sources of data used in this study Section 5 delves into the empirical findings, while Section 6 concludes with our final thoughts.
LITERATURE REVIEW
B ANK PROFITABILITY
Bank profitability is a crucial indicator of a bank's ability to generate earnings through its financial operations, reflecting its efficiency in managing assets and liabilities while providing services This metric is vital for evaluating a bank's financial health and sustainability, drawing attention from regulators, investors, and analysts who seek to understand its capacity to deliver shareholder value and maintain stability In competitive markets, extraordinary profits are often short-lived due to the influx of new competitors, while sustained profitability typically relies on barriers that limit competition, potentially leading to market dominance.
I NTERNAL FACTORS
The relationship between bank size and profitability reveals both advantages and disadvantages in the banking sector According to modern intermediation theory, larger banks often diversify their operations, which can raise concerns about agency issues and corporate governance, potentially increasing systemic risk (Boyd, 1993) However, these banks can leverage economies of scale by broadening their product offerings and attracting a larger customer base, thereby minimizing information costs and addressing asymmetric information challenges (Short, 1979) Additionally, the increased scale allows banks to lower transaction costs and pursue profitable financing opportunities, ultimately boosting their profitability, as noted by Boyd.
The positive correlation between bank size and profitability highlights the importance of economies of scale, supported by research from Flamini (2009), Kosmidou (2008), and Staikouras (2004) As banks grow larger, they benefit from marginal cost savings, especially in mature markets, as noted by Akhavein (1997) and Molyneux (1992).
A negative correlation may arise in extremely large banks, indicating diseconomies of scale due to challenges like liquidity constraints and associated risks These banks often struggle to leverage diversification effectively because of agency problems and poor corporate governance Consequently, diversification can lead to revenue fluctuations, increasing risks that adversely affect profitability While large, diversified banks may see reduced revenues, smaller, specialized banks can better manage asymmetric information issues in lending activities.
Capital is a crucial element in restructuring the banking industry's existing framework, helping to protect it from significant disruptions It also sets higher standards for businesses, promoting growth and enhancing performance Additionally, capital plays a vital role in recapitalization, enabling banks to meet their minimum requirements effectively.
9 paid-up capital, enabling them to enhance their operations and deliver greater efficiency in serving their customers
Numerous studies, including those by Goddard (2004), Hanh (2018), and Sufian (2008), have established a positive relationship between capitalization and bank profitability This connection can be understood through two key theories: the expected bankruptcy costs hypothesis, which posits that banks increase their capital levels in response to rising bankruptcy risks, and the signaling hypothesis, which suggests that banks use their capital to convey information about their future profitability to the market This can lead to a signaling equilibrium where banks, anticipating improved performance, maintain higher capital levels (Pervan, 2015) Recent research by Dan (2019) highlights the crucial role of capital adequacy in enhancing the profitability of Vietnamese banks, particularly regarding return on assets.
According to Vu and Nahm (2013), the efficiency of profit generation in Vietnamese banks is significantly influenced by specific bank attributes, including larger size and improved management capabilities, as well as macroeconomic factors such as strong per capita GDP growth and low inflation rates.
The agency cost hypothesis posits that high leverage can lower agency costs linked to external equity, thereby increasing firm value by motivating managers to better align their actions with shareholder interests Conversely, research indicates that banks with excessively high capital ratios may adopt overly cautious strategies, leading them to miss out on profitable growth opportunities and raising the opportunity costs of capital (Sharma, 2013).
Effective risk management is essential in the banking sector, as bank failures often stem from inadequate asset quality and liquidity In times of uncertainty, financial institutions typically respond by diversifying their portfolios and bolstering liquid assets to reduce risks This comprehensive risk management approach focuses on managing both credit risk and liquidity risk.
Credit risk in banking denotes the potential financial loss a bank may incur when a borrower defaults on a loan, either partially or entirely This risk emerges when borrowers fail to fulfill their repayment obligations, potentially resulting in significant financial strain or bankruptcy for the bank if not effectively managed The continuous presence of non-performing loans can exacerbate this risk, highlighting the importance of robust credit risk assessment and management strategies.
Credit risk management is a critical concern for banks, as its effective management is essential for their survival and profitability (Saleh, 2020) Some bank managers may prioritize personal interests, making robust risk management strategies crucial for anticipating and mitigating negative consequences (Athanasoglou, 2006) A comprehensive credit risk management framework is vital for banks' long-term viability and performance, as the impact of credit risk on profitability can vary significantly across the industry (Kosmidou, 2008) While increased exposure to credit risk is often linked to reduced profitability, some argue that banks with riskier assets may need to achieve higher profits to offset default risks, particularly in emerging markets with greater macroeconomic volatility (Figlewski, 2012; Gelos, 2009) Interestingly, research in Vietnam suggests that credit risk does not significantly affect bank performance (Le, 2020).
