Some studies show that there is a relationship between credit risk and business performance of commercial banks through profitability indicator ratios.NicolaePetria 2013, Hasan Ayaydin 2
Trang 1MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY
- -
NGUYEN QUOC ANH
IMPACTS OF CREDIT RISK ON VIETNAMESE COMMERCIAL BANKS’
BUSINESS PERFORMANCE
SUMMARY OF ECONOMIC DOCTORATE THESIS
Faculty: Finance - Banking
Code: 62.34.02.01 Academic Instructor: Assoc Prof S.D Nguyễn Đăng Dờn
Ho Chi Minh City – 2016
Trang 2CHAPTER 1 INTRODUCTION
1.1 REASONS FOR RESEARCH
The empirical studies in Vietnam and other countries indicate that macroeconomic factors, such
as inflation, and GDP growth significantly impact nonperforming loans (NPL) Specific factors of the banks were also tested, the previous research indicated that NPL ratio of the previous year and credit growth ratehave the strongest impact on the NPL ratio of banks Some studies show that there is a relationship between credit risk and business performance of commercial banks through profitability indicator ratios.NicolaePetria (2013), Hasan Ayaydin (2014) use the ROE (Profit after tax / Equity) as the dependent variable and study the impact of credit risk on business performance of commercial banks The results indicate that credit risk has negative impact on business performance of commercial banks
Credit risks appears objective in the market economy, especially in international integration trend and financial crisis The consequences of credit risk are the decline in bank profits and the destabilization
in the banking and economy system From the above reasons, there is a need to study the impact of credit risk on business performance of commercial banks in Vietnam
Research gap
While there are several studies on the factors affecting credit risk of commercial banks in Vietnam, there is no study on the effects of credit risk on business performance of commercial banks The authors propose that credit risk may affect business performanc ecommercial banks in Vietnam The authors examine factors affecting credit risk, such as macroeconomic factors and specific factors of commercial banks, in the period of 2005 to 2015
The findings also detect the factors affecting credit risk, indicating that NPL and credit risk management affect the business performance of commercial banks in Vietnam
1.2 RESEARCH PURPOSES
Particularly, the study aims to provide insights into the factors affecting credit risk, the impact of credit risk on business performance of commercial banks in Vietnam, and suggest solutions to limit credit risk, in order to enhance business performance of commercial banks in Vietnam To be specified, this research:
- Identify the factors affecting credit risk of commercial banks
- The impact of credit risk on business performance of commercial banks
- Measure factors influencing the level of credit risk, and the impact of credit risk on business performance of commercial banks in Vietnam
- Suggest solutions to limit credit risk, and enhance business performance of commercial banks in Vietnam
1.3 RESEARCH SUBJECTS AND SCOPE OF THE STUDY
- Research subject: the factors influencing the level of credit risk, and the impact of credit risk on business performance of commercial banks in Vietnam
- The study scope: focuses on factors influencing credit risk and business performance of commercial banks in Vietnam The major data sources were collected from 26 commercial banks in Vietnam through Bankscope, macroeconomic data sources were collected from ADB indicators with coverage from 2005- 2015
1.4 RESEARCH METHODOLOGY
Quantitative research methods: using The Pooled OLS, Fixed effects method (FEM) & Random effects model (REM) , and the GMM method to examine factors influencing credit risk; using Feasible Generalized Least Squares (FGLS) model to study the impact of credit risk on business performance of
Trang 3commercial banks in Vietnam Furthermore, the authors also use several research methods such as interpretation, synthesis, comparison and analysis to study the factors influencing credit risk of commercial banks; current state of credit risk and business performance of commercial banks in Vietnam
1.5 RESEARCH STRUCTURE
The content of this research consists of 5 chapters:
Chapter 1: Introduction
Chapter 2: Theoretical Foundations
Chapter 3: Research Methodology
Chapter 4: Research Results
Chapter 5: Conclusions and suggested solutions
Trang 4CHAPTER 2 THEORETICAL FOUNDATIONS
2.1 CREDIT RISK
After examining multiple perspectives on credit risk, the authors define credit risk as risk that arise during credit activities of banks, when customers do not pay their debts or repay debts on time for the banks This is the main risk in the banking business, so credit operations and credit risk will affect the profitability and effectiveness of banks Credit risk can lead to other risks that cause serious consequences and disrupt the balance and stability of banks
2.2 BUSINESS PERFORMANCE OF COMMERCIAL BANKS
Commercial banks use resources such as labor, infrastructure, financial resources for core activities: taking deposits, lending and investments This is the basis for determining the level of efficiency and factors affecting the efficiency of commercial banks
