Impact of covid 19 pandemic on factors affecting profitability of commercial banks in vietnam

BANKING FACULTY GRADUATION THESIS Impact of Covid-19 pandemic on factors affecting profitability of commercial banks in Vietnam Hanoi, 2023... of Covid-19 pandemic on factors affecting

BANKING FACULTY

GRADUATION THESIS Impact of Covid-19 pandemic on factors affecting profitability of

commercial banks in Vietnam

Hanoi, 2023

TABLE OF CONTENTS

TABLE OF CONTENTS i

WORDS OF GRATITUDE iii

STATEMENT OF DECLARATION iv

LIST OF TABLES v

LIST OF GRAPHS vi

LIST OF APPENDICES vii

INTRODUCTION 1

1 Significance of the study 1

2 Research objectives 2

3 Research subjects and scope 2

4 Overview of empirical researches on banks’ profitability 3

CHAPTER 1: THEORETICAL BASIS ON THE FACTORS AFFECTING THE PROFITABILITY OF COMMERCIAL BUSINESSES 10

1.1 Overview of Commercial Banks 10

1.1.1 The concept of Commercial Banks 10

1.1.2 Roles of commercial banks 10

1.2 Theoretical informations of profitability of commercial banks 11

1.2.1 The concept of profitability of commercial banks 11

1.2.2 Importance of evaluating profitability of commercial banks 12

1.2.3 Commercial banks profitability indicators 12

1.3 Factors affecting profitability of commercial banks 14

1.3.1 Bank-specific factors 15

1.3.2 Macroeconomic factors 25

CHAPTER 2: CURRENT STATE 29

2.1 Situation of the Vietnamese economy and banking system before the Covid-19 period (2012-2019) 29

2.1.1 Situation of the economy before Covid-19 29

2.1.2 Situation of the banking system before the Covid-19 period 32

2.2 Situation of Vietnam's economy and banking system during and after Covid-19 (2020-2022) 35

2.2.1 Impact of Covid-19 on Vietnam's economy 35

2.2.2 Impact of Covid-19 on the banking industry in Vietnam 36

CHAPTER 3: ANALYSIS OF FACTORS AFFECTING THE PROFITABILITY OF COMMERCIAL BANKS IN VIETNAM 44

3.1 Data and research methods 44

3.1.1 Research data 44

3.1.2 Research methods 44

3.1.3 Hypotheses 45

3.2 Measuring the affectations of factors affecting profitability of commercial banks in Vietnam 46

3.2.1 Descriptive statistics 46

3.2.2 Reliability validation of the measurement scale 51

3.2.3 Discuss the result 59

CHAPTER 4: SUGGESTIONS TO IMPROVE THE PROFITABILITY OF COMMERCIAL BANKS IN VIETNAM 67

4.1 Solutions toward the profitability of commercial banks in Vietnam 67

4.2 Recommendations on policies 70

CONCLUSION 71

REFERENCES 73

APPENDICES 76

WORDS OF GRATITUDE

I would like to express my heartfelt gratitude to several individuals who have played a significant role in the completion of this essay First and foremost, I am deeply grateful to my instructor, PhD Tran Thi Thu Huong, for her exceptional guidance, expertise, and unwavering support throughout the research process Her insightful feedback and constructive criticism have immensely contributed to the quality and depth of this work Additionally, I would like to extend my sincerest thanks to my friends Lan Phuong, Thu Thao, Quynh Khanh, Tuan Anh Their constant encouragement, thoughtful discussions, and willingness to provide feedback have been invaluable Their presence has not only made the journey enjoyable but also enriched my understanding of the subject matter I am truly grateful for their friendship and unwavering support

LIST OF TABLES

Table 1: Previous results on factors affecting commercial banks’

Table 2: Descriptive statistic result (2012-2019) 46 Table 3: Descriptive statistic result (2012-2022) 47 Table 4: Comparison of descriptive statistic results between two

Table 5: Matrix table of correlation coefficients between variables 50

Table 7: Pool regression model result (2012-2019) 51 Table 8: Regression models results in the period of 2012-2019 53 Table 9: Pool regression model result (2012-2022) 55 Table 10: Regression models results in the period of 2012-2022 57 Table 11: Comparison of regression models results between two

LIST OF GRAPHS

Graph 1: Investment structure of Vietnam in 2018 (trillion dong) 30 Graph 2: Credit growth rate and GDP growth rate of Vietnam from

LIST OF APPENDICES

APPENDIX 1: Detailed Stata 14.1 Test Result (2012-2019 period)

Table 1: Heteroscedasticity test on Pool

Table 6: Autocorrelation test &

Heteroscedasticity test for the REM

model

79

APPENDIX 2: Detailed Stata 14.1 Test Result (2012-2022 period)

Table 1: Heteroscedasticity test on Pool

Table 6: Autocorrelation test &

Heteroscedasticity test for the REM

model

84

INTRODUCTION

1 Significance of the study

Recently, with the trend of integration and rapid globalization covering the international economic environment, the finance industry worldwide including Vietnam is facing great pressure from the integration process to ensure sustainable and efficient development

Commercial banks, as important organizations playing the role of financial intermediaries in the economy, are increasingly under pressure from the development

of non-bank financial intermediaries such as Fintech companies and other international banks However, the impact of strong competition in the financial sector

at present on the banking industry will depend on the adaptability and flexibility of banks in meeting the rapidly changing needs of the economy In particular, during the Fourth Industrial Revolution, which is changing the entire operating system of the economy, the competitiveness of banks will be demonstrated in their flexible adjustment of management systems, upgrading and completing processes, products and services to keep up with the rapidly changing pace of technology and integration trends Banks that are unable to compete in this era will be easily replaced by banks that can operate more effectively Therefore, the efficiency of operations is an important factor in evaluating the sustainability and competitiveness of banks in the current economy

However, at the end of 2019, the Covid-19 pandemic broke out and caused the entire global economy to struggle The consequences of the pandemic on the economy lasted throughout 2020 and 2021, causing the global trend of globalization

to stall and face many obstacles The most typical consequence of the pandemic was the appearance of negative growth in global GDP (-3.1%) Although global GDP has rebounded to 5.5% in 2021, GDP in Vietnam continues to decline Facing the general state of the economy, the banking industry in Vietnam has also encountered many difficulties in dealing with the declining trend of mobilizing capital and credit

Starting from practical demands and urgent needs in Vietnam, within the context of integration and globalization, and the importance of the banking system,

as well as the impact of Covid-19 on the economy, I have chosen the topic "Impact

of Covid-19 pandemic on factors affecting profitability of commercial banks in Vietnam" Through this research, I hope to provide a comprehensive and practical

perspective with the aim of contributing to the sustainable development of operational efficiency for the banking system in Vietnam

2 Research objectives

- The theoretical basis of operational efficiency will be researched, specifically

in terms of profitability, and the factors affecting the profitability of commercial banks will be identified and explained