Banks are particularly susceptible to liquidity risk, which occurs when there is a substantial withdrawal of deposits by customers This situation negatively affects the bank's operations, deterring potential clients and investors, ultimately leading to a significant decline in overall effectiveness and profits In essence, liquidity risk emerges when a bank does not have enough funds to fulfill its short-term obligations, especially during unforeseen cash outflows The availability or scarcity of cash is vital in assessing the level of liquidity risk encountered by a bank.
Research indicates that banks with higher liquid asset levels often experience lower profits due to the lower returns associated with cash and cash equivalents (Katusiime, 2021; Kosmidou, 2008) However, the expected bankruptcy cost hypothesis suggests that increased liquid asset holdings can lower a bank's default risk, potentially enhancing profitability (Bourke, 1989) In Vietnam, studies by Le (2017, 2020) show that a greater proportion of liquid assets may actually improve bank margins, as banks compensate for the costs of holding these assets by implementing higher margins.
Consistent with the existing literature, Vietnamese banks with lower liquidity risk are expected to demonstrate greater profitability
Bank expenditures significantly impact profitability, highlighting the importance of effective management Research supports incorporating an expense-related variable in the microeconomic profit function, as managing expenses is a key opportunity for enhancing profitability (Rahman, 2020) The efficient utilization of labor is crucial due to the large disparities in salaries and wages, with staff expenses typically having an inverse relationship with profitability, potentially undermining financial performance (Aziz, 2019; Sun, 2017) Bourke's 1989 study indicates that high staff expenses negatively affect bank profitability, while Molyneux's 1993 research suggests a positive link between staff expenses and overall profits, arguing that in regulated industries, high profits can lead to increased payroll expenditures.
Extensive research has explored the link between banking industry structure and performance, revealing a positive correlation between profitability and market structure metrics like concentration and market share Two main hypotheses, the Structure-Conduct-Performance (SCP) hypothesis and the Efficiency-Structure (EFS) hypothesis, illustrate differing views on this relationship and have been widely applied in international banking performance studies Notable researchers, including Short (1979) and Molyneux (1993), have analyzed various internal and external factors affecting bank operations to better understand the determinants of bank profitability on both global and European levels.
The Structure-Conduct-Performance (SCP) hypothesis suggests that in concentrated banking markets, institutions can leverage their market power to charge higher loan rates while offering lower deposit rates, effectively extracting monopolistic rents Similarly, the Relative Market Power (RMP) theory asserts that only firms with substantial market shares and distinct product differentiations can influence pricing strategies for their offerings.
M ACROECONOMIC FACTORS
Gross Domestic Product (GDP) is a key macroeconomic indicator used to assess a nation's economic performance According to Sufian (2008), GDP influences various factors related to loan and deposit supply and demand A slowdown in GDP growth, particularly during recessions, often results in lower credit quality, higher loan defaults, and diminished bank returns However, Hoggarth (1998) argues that real GDP does not fully explain the greater fluctuations in banking sector profits seen in the UK compared to Germany.
The authors argue that the variable in question does not significantly explain the differing profitability between UK and German banks, reinforcing their conclusions In contrast, previous studies by Tran (2020) and Hanh (2018) suggest a positive relationship, as higher economic growth typically leads to fewer defaults and improved credit access (Rumler, 2016).
Macroeconomic control variables, such as inflation rates, long-term interest rates, and money supply growth, significantly influence bank profitability J Revell (1979) emphasizes that the effect of inflation on banks depends on whether operational costs, including wages, rise faster than inflation Economic maturity plays a crucial role in accurately forecasting inflation, enabling banks to manage costs effectively Perry (1992) argues that if banks can fully anticipate inflation, they can adjust interest rates to enhance revenues beyond costs, leading to increased economic profits Research by Athanasoglou (2008) and Hanh (2018) supports a positive correlation between inflation or long-term interest rates and profitability.
Changes in the money supply can significantly affect the overall price level, primarily influenced by central bank policies, household behavior, and banking actions Monetary policy is the government's strategy for managing money within the economy, involving adjustments to the cost and availability of money and credit to steer economic activities It can be categorized into two main types: expansionary and contractionary Expansionary monetary policy reduces borrowing costs and increases money availability, stimulating economic activity and raising the price level In contrast, contractionary monetary policy raises borrowing costs and limits money availability, leading to decreased economic activity and a lower general price level.
This study builds on previous research, such as that by Kosmidou (2008), by examining the impact of Money Supply Growth (MSG) on firm profitability (Aburime, 2008) Additionally, Mamatzakis (2003) highlighted the significance of money supply as a measure of market size, revealing its substantial effect on bank profitability.