Similarly, in the study of banking activities, some authors use the production approach with a view to banks as production units (Benston, 1965; Ferrier et al, 1990; Shaffnit et al, 1997 ; Zenios et al, 1999); some authors use intermediate approach, which views banks as financial intermediaries (Sealey and Lindley, 1977; Maudos and Pastor, 2003; Casu et al, 2003); and some other authors use modern approach that banks play both roles (Frexias and Rochet, 1997; Denizer et al, 2000;.Athanassopoulos and Giokas, 2000)
2.3 IMPACT OF CREDIT RISK ON BUSINESS PERFORMANCE OF COMMERCIAL BANKS
2.3.1 Credit risk impacts profitability and risks of commercial banks
When credit risks arise, NPL increases, which results in lower sales and leads to a loss Furthermore, when NPLs incur, the costs will increase significantly, for example: the interest payment costs, NPL management cost, provisioning costs and other credit-related expenses The increase in costs results in lower profit than the initial estimate NicolaePetria (2013) indicates credit risk negatively affects business performance of banks (as measured by ROE, ROA), which have a direct impact on and degrade business performance of banks (Hasan Ayaydin, 2014)
2.3.2 Credit risk lead to bank instability, thereby affect the business performance of commercial banks
NPL results in losses on bank assets.When high level of NPL is not limited, it will lead to a series of serious effects Normal losses occur in the lending amount, increase in operating costs, decrease in profit, decrease in the value of assets, etc which lead to bank reputation loss
2.3.3 Credit risk affects macroeconomic factors
Highlevels ofcredit risk may impose systemic risk in the banking system, which then damage general economic conditions of a country, the macroeconomic factors (Vania Andriani1, SudarsoKaderiWiryono, 2015)
2.4 RESEARCH OVERVIEW ABOUT IMPACT OF CREDIT RISK ON
BUSINESS PERFORMANCE OF COMMERCIAL BANKS
2.4.1 The impact factors of credit risk
Table 2.1: Summary of the impact factors of credit risk
subject(s)
Rajan and Dhal (2003) Non performing
loans
Dependent variable:
the NPL ratio
Panel data, FEM, REM
Bank size has negative impact
on NPLs GDP
Trang 5ofcommercial banks in India (2003 -2008)
Independent variables: loan growth, loan loss reserve, GDP growth rate, unemployment rate, interest rate
growth rate has positive effect on NPLs In good business
environment, NPLs decrease
Berge andBoye (2007) Problem loans of
Northern Europe banks
(1993 –2005)
Dependent variable:
problem loans Independent variables: GDP growth rate, unemployment, real interest rates, inflation
GMM Problem loans
impact nominal interest rates and unemployment rates
Salas andSaurina (2002) Macroeconomic
and microeconomic variables impact NPLs of Spanish banks (1985-1997)
Dependent variable:
problem loans Independent variables: GDP growth rate, bank size, efficiency, marginal income ratio, leverage ratio, market power
Panel data,FEM, REM NPL ratio
Bank size has negative impact
on credit risk GDP growth rates has positive impact on problem loans
ZribiandBoujelbène
(2011)
Examine the macroeconomic and
microeconomic variables that impact credit risk
of ten commercial banks in Tunisia
Dependent variable:
credit risk
Independent variables: the ownership
structure, the prudential
regulation of capital, profits, GDP, inflation, exchange rates, and interest rates
Panel data, REM, FEM
Ownership structure, profitability and the
macroeconomic indicators (GDP growth rates, inflation,
exchange rates, and interest rates affect credit risk
Louzis et al (2012) The
macroeconomic factors and bank’s variables that affect NPL
in Greece bank system
(2003-2009)
Dependent variable:
the NPL ratio Independent variables: real GDP growth rate, unemployment rates, interest rates and public debt, ROE, liquidity ratio, non-effectiveness ratio, bank size
Dynamic Panel Data, GMM
Problem loans due to macroeconomic variables (real GDP growth, unemployment, interest rates and public debt)
Ahlem Selma Messai
(2013)
Study factors affecting NPLs
of 85 banks in three countries
Dependent variable:
the NPL ratio Independent
Panel data, FEM, REM
The GDP growth rate, and ROA has negative impactson NPLs;
Trang 6(Italy, Greece and Spain) (2004-2008)
variables: GDP, unemployment, interest rates, growth in outstanding loans, loan loss reserve
unemployment and interest rates has a positive impact on NPLs
MarijanaCurak, Sandra
PepurandKlimePoposki
(2013)
Examine factors impacting NPLs
of the banking system in Southeast Europe (2003-2010)
Dependent variable:
the NPL ratio Independent variable: GDP, unemployment rates, interest rates, growth in outstanding loans, ROA, inflation
Panel data of
69 banks in
10 countries, GMM
There is a negative
relationship between bank size and NPL ratio
Bucuret al, (2014) The influence of
macroeconomic conditions on credit risk in Romanian (2008-2013)
Dependent variable:
credit scores Independent variable: GDP, inflation, money supply,
unemployment rate
Multivariate regression, SPSS
The growth rate