- The current state of profitability of commercial banks before and after the Covid-19 pandemic will be evaluated This will involve measuring and assessing the factors that impact bank profitability and comparing the differences between the two periods

- Proposed solutions will be provided to improve and optimize the operational efficiency and profitability of commercial banks in Vietnam

3 Research subjects and scope

The research subjects of the study are the factors affecting the efficiency and profitability of commercial banks in Vietnam However, there are numerous complex and wide-ranging factors that impact the profitability of commercial banks and limitations in accessing data Therefore, this study will rely on previous researches to select variables for the research model, including return on assets (ROA), equity to assets ratio (EAR), credit risk (ALLL), operating efficiency (OEOI), non-term deposits (CASA), bank size (Size), exchange rates (EXR), and inflation growth rate (INF)

Research scope: The study will focus on a scale of 15 commercial banks in Vietnam, including two types: state-owned commercial banks, joint-stock commercial banks, and international banks The specific banks included in the quantitative model analysis will consist of 3 state-owned commercial banks, 12 joint-stock commercial banks, and the study period will cover 11 years from 2012 to 2022

4 Overview of empirical researches on banks’ profitability

The factors influencing the profitability of commercial banks have been studied in many domestic and international research papers Some of the relevant international studies include Gazi et al (2022), Ichsan et al (2021), ; Xiazi & Shabir (2022); X Li et al (2021); Jean Paul (2021); Artha & Mulyana (2018); F Fuadi, S Saparuddin, S Sugianto (2022); MR Affandi (2022); Q Ali, S Maamor, H Yaacob, MUT Gill (2018); YR Bhattarai (2016), R Apriyanti, A Ab Rahman, S Maharani (2021) and Jamel & Mansour (2018) In addition, some domestic studies have been conducted by research groups such as Nguyen & Dang (2022); Nga et al (2022) and

HT Lam & NNH Anh (2022)

Gazi et al (2022) conducted a study on the impact of CAMELS model and macroeconomic factors on the profitability of commercial banks in Bangladesh from

2010 to 2021 The study used the Fixed Effects Model (FEM) to compare the impact

of factors on profitability before and during Covid-19 by observing in two periods of 2010-2019 and 2010-2021 The research took ROA, ROE and NIM as dependent variables and found that non-performing loan ratio (NPLR) and bank size significantly and negatively affected ROA, ROE and NIM in both pre-pandemic and including pandemic periods The capital adequacy ratio (CAR), however, only affected ROA and ROE in the same ways as NPLR and bank size did, and the loan

to deposit ratio (LDR) only affected ROA negatively during the including Covid-19 period (2010-2021) The study also found that total equity to total assets ratio (EAR) and inflation rate (INFR) affected ROA significantly and positively in both periods The result of the study showed that liquid asset to total assets ratio (LATAR) affected both ROA and ROE significantly and negatively during the Covid-19 period, however, that relationship was insignificant during the pre-pandemic period It is also noticeable that GDP growth rate of Bangladesh affected ROA and ROE of banks negatively and significantly in the pre-pandemic period, but during the Covid-19 period, the relationship was insignificant In contrast, the GDP growth rate significantly affected the banks’ NIM in a positive way during the pandemic period Moreover, the real interest rate (INTR) significantly and positively affected the

banks’ NIM, however, the result did not show any relationship between INTR with the two dependent variables of ROA and ROE

Ichsan et al (2021) also conducted a study on the determinants of Indonesian Sharia banks’ financial performance in the Covid-19 epidemic using the data of multiple Islamic banks from 2011 to 2020 The models used for the research were Multiple Linear Regression testing and linearity testing of the model used Ramsey test The research indicated that the capital adequacy ratio (CAR) has a positive and significant effect on the ROA index Moreover, surprisingly, the operating costs to operating income (BOPO), which is usually found to have a converse relation with the ROA, also has a positive and significant effect on the financial performance of Sharia banks In contrast, the not performing financing (NPF) has a negative and insignificant effect on financial performance represented by ROA

In October 2022, Xiazi & Shabir (2022) published a study to examine the effects of Covid-19 on the banks’ performance using the data of 1575 banks in 85 different countries from 2020Q1 to 2021Q4 The models used in the study were the Fixed Effects Model (REM) as the baseline model and Generalized method of moments model (GMM) as the alternative model to back up for the possible endogeneity issues due to reverse causality, omitted variable and control variable Generally, the finding illustrated that the Covid-19 pandemic has significantly and negatively affected the bank performance Specifically, the outbreak of the Covid-19 most negatively affected the performance of smaller, undercapitalized and less diversified banks In contrast, banks with better financial development and institutional environment are likely to have less negative impact of the Covid-19 pandemic on their performance

X Li et al (2021) has conducted research on the effects of revenue diversification on bank profitability and risk during the Covid-19 pandemic using the regression model The research suggested that noninterest income positively affects the performance of banks (which is measured by using ROA and ROE as dependent variables) In contrast, other results showed that the noninterest income negatively and significantly affects the bank risk measures Moreover, the research indicated

that the best performing banks are likely to continue performing well during the pandemic and the riskiest banks are likely to face more risks under the pressure of the Covid-19

Jean Paul (2021) conducted a study on the effectiveness of the CAMEL model

in assessing the performance of commercial banks in Rwanda from 2014 to 2018 The study used a descriptive statistic and panel regression model to evaluate the correlation between the explanatory variables (measured by using Capital adequacy, Asset quality, Earnings management, Liquidity management and Bank size) and the outcome variables (measured by using ROA) The study indicates that capital adequacy significantly and positively impacts the financial performance of financial institutions Same results were shown in the correlation between asset quality and financial performance In contrast, the management efficiency ratio negatively and significantly affects the performance of banks Interestingly, the study demonstrated that the management of earnings of commercial banks in Rwanda has a negative correlation on the financial performance This implies that a decrease in net interest margin will raise the value of banks’ ROA index Moreover, the liquidity management was concluded to have a negative correlation on ROA, implying that an increase in liquidity management reduces the value of banks’ financial performance The concept of "bank size" was also added as a mediator variable to better analyze the relationship between the independent and dependent variables The results of the study showed that when bank size was used as a moderator, it did not have a significant effect on financial performance

Artha & Mulyana (2018) conducted a study to determine the impact of internal and external factors on state-owned banks in Indonesia from 2012 to 2017 using the Fixed Effects Model (FEM) Noticeably, the study demonstrated that Current Account Saving Account (CASA) have a positive and significant effect on ROA of the banks and the same relationship is also found between the NIM and ROA Surprisingly, the capital adequacy ratio (CAR) was found to negatively affect the ROA of state-owned banks, however the effect was not significant In contrast, the study indicated that external factors such as inflation rate and economic growth affect

the ROA index negatively and significantly While another external factor which is the Bank Indonesia Reference Interest Rate (BI Rate) was found to have a positive and significant effect on ROA