Research on bank profitability is extensive globally, particularly in developed economies, but remains limited in Vietnam Notable studies, such as those by Batten and Vo (2019), Hanh (2018), and Le (2020), have explored profitability determinants among Vietnamese banks using data from various periods These investigations highlighted the impact of internal and external factors on profitability, yielding diverse results Given the significant fluctuations in the Vietnamese economy, there is an urgent need for updated research Future studies should adopt a broader analytical framework that includes a variety of bank ownership structures and a comprehensive examination of influencing factors, particularly in light of ongoing restructuring and liberalization in the Vietnamese banking sector.
MODEL SPECIFICATION AND DATA
B ACKGROUND
The Vietnamese government has actively promoted the expansion of the banking system through initiatives like the "Restructuring of the Financial System of Credit Institutions for the 2011 - 2015 Period" outlined in Decision No 254/QD-TTg This focus has continued with the "Restructuring of the Financial System of Credit Institutions Associated with Non-Performing Loan Resolution for the 2021 - 2025 Period," further emphasizing the importance of strengthening financial institutions in Vietnam.
No 689/QD-TTg dated June 8, 2022, by the Prime Minister These efforts have propelled banks to operate more efficiently and increase their profitability
Consequently, there has been a determined effort to implement the restructuring plan for credit institutions involved in non-performing loan resolution for the 2021 - 2025 period The
The objective is to create a strong, high-quality credit institution system that is efficient, transparent, and accountable to the public, adhering to banking safety standards and international best practices The aim is to reach a development level comparable to the top ASEAN countries by 2025 (Chi, 2022).
Efforts are concentrated on the design, approval, and execution of restructuring projects for struggling banks The goal is to fundamentally resolve the challenges faced by weak banks and credit institutions by 2025, with a strong focus on preventing the rise of new underperforming institutions.
Graph 1_Total assets by bank structure Source: author’s calculation
Table 1_ROA and ROE of state-owned and privately-owned banks Source: Author’s calculation.
By the end of 2022, the total assets of the entire credit institution system in Vietnam reached 15.3 quadrillion VND, a 14.5% increase compared to 2021 Among these, the total assets of the
VCB AGRIBANK CTG BIDV Other financial insitutions
State-owned banks Privately-owned banks
17 four state-owned banks accounted for 48.33%, with BIDV having the largest asset scale at 2.1 quadrillion VND, a 20.41% increase from 2021
Despite being the largest in total assets, the banks in this group exhibit low asset utilization efficiency Vietcombank leads with an asset utilization efficiency of 1.65% in 2022, while private joint-stock commercial banks, despite their smaller total assets, excel in resource utilization Vietcombank also boasts the highest Return on Equity (ROE) at 22.06%, indicating it earns 22.06 VND for every 100 VND invested Conversely, smaller banks like MBB demonstrate superior performance with a 2.49% Return on Assets (ROA) and a remarkable 22.8% ROE in 2022, highlighting the efficiency and profitability of private banks in leveraging their resources.
A low Return on Assets (ROA) may indicate inefficient investment or lending practices, as well as rising operating costs In contrast, a high ROA signifies a bank's effective asset management, sound investment strategies, and efficient utilization of resources.
To effectively achieve the objectives outlined in the Project for 2021-2025, Credit Institutions must address challenges related to non-performing loans (NPLs), which significantly affect their business efficiency Recent efforts, guided by the National Assembly, Government, and State Bank of Vietnam, have led to a notable decrease in the NPL ratio, enhancing the effectiveness of NPL management within the Credit Institution system However, the Covid-19 pandemic, particularly during its fourth wave, has adversely impacted the business operations of these institutions, highlighting the need for ongoing restructuring solutions to resolve existing issues.
Following the Governor of the State Bank of Vietnam's Directive aimed at assisting customers affected by the Covid-19 pandemic, non-performing loans (NPLs) in credit institutions have notably decreased and are being effectively managed Nonetheless, these NPLs continue to adversely affect business performance.
By August 2022, the on-balance sheet non-performing loan (NPL) ratio in Vietnam was a stable 1.9%, while the overall NPL ratio, including those sold to the Vietnam Asset Management Company (VAMC) and potential NPLs, reached 4.99%, down from 6.3% at the end of 2021 The integration of modern technology and infrastructure improvements has significantly boosted the profitability of banks This study examines the financial performance of commercial banks in Vietnam from 2010 to 2022, with detailed data sources discussed in the subsequent section.
