Slide: DETERMINANTS OF LOAN LOSS PROVISIONS OF VIETNAMESE COMMERCIAL BANKS

Bad loans remain the biggest problem of the banking system, causing financial burdens of provisions. High provisions result in considerable loss in banks’ profit and government revenue. Vietnamese banks’ weakness in capital buffers. Vietnam’s membership of TransPacific Partnership and VietnamEuropean Union free trade agreement since 2015. Vietnamese commercial banks regularly set current loan loss provisions based on the previous year’s provisions. Vietnamese commercial banks regularly use provisions to reduce the fluctuation in annual income streams. Vietnamese commercial banks use provisions to inform outsiders of banks’ financial strength. Provisioning decisions are dependent on bad loans and loan growth.

DETERMINANTS OF LOAN LOSS PROVISIONS OF VIETNAMESE COMMERCIAL BANKS Author: Pham Thi Thanh Yen Academic Supervisor: MA Nguyen Thu Hang Outline Motivations Research questions and hypotheses Literature review Data Methodology Regression results Economic implications Motivation  Bad loans remain the biggest problem of the banking system, causing financial burdens of provisions  High provisions result in considerable loss in banks’ profit and government revenue  Vietnamese banks’ weakness in capital buffers  Vietnam’s membership of Trans-Pacific Partnership and Vietnam-European Union free trade agreement since 2015 2 Research questions How to control loan loss provisions at suitable level? What are the drivers behind provisioning decisions? Literature Review Bikker, J A and Metzemakers, P A J., 2005 Bouvatier, V and Lepetit, L., 2008 Bushman, R and Williams, C., 2012 Cavallo, M and Majnoni, G., 2002 Fonseca, A R., and Gonzalez, F., 2008 Laeven, L., and Majnoni, G., 2003 … Literature Review Bank-specific factors Macroeconomic factors • • • • • Lag of loan loss provisions Income smoothing Capital management Signaling Others • GDP • Inflation • Global financial crisis Methodology • With unbalanced panel and lagged independent variable, GMM regression method is employed • The model is modified from the works of Bouvatier and Lepetit (2008), Packer and Zhu (2012), and Adzis et al (2015) The model is: = Data 39 banks’ financial information years’ macroeconomic data Data sample (312 observations) Regression results Independent variables Predicted signs + EBTP CAP SIGN SZ NPL LG + -_ + +/_ + +/_ OLS FEM GMM 0.5456*** 0.3570** 0.5073** (7.28) (2.34) (2.52) 11.1454*** 8.8730 12.5048** (3.28) (1.36) (2.60) -0.6494* 0.2716 -0.5964 (-1.70) (0.31) (-1.41) 0.0798*** 0.0619 0.0832** (3.29) (1.50) (2.54) -0.0497 -0.1229 -0.0485 (-1.57) (-0.94) (-1.04) 0.0358 0.0056 0.0398* (1.30) (0.21) (1.86) -0.4605 -0.4498 -0.4563* (-1.58) (-1.13) (-1.97) Economic implications Vietnamese commercial banks regularly set current loan loss provisions based on the previous year’s provisions Vietnamese commercial banks regularly use provisions to reduce the fluctuation in annual income streams Vietnamese commercial banks use provisions to inform outsiders of banks’ financial strength Provisioning decisions are dependent on bad loans and loan growth THANKS FOR LISTENING TO MY AWESOME PRESENTATION!!!