Additionally, Fuadi et al (2022) conducted a study on the impact of inflation, bank Indonesia rate (BI rate), and exchange rate on the profitability of Islamic banks

in Indonesia from 2009 to 2019 The method of data analysis that the researchers used was Vector Auto-Regressive (VAR) analysis The study found that inflation has a negative relationship to the ROA index, however, the ability of inflation to affect the ROA was found to be only 0.62%, meaning the effect is insignificant The BI Rate has the ability to affect the ROA of 0.13%, which indicates that this relationship is also insignificant and the BI rate might only have the indirect effects on the ROA These findings are different from the results shown by Artha & Mulyana (2018) which indicates that inflation rate and BI rate have significant impact on the ROA index of banks in Indonesia These explanation for these inconsistent results might

be because of the difference in types of targeted banks of the two studies Specifically, Artha & Mulyana (2018) has conducted a study on state-owned banks while Fuadi et

al (2022) study was done with data from Islamic banks

Ali et al (2018) conducted a study on the impact of macroeconomic factors

on the profitability of Islamic banks in Brunei from 2012 to 2016 using the fixed effects panel regression model The study found that factors such as GDP growth rate, inflation rate, exchange rate, oil prices, and money supply had a positive impact on the profitability of Islamic banks Among the indicators, the oil prices, GDP growth rate, and inflation rate have the greatest impact

The study by Bhattarai (2016) aimed to evaluate the impact of credit risk on the performance of commercial banks in Nepal by applying the pooled data regression model on the dataset of 14 commercial banks in Nepal The research used ROA as dependent variables while capital adequacy ratio, non-performing loan ratio, cost per loan assets, cash reserve ratio and bank size are independent variables The result indicates that the capital adequacy ratio had a positive but insignificant relationship to the ROA index The non-performing loan ratio was as expected, had

a strong negative relationship with the ROA of the banks However, surprisingly, cost per loan assets significantly and positively affected the bank performance, and the author indicated that this variable is the influencing credit risk variable that determines bank performance While the cash reserve ratio had a negative and insignificant association with ROA, the bank size, in contrast, had a significant and positive relationship with the bank performance, which indicates that larger Nepalese banks have better profitability than the smaller ones The study stated that this result could be explained by taking the general theory that the large banks have more opportunities to grow and develop greater products and have better loan diversification

Jamel & Mansour (2018) conducted a study on the factors affecting the profitability of banks in Tunisia from 1999 to 2016 using the General Least Squares (GLS) technique The results showed that independent variables such as the ratio of owner equity to total assets and bank size had a positive and strong impact on the ROA of banks in Tunisia In contrast, credit risk had a strong negative impact on the ROA of banks Additionally, macro variables such as inflation rate and GDP growth rate were evaluated as having no impact on the performance of banks in Tunisia

In Vietnam, Nguyen & Dang (2022) studied the factors affecting the profitability of commercial banks in Vietnam from 2014 to 2020 The research applied the adjustment model on the FEM model and found that the total equity to total assets ratio had positive relation with ROA of commercial banks in Vietnam The bank size also affected the profitability of commercial banks, however, the effect was insignificant In contrast, as expected, the result showed that operating expense

to total assets ratio, tax expense and the credit risks significantly and negatively affected the banks’ performance The study concluded that the total loans to total assets ratio and total loans to total deposit ratio both had positive but insignificant correlation with the ROA of banks Noticeably, the regression result showed that the macroeconomic variables such as GDP growth rate and inflation rate did not have any statistical relation with the ROA of commercial banks in Vietnam

Moreover, Nga et al (2022) conducted a study on the impact of Covid-19 on the business performance of 21 commercial banks in Vietnam during the period 2012-

2021, using a Random Effects Model and Feasible Generalized Least Squares (FGLS) method The study used the independent variable "Covid-19", with the method of determination being that if a bank was affected by the Covid-19 pandemic, the value of this variable would be 1, and conversely, if the bank was not affected by Covid-19, the value would be 0 The results of the study showed that Covid-19 had a negative impact on both ROA and ROE with a significant level of impact In particular, the results showed that when banks were affected by Covid-19, the return

on equity (ROE) decreased up to 4.066 times The authors concluded that the significant negative impact of the Covid-19 pandemic on bank profitability was consistent with the theory of economic shocks and the situation in Vietnam Specifically, the Covid-19 pandemic has seriously affected the operations of businesses in the Vietnamese economy, leading to difficulties in paying principal and interest to banks As a result, commercial banks were also significantly affected by Covid-19 Additionally, the study's results showed that variables such as cost management ability (CIR) and non-performing loan ratio (NPL/TL) had significant negative impacts on the ROE of banks However, the results also showed that the TE/TA variable had a positive impact, but it was not significant, on the ROA of banks

Additionally, HT Lam & NNH Anh (2022) conducted a study on the factors affecting the profitability of listed commercial banks in Vietnam from 2010 to 2020 using the Feasible Generalized Least Squares (FGLS) model The results showed that the size of the bank, liquidity risk, economic growth rate, and inflation had a positive impact on profitability Conversely, expenses to income ratio, financial leverage, and credit risk had a negative impact on the profitability of commercial banks in Vietnam The study has clearly stated that the profitability of commercial banks in Vietnam is not only affected by the internal factors in the banks, but also by the external factors such as macroeconomic variables Moreover, the study also indicated that the bank size has a positive correlation with the profitability and it is applied to most of the

bank groups in the Vietnamese banking sector since the bank size helps commercial banks to have more advantages in diversification of their products and build the brand name for the competitiveness Especially in Vietnam, where the clients tend to have more reliance and trust on larger banks

Overall, there are many different studies from both domestic and international sources that have been conducted to identify and evaluate the factors affecting the profitability of commercial banks However, most of these studies were conducted

on banking systems in various countries and in different periods In Vietnam, the issue of evaluating the factors affecting the profitability of commercial banks has not yet addressed the up-to-date situation of the Covid-19 pandemic Therefore, the study

by the author will provide more valuable insights into this topic

CHAPTER 1: THEORETICAL BASIS ON THE FACTORS AFFECTING

THE PROFITABILITY OF COMMERCIAL BUSINESSES

1.1 Overview of Commercial Banks

1.1.1 The concept of Commercial Banks

Commercial banks are an extremely important component for the development of the economy throughout history Banks in the early stages were formed from the simplest and most rudimentary banking systems and organizational structures, and gradually upgraded and improved into modern banks and huge financial conglomerates along with the strong development and transformation of the economy Although they have been transformed, improved, and upgraded to better fit the needs and diversity of the market for many years, however, to this day, the concept of the definition of commercial banks can be consistently viewed as follows:

Commercial banks are financial intermediaries that play a role in bridging the capital flow between individuals and organizations that need to save with individuals and organizations that need capital to invest in the economy Specifically, commercial banks operate as monetary business organizations with the main activities of mobilizing deposits from individuals in the economy and using those deposit funds to carry out lending activities, investing in other profitable assets In addition, commercial banks also provide diverse and suitable financial and payment services to meet market demands