D ETERMINANTS
This study utilizes key variables outlined in Table 2, focusing on two profitability metrics: return on assets (ROA) and return on equity (ROE) ROA measures a bank's efficiency in generating profits from its assets, while ROE indicates the return to shareholders based on their equity, calculated as ROA multiplied by the total assets-to-equity ratio, also known as the equity multiplier Typically, banks with lower leverage and higher equity demonstrate higher ROA but may have modest ROE Since ROE does not account for the risks associated with high leverage and is often influenced by regulatory factors, ROA is prioritized as the primary metric for evaluating bank profitability (Gul, 2011).
Determining the optimal size for maximizing bank profitability is crucial in banking policy formulation Research indicates that larger banks often enjoy competitive advantages through economies of scale, enhancing profitability up to a certain point, as noted by Molyneux (1992) and Flamini (2009) However, studies by Sufian (2008) and Afandi (2019) reveal that increased diversification may lead to reduced credit risk and lower returns, suggesting a potential negative correlation between size and profits To measure bank size, the natural logarithm of total assets is commonly used, with Flamini (2009) predicting a positive impact on firm performance.
H1: Bank size has positive impact on profitability
Capital is defined as the ratio of equity capital to total assets, as suggested by Hirindu (2017) A higher capital level typically leads to increased profitability, as it allows banks to meet regulatory requirements and extend excess capital as loans Capital serves as a reserve to support a bank's operations and provides a safety net during unfavorable conditions Additionally, the positive relationship between capital and earnings is reinforced when new banks enter the market, enabling banks with better performance expectations to signal their strength by maintaining higher capital levels.
H2: Bank capital has positive impact on profitability
Credit risk (CR) is assessed by analyzing loan-loss provisions in relation to loans, as established by central banks' standards Bank management adjusts these provisions at the beginning of each period, treating credit risk as a predetermined variable However, this study uses the non-performing loans (NPL) to total credit exposure ratio as a more accurate proxy, reflecting each bank's actual situation, as suggested by Katusiime (2021) Theoretically, higher credit risk exposure leads to lower firm profitability, indicating a negative correlation between return on assets (ROA) or return on equity (ROE) and NPL Therefore, banks can improve profitability by implementing effective credit risk screening and monitoring strategies, which involve predicting future risk levels.
H3: Credit risk has negative impact on profitability
Liquidity risk (LIQ) is a critical factor impacting a bank's profitability, stemming from the potential inability to support asset growth or fulfill obligations While the loan market is perceived as riskier, it provides higher returns compared to safer assets like government securities Consequently, a positive correlation between liquidity and profitability can be expected (Ramadan, 2011).
Profitability may rise when fewer assets are dedicated to liquid investments, as suggested by Athanasoglou (2006) To assess liquidity risk, we utilize the ratio of liquid assets to total assets, aligning with the methodologies established in Athanasoglou's 2006 study and Slaeh's 2012 research, which anticipate a negative correlation.
H4: Liquidity risk has negative impact on profitability
Cost management (CM) in banking involves categorizing overall expenses, excluding interest payments, into operating costs and other expenditures like taxes and depreciation Operating expenses, which are influenced by management decisions, are expected to negatively correlate with profitability; effectively managing these costs enhances operational efficiency and boosts profits (Aziz, 2019; Sun, 2017) Therefore, we utilize the natural logarithm of overhead costs as an indicator of expense management.
H5: Cost management has positive impact on profitability
The relationship between bank profitability and ownership is noteworthy, particularly as privately-owned banks may outperform state-owned banks that often do not prioritize profit maximization However, existing literature lacks definitive empirical evidence to substantiate this claim In Vietnam, the banking sector transitioned from a mono-bank system, which catered solely to state needs, to a two-tier system following the "Doi Moi" reforms in the late 1980s This new framework established the State Bank of Vietnam (SBV) as the central bank, with state-owned commercial banks (SOCBs) as lenders, while also allowing the emergence of private joint-stock banks (JSBs) and limited foreign investment in joint-venture banks To explore this hypothesis, we implement a dummy variable approach, assigning a value of 1 to privately-owned banks and 0 to others, as suggested by Athanasoglou (2008).
H6: Do private banks generate more profit than state ones?
Concentration (HH): This study utilizes the Herfindahl-Hirschman index, calculated based on a bank's total loans relative to the total loan exposure of the entire system for a specific year,
The article highlights that nearly half of the market share in the sector is controlled by a dominant firm, which has led to increased competitive dynamics due to the expansion of the private sector and the rise of new commercial banks (Moutsianas, 2016; Zheng, 2017) This concentration effect is examined in Rahman's 2020 research, which anticipates a positive correlation between market concentration and competitive behavior.
H7: Concentration has positive impact on profitability
Rapid economic growth significantly boosts profitability across various countries, as highlighted by Demirgüç-Kunt (1999) Gross Domestic Product (GDP) serves as a key indicator of business cycle fluctuations, reflecting both economic upturns and downturns Consequently, shifts in overall economic activity are expected to directly affect bank profitability This study adopts the annual percentage growth rate of GDP at market prices, adjusted for constant local currency, as a proxy for this variable, following the methodology of Rumler (2016) Therefore, we hypothesize that GDP positively impacts profitability.