1.1.2 Roles of commercial banks

Based on the concept of commercial banks, it can be seen that commercial banks play an extremely important role in the movement and regulation of capital in the economy

Firstly, as financial intermediaries of the economy, commercial banks apply

flexible use of their products to mobilize capital from those with idle funds and transfer them to those in need of capital for investment or business operations Specifically, with a wide range of products being flexibly applied to optimize the needs of the economy, commercial banks can meet the short, medium and long-term capital needs of the market

Secondly, as a payment intermediary, commercial banks will perform transfer

transactions on behalf of customers to pay for goods and services through products and services provided by banks such as: Issuing and clearing checks, paying salaries, providing electronic payment networks,

Third, with the role of providing guarantee services, commercial banks will

commit to repaying debts to customers in case customers are insolvent

Lastly, with the role of policy implementation, commercial banks are also an

important tool to implement macro policies such as monetary policy in order to contribute to the adjustment and moderation of economic growth pursue common national goals

1.2 Theoretical informations of profitability of commercial banks

1.2.1 The concept of profitability of commercial banks

The profitability of commercial banks is one of the most important measures and needs to be prioritized by bank management as it is a crucial basis for evaluating the effectiveness of bank operations and financial results The profitability of a bank

is considered based on a combination of business performance and the ability to use and optimize bank resources In other words, the profitability of a bank is the difference between the revenue generated by the bank and the total costs incurred by the bank

The profitability of a bank can be evaluated through various characteristic indicators such as return on average assets (ROA), return on average equity (ROE), and net interest margin (NIM) However, in order to have an overall assessment of the profitability of a bank, the ROA indicator is often used as the main financial ratio

to measure the relationship between the after-tax profit of the bank and the average total assets of the bank over a certain period of time This indicator assesses the effectiveness in managing revenue and expenses, while reflecting the ability of the bank to convert its assets into net profit (Akbaş, 2012) Therefore, this is an indicator that reflects the overall effectiveness of the operations of a bank

1.2.2 Importance of evaluating profitability of commercial banks

Given the importance of commercial banks for the economy in the context of globalization and increasing competition in the financial market, evaluating the profitability of commercial banks is crucial One of the most important and comprehensive indicators used to evaluate the profitability of commercial banks is their ability to generate profits Some of the important roles of assessing the profitability of commercial banks include:

Firstly, evaluating profitability allows bank managers to analyze and

understand the overall effectiveness of the bank's operations in all aspects With the ultimate goal of optimizing the bank's profitability, managers can develop business strategies and implement suitable models to enhance the bank's competitiveness in the market

Secondly, the ability to analyze specific factors that affect the bank's

profitability enables management to gain a more detailed understanding of existing issues that have a significant impact on the bank's performance This allows them to make decisions to adjust and improve more thoroughly while balancing the benefits and risks associated with the factors that contribute to the bank's profits

Therefore, it can be seen that analyzing, measuring, and evaluating profitability to indicate the effectiveness of a bank's business operations, and then finding solutions to improve profitability is extremely important in bank management

1.2.3 Commercial banks profitability indicators

Some common indicators that are widely used in Vietnam and around the world to evaluate a bank's profitability include ROA, ROE, and NIM Among them, ROA and ROE are the most commonly used and widely applied indicators, while NIM is often used when studies focus on the bank's profitability in terms of net interest income without deep analysis of the bank's overall profitability Specifically, the formulas for these indicators are as follows:

● Return on Assets (ROA):

ROA = 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒!"#$% $''(#'

Theoretically, The ROA (Return on Assets) ratio reflects the relationship between the profit that a business generates and the amount of capital it invests in assets In other words, it evaluates whether the investment and management of a company's assets are producing substantial profits or not However, the ROA ratio can vary significantly among different industries due to the nature of their business operations and the types of assets they hold

Specifically, unlike many other sectors, banks typically have higher asset intensity compared to other industries This means that banks have a larger amount

of assets on their balance sheets, such as loans, investments, and deposits This can lead to a lower ROA for banks since a large amount of assets can result in higher costs, lower margins, and a slower turnover of assets Since banks generate a significant portion of their revenue from interest income earned from loans and investments, and the amount of loans also take an enormous portion in their total asset, the ROA ratio in the banking sector can precisely reflect the quality of banks’ operating activities

● Return on Equity (ROE):

ROE = !"#$% /0*#1 )(# *+,"-(

ROE (Return on Equity) is a financial ratio that measures the profitability of a company in relation to the amount of equity held by its shareholders In the case of banks, ROE is particularly important as it reflects how effectively a bank is using the capital invested by its shareholders to generate profits

However, banks typically have higher leverage than other industries, meaning they use more debt to finance their operations This can lead to a higher ROE for banks as they can generate income from a relatively small amount of capital invested

by shareholders However, higher leverage also means that banks are exposed to higher levels of risk While higher leverage can lead to higher returns on equity for banks, it also means they are exposed to higher levels of risk If the bank's loans or investments do not perform as expected, they may not be able to repay their debts, which could lead to financial difficulties or even bankruptcy This is why banks are

required to maintain minimum levels of capital to ensure they can withstand potential losses and maintain the trust of their customers and investors

● Net interest margin (NIM):

NIM = 2+#(3('# *+,"-( 4 2+#(3('# (56(+'(78(3$9( ($3+*+9 $''(#' NIM (Net Interest Margin) is a special indicator that acts as a key performance metric for banks and other financial institutions It measures the difference between the interest income earned on loans, investments, and other interest-earning assets, and the interest paid on deposits and other interest-bearing liabilities The difference between the interest earned and the interest paid is a key source of income for banks

A higher NIM means that a bank is earning more interest income, which can help it generate higher profits

However, a higher NIM can also be an indication that a bank is taking on more risk For instance, a bank with a high NIM may be investing in riskier assets, such as loans to borrowers with poor credit ratings, which carry a higher interest rate These assets may have a higher chance of default, and thus, expose the bank to greater credit risk

Therefore, monitoring NIM is important for banks to balance their profitability goals with their risk management goals Banks need to strike a balance between generating profits and managing risk to ensure their long-term financial stability A bank that has a higher NIM but also takes on excessive risk may face a greater chance

of financial distress if its lending activities result in a high number of defaults or losses

1.3 Factors affecting profitability of commercial banks

To comprehensively evaluate the effectiveness of a bank's operations, there are many internal and external factors that can impact its performance For example, research by Nguyen V.H (2008) pointed out that internal factors include financial capability, operational management ability, technological progress, and the quality of labor, etc Meanwhile, external factors that can affect a bank's profitability are factors beyond the bank's operational scope, such as economic, political, and social environments both domestically and internationally

However, with the aim of focusing on identifying the factors that impact banks the most and developing solutions to optimize their profitability, this article will evaluate some of the factors that fall within the scope of financial indicators and business efficiency of the bank In addition, some macro factors will also be considered to analyze the sensitivity of banks performance to market factors such as inflation rates, GDP growth rates, or exchange rates in each period