Inflation (INFL) is a crucial indicator of how the macroeconomic environment affects bank profitability Revell (1979) highlighted that the impact of inflation is contingent upon whether banks' operating expenses, such as salaries and benefits, rise more quickly than inflation Research has consistently shown a negative correlation between inflation and bank performance (Athanasoglou, 2006).
2008, Rumler, 2016) In line with previous studies, we employ the annual inflation rate as a proxy to assess its effect on bank profitability
H9: Inflation has negative impact on profitability
The money supply, particularly M2, plays a crucial role in influencing nominal GDP and the aggregate price level, as outlined by the quantity theory of money While the Central Bank primarily determines the money supply, household behavior and bank deposit practices also contribute to its dynamics Research by Kosmidou (2008) and Mamatzakis (2003) highlights the money supply as an essential indicator of market size, demonstrating its significant impact on bank profitability.
22 consider the growth of the money supply (M2), and we expect it to have a positive effect on banks' profits and margins
H10: Money supply has positive impact on profitability
M ODEL
This research investigates the influence of firm characteristics and macroeconomic factors on bank profitability through panel data analysis Utilizing panel data enhances the sample size and allows for repeated observations of spatial data, providing richer insights Furthermore, panel data is ideal for dynamic research and produces more efficient estimations, as noted by Baltagi (2008).
This study presents two models aimed at elucidating the relationship between independent and dependent variables We will employ Hausman tests to determine the suitable choice between fixed or random effects models Following this, we will perform tests to evaluate multicollinearity, cross-sectional issues, autocorrelation, and heteroscedasticity.
Whereas: à 𝑖 is used to capture the unobserved individual effects (either fixed effect model or random effect model)
𝑅𝑂𝐴 𝑓,𝑡 Net income/Total asset of bank f in year t
𝑅𝑂𝐸 𝑓,𝑡 Net income/Total equity of bank f in year t
Independent variables Definition Expected sign
𝑆𝐼𝑍𝐸 𝑓,𝑡 Natural logarithm of total assets bank f in year t (+)
𝐸𝐴 𝑓,𝑡 Total equity/Total assets of bank f in year t (+)
𝐶𝑅 𝑓,𝑡 Non-performing loans/Total loans of bank f in year t (-) 𝐿𝐼𝑄 𝑓,𝑡 Liquid assets/Total assets of bank f in year t (-)
𝐶𝑀 𝑓,𝑡 Natural logarithm of overheads of bank f in year t (+)
𝐻𝐻 𝑓,𝑡 Total loans of bank f/Total loans of industry in year t (+)
𝑃𝑅𝐼𝑉𝐴𝑇𝐸 𝑓,𝑡 Take 1 for privately-owned bank and 0 for state- owned bank f in year t (+)
Table 2_Dependent and independent variables
This study analyzes the impact of firm-specific characteristics and external factors on Return on Assets (ROA) and Return on Equity (ROE) by examining a dataset of 32 Vietnamese banks from 2010 to 2022 The data, primarily derived from the financial statements of these banks, adheres to Vietnamese accounting standards and focuses on commercial banks, which are the main entities in the Vietnamese banking sector, while foreign affiliates and joint-venture banks have a minor role (Le, 2020).
To ensure the quality and consistency of financial information, we filtered the dataset by removing outliers and excluding banks with incomplete data due to market fluctuations Our final dataset consists of 408 observations from an unbalanced panel of 32 banks, including four state-owned and 28 privately-owned banks, which together represent over 80% of the total assets in the Vietnamese banking sector Additionally, data on GDP, inflation, and money supply was obtained from the World Bank database.
EMPIRICAL RESULTS
E CONOMETRIC APPROACH
This study analyzes an unbalanced panel of 32 Vietnamese commercial banks from 2010 to 2022, a common occurrence in banking profitability research (Baltagi, 2001) The econometric analysis includes several key components: first, we present summary statistics for the analyzed variables; second, we evaluate the panel's stationarity using a unit root test tailored for unbalanced data; third, we determine whether the individual effects are fixed or random; fourth, we utilize dynamic panel estimation techniques to reduce potential biases; and finally, we discuss the underlying reasons for our findings.
Variables Obs Mean Std.Dev Min Max
Table 3_Descriptive statistics Source: Stata analysis results
The dataset reveals key insights into the performance of Vietnamese banks, with an average Return on Assets (ROA) of approximately 0.978, indicating varying degrees of asset management efficiency among institutions The Return on Equity (ROE) shows significant fluctuations, suggesting a high level of leverage during the sample period, while the modest variability in ROA and DuPont Analysis reinforces this observation (Calamar, 2016) Notably, for every 100 VND increase in equity, banks earn an average of 11.49 VND The SIZE and Cost Management (CM) variables exhibit minimal fluctuation, indicating a relative uniformity in asset sizes and cost management practices across banks With an average SIZE of 11.739, the dataset highlights the diverse scale of banks in Vietnam, ranging from smaller regional entities to larger national players, which influences their market reach and financial capabilities Additionally, an average CM of approximately 7.567 reflects the banks' effectiveness in managing operating costs while maintaining income The average inflation rate of about 5.259 emphasizes the importance for banks to incorporate inflation considerations into their risk management and pricing strategies to ensure stability and profitability.
Table 4_ Fisher's test for unit root Source: Stata analysis results
Using a large T in bank profitability models may attract criticism regarding panel non-stationarity Maddala (1999) recommends the Fisher test, which combines p-values from individual unit root tests for each bank This test not only outperforms other unit root tests in panel data analysis but also does not require a balanced panel, unlike most alternatives The results indicate that the null hypothesis of non-stationarity is rejected at the 5% significance level, suggesting that no unit roots exist in the panel under the specified test conditions.
ROA ROE SIZE EA CR LIQ CM HH PRIVATE GDP INFL M2
Note: ***, **, and * denote significance at 1%, 5%, and 10% critical levels
Table 3 _Correlation matrix Source: Stata analysis results.
Table 5 presents the correlation matrix between Return on Assets (ROA) and Return on Equity (ROE), alongside ten independent variables The analysis reveals that factors such as size, capital, cost management, ownership, and inflation positively influence ROA, while credit risk, liquidity risk, GDP, and money supply negatively affect it While bank-specific variables align with expected correlations, external variables show some discrepancies ROE demonstrates a similar correlation pattern to ROA, with notable exceptions for capital, concentration, ownership, and inflation Importantly, all correlation coefficients remain below 0.5, indicating the absence of multicollinearity among the independent variables.
The second concern revolves around selecting the most appropriate model, whether it's a pooled, fixed effects (FE), or random effects (RE) model Initially, simple regressions were
In the analysis of Model 1 and Model 2, significant findings were recorded, with Model 1 showing statistical significance for all variables except GDP and M2, as detailed in Table 7 The correlation table indicated that only bank-specific variables met expectations, while external factors did not, resulting in an R-squared value of 0.286, meaning 28.6% of the variation in Return on Assets (ROA) is explained by this model In contrast, Model 2 revealed that only four out of ten variables—size, capital, credit risk, and inflation—were statistically significant, leading to a lower R-squared value of 23.44% Further analysis using White's test for heteroskedasticity and the Wooldridge test for autocorrelation indicated that the pooled model is not the preferred choice, as both tests rejected the null hypothesis.
The Hausman test results for Model 1 indicate a significant difference in coefficients between fixed effects (FE) and random effects (RE), strongly favoring the FE model The FE model demonstrates superior performance compared to both pooled and RE models, particularly when liquidity is the only non-significant variable Key findings reveal that size, capital, and all three macroeconomic variables positively correlate with ROA, whereas other variables show negative relationships Additionally, the R-squared value increases from 28.6% in the pooled model to 41.4% in the FE model However, issues of heteroskedasticity and autocorrelation persist as seen in the pooled model To address heteroskedasticity, we will utilize the generalized least squares (GLS) approach, which involves applying weights to individual observations, with results detailed in Table 11.
The Hausman test results indicate strong support for adopting the Random Effects (RE) model in Model 2, as detailed in Table 12 Key variables such as LIQ, CM, PRIVATE, and GDP show no statistical significance, particularly highlighting the lack of significance for LIQ in both models This suggests that bank liquidity levels do not significantly influence profitability Instead, banks should focus on strategies to enhance their size, which demonstrates the highest coefficient among the variables However, challenges persist with White's test and the Wooldridge test, leading to the conclusion that the Generalized Least Squares (GLS) approach is the most suitable for Model 2, as illustrated in Table 13.
RESULT AND DISCUSSION
I NTERNAL FACTORS
By using GLS approach, the regression analysis was conducted to assess the derived hypotheses, and the model summary is presented in Table 6
Pool OLS FEM REM GLS
Pool OLS FEM REM GLS
Table 4_Model 1, model 2 regression summary Source: Stata analysis results
The analysis reveals that bank size (SIZE) significantly influences profitability, with larger banks exhibiting higher returns on assets (ROA) and equity (ROE), confirming findings from Molyneux and Thornton (1992) and Flamini (2009) Additionally, the capital variable (EA) demonstrates a strong positive correlation with profitability, highlighting the financial robustness of Vietnamese banks Banks with solid capital positions are better positioned to capitalize on business opportunities and manage unexpected losses, thereby enhancing their profitability These insights underscore the critical role of strong capital adequacy in maintaining the stability of the banking system, suggesting that well-capitalized banks enjoy lower funding costs and reduced bankruptcy risks, in line with Demirguc's findings.