1.3.1 Bank-specific factors

a Capital adequacy determinants

Capital adequacy refers to the Statutory minimum capital requirement for financial institutions It measures the Banks’ and other financial institutions’ ability

to pay the loan due when their debtors refused to pay back the money borrowed (Jean Paul, 2021) Specifically, it is the minimum amount of money that functions as a reserve that financial institutions have to hold due to the regulations to serve as a risk hedging instrument during unfavorable conditions It is considered as a crucial aspect

to evaluate the health of the financial institutions and their ability to pay the term debt

or absorb other risks Therefore, regulation departments of the government have always been constantly speculating the capital adequacy of banks and other financial institutions

There are some financial ratios to measure capital adequacy which have been applied in many research articles throughout history, however, the most common two indicators are Equity to Asset ratio and Capital adequacy ratio The Equity to asset ratio is formulated by taking the Total Equity for the period divided by the Total Asset, while the Capital adequacy ratio is formulated by taking the core capital divided by the risk-weighted asset

Equity to Asset ratio (EAR) = !"#$% /0*#1!"#$% 7''(#

The equity to asset ratio is an important measure of a bank's financial health

It indicates the proportion of a bank's assets that are financed through shareholder equity, as opposed to borrowed funds A higher equity to asset ratio indicates that a bank has a larger cushion of shareholder equity to absorb losses, which can make it more resilient during times of financial stress

In general, a higher equity to asset ratio is associated with higher levels of profitability, as measured by return on assets (ROA) This is because a higher equity

to asset ratio reduces a bank's reliance on debt financing, which can lower its borrowing costs and improve its overall financial stability However, it's important to note that there is no perfect answer to how the equity to asset ratio affects a bank's ROA The relationship between the two variables can vary depending on a variety of factors, including a bank's business model, risk appetite, and overall financial strategy Nonetheless, a higher equity to asset ratio is generally viewed as a positive indicator of a bank's financial health and can be beneficial for its performance

Capital adequacy ratio (CAR) = !*(34: ,$6*#$% ; !*(34< ,$6*#$%=*'> ?(*9@#(A $''(#

The capital adequacy ratio (CAR) is a metric that gauges a bank's capacity to endure losses and fulfill its financial responsibilities This ratio is obtained by dividing a bank's regulatory capital by the amount of its risk-weighted assets A greater CAR suggests that a bank possesses a larger amount of capital to absorb losses, which can increase its ability to withstand financial pressures

Generally, a higher capital adequacy ratio is linked to greater profitability, which can be measured by return on assets (ROA) This is because a higher CAR can decrease the probability of a bank becoming insolvent, which may result in lower borrowing costs and better overall financial stability However, similar to the EAR indicator, it is worth noting that the relationship between the capital adequacy ratio and ROA may not be the same for all banks since the impact can be different due to many other indicators

b Asset quality determinants

The quality of assets is an essential metric for determining the degree of financial strength in the banking sector The maintenance of asset quality is a fundamental feature of banking The prime motto behind measuring the assets quality

is to ascertain the component of nonperforming assets as a percentage of the total assets (Altan et al., 2014)

Poor asset quality in many cases is a fundamental cause of bank failures Typically, this stems from inadequate management in lending policies, both in the

past and present If the market knows that asset quality is poor, it will create pressure

on the bank's short-term funding And this can lead to a liquidity crisis or a run on the bank Therefore, it is essential to evaluate the quality of a bank's assets specifically and accurately and to provide solutions to optimize asset quality in order to improve the profitability and effectiveness of the bank

Non-performing loan ratio (NPL) = !"#$% +"+46(3B"3-*+9 C"$+'!"#$% C"$+'

Non-performing loans (NPLs) refer to loans on which the borrower has failed

to make timely payments or has defaulted NPLs are a common problem for banks and other financial institutions that lend money to individuals and businesses Therefore, NPLs can have a significant impact on a bank's financial health and performance

Specifically, a higher level of non-performing loans is usually associated with lower profitability, as measured by return on assets (ROA) This is because NPLs can lead to losses for a bank, which can reduce its net income and erode its capital base Furthermore, banks with high levels of non-performing loans may face higher borrowing costs, as lenders may perceive them as riskier and require higher interest rates to compensate for the risk This can further reduce a bank's profitability and negatively impact its performance In addition to financial costs, non-performing loans can also consume significant amounts of a bank's resources, including personnel, time, and legal expenses This can divert attention away from other aspects

of the bank's operations, potentially harming its overall performance

Loan to Deposit ratio (LDR) = !"#$% D(6"'*#'!"#$% C"$+'The loan-to-deposit ratio (LDR) is a measure of a bank's loan portfolio relative

to its deposit base It is calculated by dividing a bank's total loans by its total deposits

A higher LDR indicates that a bank is lending more of its deposits, while a lower LDR indicates that a bank is holding a higher proportion of its deposits as reserves

The LDR can have an impact on a bank's performance, as measured by return

on assets (ROA) In general, a higher LDR is associated with higher profitability, as

it indicates that a bank is lending more of its deposits and generating more interest

income from its loans However, a high LDR can also increase a bank's risk profile,

as it may be lending out more money than it has available in deposits This can make the bank more vulnerable to liquidity shortages and may lead to higher borrowing costs if the bank needs to borrow funds to meet its obligations

Conversely, a low LDR can indicate that a bank is holding excess reserves, which can limit its profitability by reducing its ability to generate interest income from loans However, a low LDR can also indicate that a bank is more conservative

in its lending practices and may be less vulnerable to liquidity shortages and credit risk

c Management quality determinants

The factor of management quality in banks is a very broad field It includes factors such as asset management, capital management, cost management, labor management, or organizational structure management However, within the scope of this study, only the factor of profit and cost management will be mentioned as it is the most direct and clear indicator of the bank's profitability

Management quality refers to the ability of senior management to utilize a firm’s resources (material, financial, human, and informational resources) to maximize income Examining management quality by looking at the financial statements is intricate, for the characteristics of good governance are generally qualitative Some ratios used to measure it are operating expenditure divided by operating income or net operating income The higher expenses to income ratio, the more the firm becomes inefficient that indicates the weaknesses of management (Wachira, 2010)

Operating expenses to Operating income ratio = E6(3$#*+9 (56(+'('E6(3$#*+9 *+,"-(

The operating expenses to operating income ratio is a measure of a bank's efficiency in managing its operating expenses It is calculated by dividing a bank's operating expenses by its operating income A lower ratio indicates that a bank is able

to generate more income relative to its expenses, which can improve its profitability and performance, as measured by return on assets (ROA)

A higher operating expense to operating income ratio can indicate that a bank

is spending a significant amount of money to generate income, which can limit its profitability This can be caused by factors such as high staffing costs, marketing expenses, or IT infrastructure costs In addition, a high operating expense to operating income ratio can indicate that a bank may not be managing its expenses efficiently, which can lead to lower returns on assets Conversely, a lower operating expense to operating income ratio can indicate that a bank is operating efficiently and generating more income relative to its expenses This can be achieved through various means, such as streamlining operations, controlling costs, or investing in technology to automate processes and reduce staffing needs