Numerous empirical studies, including those by Batten (2019), Bourke (1989), and Demirguc (2019), consistently demonstrate that banks with a high equity-to-assets ratio are among the top-performing institutions in the financial sector.
Credit risk (CR) significantly negatively impacts bank profitability, as banks involved in risky lending often face high levels of non-performing loans This challenge directly affects their financial performance In the Vietnamese banking sector, managers focused on profit optimization tend to adopt a risk-averse strategy, particularly through initiatives aimed at addressing Non-Performing Loans during 2021.
By 2025, the banking sector is dedicated to reducing the negative effects of credit risk on financial performance, which in turn enhances overall profitability This relationship is consistent with earlier research by Athanasoglou (2008) and Ramadan (2011), highlighting the importance of effective risk management in the industry.
Despite initial expectations of a positive correlation between liquidity and the profitability of Vietnam's domestic commercial banks, empirical analysis indicates that liquidity does not significantly impact profitability Previous studies by Bourke (1989) and Le (2020) supported a positive relationship between liquidity risk and bank profitability This finding aligns with the opportunity costs hypothesis, which suggests that a higher proportion of liquid assets can enhance bank profits Banks can counterbalance the costs of holding liquid assets by imposing higher margins, thereby positively affecting their overall profitability.
Cost management (CM) plays a crucial role in influencing bank profitability, particularly in the context of Vietnamese banks Our findings reveal a positive and statistically significant relationship between operating expenses and return on equity (ROE), while the link to return on assets (ROA) appears insignificant This suggests that Vietnamese banks may not yet be at a maturity stage where cost minimization can be a sustainable strategy, as they need to focus on customer acquisition and retention Additionally, this scenario indicates the income instability inherent in these banks, where profitability often depends on higher operational costs.
A study of 31 depositors and borrowers highlights the increased risk associated with heightened competition in the banking sector This finding is consistent with earlier research by Batten (2019), which analyzed 35 domestic Vietnamese commercial banks from 2006 to 2014.
Empirical findings reveal that concentration significantly impacts bank profitability, contradicting the SCP hypothesis highlighted by Staikouras (2004) A notable decline in the Herfindahl-Hirschman index indicates a shift towards a more competitive market structure, which could lead to decreased profitability This trend can be attributed to three main reasons: increased competition in concentrated markets may reduce profitability, management may incur higher costs due to cost-related preferences, and cautious asset management in such markets can result in lower returns Regarding ownership structure, while it shows a positive but statistically insignificant effect on profitability, banks should focus on increasing their size, as it plays a critical role in enhancing profitability Notably, despite four state-owned banks holding nearly half of the sector's assets, they did not rank among the top four most profitable banks in 2022.
E XTERNAL FACTORS
The GDP coefficient generally shows a positive and significant impact on bank profitability, indicating that as the overall economy grows, bank profitability tends to increase Specifically, a 1% rise in GDP, which represents the country's total economic output, typically results in an approximate 0.12% increase in the bank's Return on Assets (ROA) However, this relationship can fluctuate, with potential variations ranging from a slight decrease of 0.001% to an increase of 0.025%, depending on specific circumstances.
Since Vietnam became a member of the World Trade Organization (WTO) in 2007, it has experienced significant economic growth This growth has led to higher demand for loans from
A study by Le (2020) found that the profitability of Vietnamese banks has improved, aligning with established research that links economic growth to financial sector performance This connection is further supported by the findings of Hanh (2018) and Le (2020), who both examined Vietnam's banking sector.
Inflation plays a crucial role in enhancing bank profitability, as evidenced by previous studies (Bourke 1989; Molyneux and Thornton 1992) This phenomenon occurs because banks can pass inflation-related costs onto their customers, resulting in a positive correlation between inflation and key profitability metrics such as Return on Assets (ROA) and Return on Equity (ROE) Consequently, banks do not experience adverse effects from inflation, reinforcing its beneficial impact on their financial performance.
The growth rate of the money supply, represented by M2, significantly influences bank profitability due to the central bank's control over money circulation This control allows banks to enhance their lending activities by utilizing this more affordable funding source, resulting in increased profits The low standard errors (0.002 and 0.005) in both models indicate a stable relationship, highlighting the central bank's essential role in money supply regulation This positive correlation is supported by existing literature and aligns with Le's (2020) findings in the Vietnamese banking sector.