Operating expenses to Net operating income = )(# "6(3$#*+9 *+,"-(E6(3$#*+9 (56(+'('

The operating expenses to net operating income ratio is another measure of a bank's efficiency in managing its expenses It is calculated by dividing a bank's operating expenses by its net operating income, which is the difference between its operating income and operating expenses The effects of this indicator on the banks’ performance measured by ROA are basically the same with the operating income to operating expenses ratio

d Earnings ability determinants

Earnings quality reflects the quality of a bank’s profitability and its ability to earn consistently It basically determines the profitability of a bank and explains its sustainability and growth in earnings in future (Altan et al., 2014) The more earnings increase, the better firms can support forecastable such as finance business expansion

or other business plans in the future, therefore, the earnings quality can determine banks’ competitiveness in the industry

Generally, the most common indicator that is used to determine the quality of earnings is the Net interest margin ratio since it is formulated by taking the difference between Interest income and Interest expense over the average earning asset Thus, it represents the ability to earn profit of the banks from providing loans and managing the interest expense - which is the main activities of banks

Net interest margin (NIM) = 78(3$9( #"#$% $''(#' ("3 ($3+*+9 $''(#'))(# *+#(3('# *+,"-(

Net interest margin (NIM) is a measure of a bank's profitability, which indicates the difference between the interest income earned by a bank on its interest-earning assets, such as loans and investments, and the interest expenses paid out on its interest-bearing liabilities, such as deposits and borrowings A higher net interest margin indicates that a bank is earning more interest income on its assets relative to its interest expenses, which can improve its profitability and performance, as measured by return on assets (ROA)

A higher net interest margin can be achieved through various means, such as offering higher interest rates on loans and investments, while keeping interest expenses low by attracting low-cost deposits or minimizing interest paid on borrowings By earning more interest income relative to its interest expenses, a bank can generate more net income, which can improve its profitability and performance Conversely, a lower net interest margin can indicate that a bank is earning less interest income relative to its interest expenses, which can limit its profitability and performance This can be caused by factors such as low lending interest rates, higher interest expenses on deposits or borrowings, or a lower interest income on loans and investments

e Liquidity determinants

Liquidity refers to the ability of the banks or other financial institutions to convert their assets into cash without losing its market price at cost-effective (Jean Paul, 2021) It is measured in terms of net liquid assets as a percentage of net deposit liabilities Liquidity gap can be supplemented by gap analysis of maturity mismatches between assets and liabilities within the specified maturity bands

In the standard CAMELS framework, liquidity is assessed according to: volatility of deposits; reliance on interest-sensitive funds; technical competence relative to structure of liabilities; availability of assets readily convertible into cash; and access to interbank markets or other sources of cash, including lender-of-last-resort (LOLR) facilities at the central bank (Errico and Sundararajan, 2002) The importance of the liquidity position of financial institutions is non-negotiable since it

represents the ability to meet the near-term obligations like withdrawals for the financial institutions to remain viable

Generally, the most popular ratios to evaluate the liquidity position of a bank

or a financial institution are liquid assets divided by total assets and liquid assets divided by total deposits

Liquid Asset to Total Asset ratio = C*/0*A $''(#'!"#$% $''(#'The Liquid Asset to Total Asset Ratio (LATAR) is a measure of a bank's ability to meet its short-term obligations It represents the proportion of a bank's total assets that are held in liquid assets such as cash, short-term investments, and marketable securities

A bank's LATAR can also affect its performance, as measured by return on assets (ROA) A higher LATAR may reduce a bank's profitability in the short term because liquid assets tend to earn a lower return than loans and other interest-earning assets However, a higher LATAR can also help to mitigate liquidity risk and financial instability, which can ultimately lead to more stable and sustainable profits

in the long term On the other hand, a lower LATAR may increase a bank's liquidity risk, as it may have insufficient liquid assets to meet its short-term obligations This can lead to higher borrowing costs and lower investor confidence, which can ultimately affect the bank's performance

Liquid Asset to Total deposits ratio = !"#$% A(6"'*#'C*/0*A $''(#'The Liquid Asset to Total Deposits Ratio (LATDR) is a measure of a bank's liquidity, and specifically, the extent to which a bank's liquid assets (such as cash and short-term investments) cover its deposit liabilities It represents the proportion of a bank's total deposits that are covered by its liquid assets

A higher LATDR indicates that a bank has a larger cushion of liquid assets to cover its deposit liabilities, which can enhance the bank's liquidity and reduce its vulnerability to liquidity risk This is because a larger portion of the bank's liquid assets is available to cover potential deposit withdrawals or deposit outflows Conversely, if a bank has a lower Liquid Asset to Total Deposits Ratio (LATDR), it

means that the amount of liquid assets it has to cover potential deposit withdrawals

or outflows is smaller As a result, the bank may be at greater risk of facing liquidity issues, which could negatively impact its ability to meet its deposit obligations and cause financial instability

Regarding its impact on a bank's performance, a higher LATDR may reduce

a bank's profitability in the short term, as it may limit the bank's ability to generate higher returns from its liquid assets However, a lower LATDR may also reduce a bank's profitability if it leads to higher funding costs or lower returns on its assets

f Current Account Savings Account (CASA)

For commercial banks in Vietnam, deposits are the main source of funding for the bank's business activities Deposits are defined as the amount of capital that banks mobilize from entities in the economy such as individuals, organizations, or the government There are three main types of deposits, including time deposits, demand deposits, and savings deposits CASA stands for Current Account Savings Account, which is a low-cost fund considered as demand deposits and savings The ratio of non-term deposits can be calculated by dividing the total amount of non-term deposits

by the total amount of funds raised For banks, attracting a high ratio of non-term deposits plays an important role because it creates a cheap source of capital If the bank can maintain a good growth rate of non-term deposits compared to total funds raised, it can offset the increase in costs from term deposits and bond issuances This helps banks have the opportunity to expand profit margins despite increasing funding costs Therefore, the higher the CASA ratio a bank has, the higher its competitive advantage

CASA = !"#$% D(6"'*#'H7I7 D(6"'*#'The Current Account Savings Account (CASA) ratio is a measure of a bank's deposit mix, specifically the proportion of deposits that come from current and savings accounts compared to the total deposits A higher CASA ratio indicates a larger proportion of low-cost deposits (current and savings accounts) relative to high-cost deposits (such as fixed deposits) Current accounts typically do not pay interest,

while savings accounts may offer a relatively low interest rate Time deposits, on the other hand, typically pay a higher interest rate than current and savings accounts

Banks with a higher CASA ratio have a larger proportion of low-cost deposits (current and savings accounts) relative to high-cost deposits (time deposits), which can lead to lower funding costs and higher net interest margins (NIM) This is because the interest paid on current and savings accounts is usually lower than that paid on time deposits, which can reduce the bank's cost of funds On the other hand, a lower CASA ratio may result in higher funding costs and lower NIM, which can negatively impact a bank's profitability

In addition, a higher CASA ratio may also indicate a stronger customer relationship, as current and savings accounts are often used for day-to-day banking activities This can lead to higher customer retention and lower customer acquisition costs, which can ultimately and indirectly contribute to a bank's profitability

g Non-interest income ratio (NIIR)

Based on the business characteristics, the income sources of commercial banks can be divided into two components: interest income and non-interest income Interest income includes revenue generated from traditional lending activities, which

is the main income source and accounts for the largest proportion of total bank income Non-interest income includes revenue from service activities; foreign exchange trading; gold, silver, and gem trading; securities trading and other service activities (Van Thi Thai Thu, 2022)

The Non-Interest Income Ratio (NIIR) is a measure of a bank's non-interest income as a percentage of its total operating income Generally, a higher NIIR can indicate a bank's ability to generate revenue from sources other than traditional lending activities, which can diversify its revenue streams and potentially improve its overall financial performance This can be especially important during times of economic downturns or when interest rates are low Additionally, a higher NIIR may indicate the bank's ability to effectively cross-sell other financial products to its existing customer base, which can lead to higher customer retention and increased profitability However, a high NIIR may also indicate that the bank is relying too

heavily on non-interest income, which may be less stable than interest income and could be subject to more volatility Moreover, excessive reliance on non-interest income may also be a sign of lower core profitability

In general, a moderate level of non-interest income can be beneficial for a bank's financial performance, but the optimal level may differ depending on the specific circumstances of each bank

h Bank size

In addition, the scale of a bank is also an important factor that needs to be taken into account for evaluation Larger banks may be able to achieve economies of scale in areas such as technology, marketing, and operations These efficiencies can lead to lower costs, which can improve profitability In the banking industry, economies of scale exist when the cost per currency unit of loans (or assets) decreases

as the volume of loans (or assets) increases A bank is considered to operate efficiently when it has the lowest cost per dollar of assets or loans The presence of economies of scale indicates that large banks have cost advantages over small banks and are able to generate more profits However, when the scale of a bank exceeds the necessary level, large banks may face inefficiencies (Berger et al., 1987; Berger & Humphrey, 1997; Fu & Heffernan, 2008) This conclusion implies that there is an inverse "U" relationship between scale and performance This inverse relationship suggests that the impact of bank scale is non-linear, as the profit potential of a bank initially increases with scale but then decreases as scale exceeds the necessary level (Athanasoglou et al., 2008)

Another advantage of larger banks is their ability to diversify their business mix This means that they can offer a wider range of products and services to customers, which can reduce their exposure to risk in any one area For example, a large bank may have a mix of retail, commercial, and investment banking activities, which can help it weather downturns in any one sector This can lead to more stable earnings and higher ROA Moreover, larger banks also benefit from brand recognition and reputation This means that they are more likely to attract deposits and customers than smaller banks, as customers may perceive them as more

trustworthy and reliable This can give larger banks a funding advantage, as they can access cheaper sources of funding, such as deposits This can lead to higher profitability and higher ROA

However, larger banks also face challenges in terms of regulatory burden As banks become larger, they may face more regulatory scrutiny and compliance costs than smaller banks This can reduce profitability, as banks may need to invest in more staff and resources to comply with regulations In some cases, these costs may be passed on to customers in the form of higher fees or lower interest rates, which can negatively impact ROA

1.3.2 Macroeconomic factors

Being able to assess the sensitivity and volatility of banks' profits to macro factors such as GDP, inflation rate or exchange rate can help banks have an accurate and clear view more about how the macro environment affects profitability From there, managers will be able to rely on the prediction of fluctuations in the macro environment and use tools and strategies to manage risks optimally Therefore, here are some indicators that contribute to the volatility of profitability of commercial banks: GDP growth rate, inflation rate and exchange rate

a GDP growth

Gross Domestic Product (GDP) is the total output produced by an economy of

a country in a certain period of time To measure macroeconomic conditions, GDP growth is used as a representative measure for economic growth It reflects the state

of the economic cycle The relationship between GDP growth and a bank's performance, as measured by return on assets (ROA), can be complex and multifaceted In general, economic growth is often seen as a positive factor for the banking industry, as it can create more demand for credit, increase the value of collateral, and stimulate overall economic activity During periods of economic growth, banks may experience higher loan demand, which can lead to increased interest income and profitability Additionally, a growing economy may lead to higher consumer and business confidence, which can result in increased deposit balances and more opportunities for banks to cross-sell other financial products

However, the relationship between GDP growth and banks' performance is not always straightforward For example, in times of rapid economic expansion, banks may become more aggressive in their lending practices, leading to higher levels of risk and potential losses Similarly, a rapid expansion of credit could lead to inflation and a potential downturn in the economy, which could negatively impact the performance of banks

Moreover, the impact of GDP growth on banks' performance can vary depending on a number of factors, including the overall health of the banking sector, the regulatory environment, and the competitive landscape Nonetheless, in general,

a growing economy can provide a positive environment for banks to operate in and can contribute to improved financial performance

b Inflation rate

Inflation is the rate at which the general price level of goods and services continues to rise in the economy Inflation erodes the purchasing power of consumers Inflation affects the real value of costs and revenues The inflation rate can have a significant impact on a bank's performance, as measured by return on assets (ROA)

Specifically, inflation can lead to higher interest rates, which can increase a bank's net interest income As inflation increases, central banks may raise interest rates to combat rising prices This can result in higher borrowing costs for consumers and businesses, leading to higher interest income for banks

However, inflation can also increase a bank's operating expenses As the cost

of goods and services increase, banks may face higher costs for rent, utilities, and employee salaries This can reduce a bank's profitability and ROA Additionally, inflation can impact loan quality As the value of currency decreases, borrowers may struggle to repay their loans, leading to higher levels of non-performing loans This can increase a bank's credit risk, which can further impact profitability Furthermore, inflation can affect the overall economy and business environment, which can impact the demand for credit and financial services High inflation can lead to decreased consumer and business confidence, reducing demand for loans and other financial products

Overall, the impact of inflation on a bank's performance can vary depending

on a number of factors, including the level and duration of inflation, the bank's business model, and the overall economic environment However, inflation is an important factor that banks must consider when managing their operations and assessing their financial performance

c Exchange rate

Exchange rate is the number of units or units of a certain currency needed to obtain or buy one unit or units of another type of currency (Fuadi et al., 2022) Therefore, the exchange rate is an important tool to compare the purchasing power of

a domestic currency with a foreign currency

In the banking sector, exchange rates can affect a bank's performance in several ways, particularly if the bank engages in international transactions A bank that has assets denominated in a foreign currency may experience a gain or loss when the exchange rate changes For example, if the bank has lent money in a foreign currency and the exchange rate decreases, the value of the foreign currency will decrease relative to the bank's domestic currency, and the bank will realize a loss Conversely, if the exchange rate increases, the value of the foreign currency will increase relative to the bank's domestic currency, and the bank will realize a gain