CONCLUSION AND RECOMMENDATION
This study examines the impact of various factors on the profitability of Vietnamese banks amidst ongoing banking reforms Key findings indicate that bank size is positively correlated with profitability, while higher capital levels significantly enhance profits Conversely, increased credit risk negatively affects profitability Interestingly, liquidity risk does not substantially influence profit variations, implying that banks can be profitable regardless of their liquidity levels, depending on their management strategies Additionally, effective cost management is crucial for bank performance, as management decisions regarding expenses significantly affect profitability Furthermore, a concentrated banking system is linked to lower profitability, suggesting that state-owned commercial banks may hinder overall profitability in the Vietnamese banking sector.
The ownership status of banks does not significantly influence their profitability, indicating that private banks, during the examined period, do not consistently outperform in terms of profits.
Macroeconomic factors such as GDP, inflation, and money supply significantly impact the performance of the banking sector In Vietnam, the sustained profitability of banks reflects competitive barriers and considerable government intervention Additionally, banks often have annual targets for asset quality and capitalization, which further supports this trend of ongoing profitability.
This research offers key recommendations to improve the profitability of the Vietnamese commercial banking system, benefiting both commercial banks and regulators in the near future.
To enhance profitability, commercial banks should focus on several key strategies rooted in effective internal management Firstly, diversifying their portfolio of products and services is essential to attract both new and existing customers, positioning the bank as the preferred choice for various transactions, including payments and online shopping Secondly, embracing modern banking technology is crucial, as it can significantly improve operational efficiency and reduce costs, particularly in the context of the growing demand for electronic payments Finally, increasing the scale of operations and optimizing shareholder equity is vital for assessing a bank's strength and resilience, enabling them to expand their asset base and invest strategically in technology and branch networks, ultimately reaching a broader customer base.
The State Bank of Vietnam (SBV) is essential for ensuring the stability and effective operation of the country's banking system through comprehensive supervision, regulation, and guidance It establishes policies that promote transparency, accountability, and sound financial practices within financial institutions Additionally, the SBV evaluates and addresses risks during the restructuring process while fostering a competitive environment that encourages innovation and technological advancement This includes welcoming new private banks and foreign investments, promoting mergers and acquisitions, and aligning the sector with international standards Furthermore, the SBV is crucial in maintaining financial stability by monitoring systemic risks, managing non-performing loans, enhancing banks' capital adequacy, and creating effective resolution frameworks for financial distress situations.
To ensure the long-term prosperity and stability of Vietnam's banking sector, the government and regulatory bodies must create an enabling environment that fosters growth while mitigating risks This involves consistently reviewing and enhancing the legal and regulatory framework to align with international standards, ensuring transparency, and simplifying compliance procedures Regulatory divisions should focus on diligent supervision, emphasizing risk management, corporate governance, and compliance through regular audits and stress tests to proactively identify vulnerabilities Additionally, maintaining a level playing field and fair competition among banks is essential to encourage innovation and protect consumers, while preventing anti-competitive behavior and monitoring market concentration Promoting financial inclusion by incentivizing banks to serve underserved populations, particularly in remote and economically disadvantaged areas, is crucial Collaboration with international regulatory bodies can facilitate knowledge sharing and best practices, helping align Vietnam's banking sector with global standards and attracting foreign investment.
In summary, the profitability of banks in Vietnam is shaped by various factors, including the institutional context and not just managerial skills Ongoing reforms should focus on expanding bank size and minimizing government intervention by reducing ownership stakes, improving corporate culture, and fully liberalizing the financial system This approach is crucial, as profitability is likely to rise when Vietnamese banks embrace a market-driven strategy and operate in a more competitive landscape.
APPENDIX
Table 5_OLS regression Source: Stata analysis results
Adj R-squared: 0.268 l_ROA Coef Std Err t P>|t| [95% Conf Interval]
Adj R-squared: 0.215 l_ROE Coef Std Err t P>|t| [95% Conf Interval]
Table 6_Model 1 heteroskedasticity and autocorrelation test Source: Stata analysis results
2 Wooldridge test for autocorrelation in panel data
Table 7_Model 1 FE vs RE Source: Stata analysis results
H0: difference in coefficients not systematic
Ha: difference in coefficients is systematic chi2(9) = (b-B)'[(V_b-V_B)^(-1)](b-B)
Table 8_Model 1 FE regression Source: Stata analysis results l_ROA Coef Std Err t P>|t| [95% Conf Interval]
Table 9_Model 1 GLS regression Source: Stata analysis results l_ROA Coef Std Err z P>|z| [95% Conf Interval]
Table 10_Model 2 FE vs RE Source: Stata analysis results
H0: difference in coefficients not systematic
Ha: difference in coefficients is systematic chi2(9) = (b-B)'[(V_b-V_B)^(-1)](b-B)