Similarly, a bank that has liabilities denominated in a foreign currency may also experience gains or losses due to changes in the exchange rate If the exchange rate decreases, the value of the bank's liabilities denominated in the foreign currency will decrease relative to the bank's domestic currency, resulting in a gain Conversely,

if the exchange rate increases, the value of the bank's liabilities denominated in the foreign currency will increase relative to the bank's domestic currency, resulting in a loss

In addition, fluctuations in the exchange rate can affect a bank's customers, particularly those engaged in international trade or travel If a bank's customers are negatively impacted by changes in the exchange rate, they may be less likely to engage in transactions or take out loans, which can in turn affect the bank's financial performance

Overall, exchange rates can be a significant factor in a bank's financial performance, particularly if the bank engages in international transactions or has customers who are impacted by changes in the exchange rate

CHAPTER 2: CURRENT STATE 2.1 Situation of the Vietnamese economy and banking system before the Covid-

19 period (2012-2019)

2.1.1 Situation of the economy before Covid-19

In 2018, the scale of Vietnam's economy continued to expand with a GDP growth rate of 7.08%, higher than the planned target (6.7%), the highest growth rate since 2011 The economic growth rate of 7.08% in 2018 showed that the structural transformation of Vietnam's economy continued to move in the right direction and there was no significant fluctuation Economic growth gradually shifted in depth, with the contribution rate of productivity of synthetic factors in GDP growth reaching 43.5% in 2018 (the average of the 2016-2018 period was 43.3%), much higher than the average rate of 33.6% in the 2011-2015 period In addition, Vietnam's labor productivity also showed positive changes in a steady increase over the years, making

it a country with a high labor productivity growth rate in the ASEAN region

Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 GDP

growth (%)

5.25 5.42 5.98 6.68 6.21 6.81 7.08 7.02 2.91 2.58 8.02

In 2018, the agriculture, forestry, and fisheries sector accounted for 14.57% of GDP; the industry and construction sector accounted for 34.28%; the service sector accounted for 41.17%; and the product tax excluding subsidy products accounted for 9.98% Vietnam's trade surplus reached USD 7.2 billion, indicating a good ability to take advantage of opportunities from integration and contributing to making exports

an important driving force in GDP growth

The growth of these sectors has contributed to accelerating the restructuring

of the labor force, with the proportion of labor in the agriculture, forestry, and fisheries sector decreasing to 38.5%, while the proportion of labor in the industry and construction sector reached 26%, and the service sector reached 35.3% The unemployment rate was 2.2%, slightly lower than in 2017, with the urban area having

a rate of 3.09% and the rural area having a rate of 1.75%

Graph 1: Investment structure of Vietnam in 2018 (trillion dong)

Source: General Statistics Office

In the investment structure, the non-state sector accounted for 42.5%, FDI sector accounted for 23.9%, and the state sector accounted for 33.6% The number of newly registered businesses in 2018 was mainly non-state enterprises with 131.3 thousand enterprises, with a total registered capital of 1,478.1 trillion dong, up 3.5%

in number and 14.1% in registered capital compared to 2017 The average registered capital per enterprise was 11.3 billion dong Investment in the non-state sector has had positive developments towards long-term development, reflected by many large-scale private enterprises implementing investment strategies in industries and services that focus on capital and technology, as well as high-tech agriculture This sector is increasingly adapting to a business environment that is not yet truly favorable for technology application and innovation

FDI attraction in 2018 reached over 35.46 billion USD With nearly half of the added capital, joint ventures, and share purchases, investors have demonstrated longer-term business strategies, trust in the future, partly from an improved investment environment, and partly thanks to Vietnam's integration commitments FDI capital implemented in 2018 reached 19.1 billion USD, up 9.1% compared to the

same period in 2017, and this capital source has directly contributed to economic growth

In terms of the FDI attraction structure, the processing and manufacturing industry still leads the way with a total of newly registered capital of 16.58 billion USD, accounting for 46.7% of the total newly registered FDI capital The real estate business sector ranks second with a total investment capital of nearly 6.6 billion USD, accounting for 18.6% In terms of investment partners, Japan ranks first with a total registered capital of 8.6 billion USD (accounting for 36%); South Korea ranks second with 7.2 billion USD (accounting for 28.9%); Singapore with 5 billion USD (accounting for 18.7%); China with nearly 1 billion USD

Although there were concerns about inflation risks at certain times, the average inflation rate in 2018 only increased by 3.54%, which was below the set target This result was achieved thanks to the continued flexible and cautious fiscal policy, closely coordinated with monetary policy to ensure macroeconomic stability and growth targets

Limitations and difficulties of the Vietnamese economy before Covid-19:

First of all, the main driving force for economic growth is from the manufacturing sector, focusing on some advantageous industries in the FDI area, with low value-added, indicating that the quality of growth has improved but still slow The structural shift between sectors and within the domestic industry is still slow, new industries and the application of 4.0 technology have emerged, but are not strong enough to create a change in product and industry structure Trade activities continue

to expand, but exports both in terms of value and product structure, and markets have not had many changes Exports have increased, but over 70% still come from the FDI area, and the main exported products are still traditional items Vietnam has not yet fully exploited the potential of the ASEAN and Chinese markets

Business environment continued to improve significantly, and the prospects

of the market are the main drivers of the increasing number of new registered businesses in 2018 However, over 40% of the new registered businesses are engaged

in commercial activities, mainly wholesale and retail trade, and repair of motor

vehicles and motorcycles The sectors with rapidly increasing numbers of registered businesses are real estate business (up 42%), while important sectors such as manufacturing and services, particularly processing and manufacturing, have grown slowly (up 0.6%); science, technology, consulting services (up 6.6%), education and training (up 12%); even some sectors have declined such as information and communication (down 3.7%) and agriculture, forestry, and fisheries (down 5.5%)

According to information from the World Economic Forum in 2018, among

140 economies, the growth rate of Vietnam's innovative businesses is still low This partly reflects the current business environment that has not provided enough motivation for startups and the digital technology sector: the information infrastructure ranks 95th, skills of trained personnel only rank 128th, ease of finding skilled labor ranks 104th, vocational training quality ranks 115th, intellectual property rights rank 105th, and regulations on reporting standards and auditing rank 128th

The intrinsic limitations of the economy have significantly affected the strategy and business quality of the domestic business sector, as well as the pace of economic development

2.1.2 Situation of the banking system before the Covid-19 period

a The situation of credit growth

In the period from 2014-2019, Vietnam has had outstanding credit growth compared to previous periods This growth rate is many times higher than GDP growth rate in the same period

Graph 2: Credit growth rate and GDP growth rate of Vietnam from 2014-2019 (%)