of money supply and exchange rate have a negative
relationship with credit risk The unemployment rate has a positive
relationship with credit risk Tehuluet al (2014) Examine the
bank-specific determinants of credit risk in Ethiopian
commercial banks (2007 - 2011)
Dependent variable:
loan loss reserve
Independent variable: credit growth, bank size, ownership,
operating inefficiency, bank liquidity,
profitability
Panel data, GLS
Credit growth and bank size have negative impact on credit risk
Operating inefficiency and ownership have positive impact
on credit risk
HasnaChaibiandZiedFtiti
(2015)
Credit risk determinants:
Evidence from a cross-country study
(2005-2011)
Dependent variable:
loan loss reserve
Independent variable: inflation rate, GDP, interest rates,
unemployment, exchange rate, efficiency,
leverage, size, profitability, loan loss reserve
Dynamic Panel Data
All examined macroeconomic variables affect the NPL ratio
Đào Thị Thanh Bình and Factorsaffecting
Trang 7Đỗ VânAnh (2013) commercial
banks in Vietnam (2008-2012)
the NPL ratio Independent variable: bank size, ROE, GDP, inflation
commercial banks in Vietnam, FEM, REM
on NPLs ROE has negative impact on NPLs
Đỗ Quỳnh Anh, Nguyễn
Đức Hùng (2013)
Factors affecting NPLs of commercial banks in Vietnam (2005 -2011)
Dependent variable:
the NPL ratio
Independent variable: GDP, inflation, credit growth, bank size
Panel data, REM, FEM, GMM
Inflation and GDP growth have impact onNPLs
NPLs affectfollowing year’s NPLs Bank size has positive
relationships with NPLs
Võ Thị Quý and Bùi
Ngọc Toản (2014)
Examine factors affecting credit risk of commercial banks
(2009 – 2012)
Dependent variable:
loan loss reserve
Independent variable: credit growth, bank size, GDP growth
GMM model, panel data
of 26 commercial banks
Credit risk, credit growth, GDP growth rate, the impact of negative loss ratio in the year
on credit risk Nguyễn Thị Ngọc Diệp
and Nguyễn Minh Kiều
(2015),
Define bank characteristics affecting credit risk in commercial banks in Vietnam (2010- 2013)
Dependent variable:
loan loss reserve Independent variable: credit growth, loan size, and operational cost / income loans ratio
Data panel
of 32 commercial banks in Vietnam with regression least squares (OLS)
Credit growth, loan size, and the operational cost / income loans ratio impact credit risk
2.4.2 The impact of credit risk on business performance of commercial banks
Table 2.2: Summary of studies about the impact of credit risk on business performance Author(s) Research
Dependent variable:
ROE, ROA, Independent variable:
loan loss reserve, Equity-to-Asset ratio, operating costs
Panel data, FEM, REM, 3GLS
The bank-specific factors, such as: loan loss reserve, Equity-to-Asset ratio, operating costs have an impact on bank profits
Hassan and
Sanchez
(2007)
The factors determining the efficiency of commercial banks in Latin America
Dependent variable:
bank efficiency
Independent variables:
capitalization level, profitability, loan
DEA model Loan loss reserve has
negative relationship with business performance Capitalization level, and profitability have positive relationship with business
Trang 8(1996-2003) loss reserve, labor,
ECM Model Loan loss reserve, total
Loans-to-Total Assets Ratio, Equity-to-Total Asset Ratio have negative effect on business performance
Bank size has positive effect on business performance
Nicolae Petria
(2013)
Examine determinants of banks'
profitability of
EU 27 banking systems
(2004-2011)
Dependent variable:
ROE, ROA Independent variable:
size, credit risk, cost efficiency, liquidity, HHI, GDP, inflation
Panel data, REM, FEM
Credit risk has negative impact on business performance (ROE) of commercial banks
Hasan
Ayaydin
(2014)
Factors affecting the capital and profits of Turkish banks
Panel data, GMM
Loan loss reserve negatively impact bank performance, measured through ROE variable
Zou et al
(2014)
Examine the relationship between credit risk and profitability of commercial banks in Europe (2007-2012)
OLS Credit risk has no positive
impact on the profitability
of commercial banks NPL ratio has a significant impact on ROE and ROA
Alshatti
(2015)
Examine the impact of credit risk on financial efficiency of commercial banks in Jordan
Panel data Credit risk impacts
business performance of commercial banks
Samuel (2015) The influence of
credit risk on the profitability of banks in Nigeria
Dependent variable:
ROA Independent variable : NPL / credit balance, outstanding loans / total deposits
OLS Lending rate has negative
relationship with profitability
Gizawet al The influence of Dependent variable: Panel data and NPL ratio, loan loss
Trang 9(2015) credit risk on the
business performance of banks in Ethiopia
(2003-2004)
ROE, ROA Independent variable:
CAR, NPL ratio, loan loss reserve
multivariate regression analysis
reserve impact business performance of banks in Ethiopia
Kodithuwakku
(2015)
The influence of credit risk on business
performance of commercial banks in Sri Lanka
Dependent variable:
ROA Independent variable:
reserve / total loans ratio; loan loss reserve / NPLs ratio;
loan loss reserve / total asset ratio, NPLs / loans ratio
Multivariate regression, Eview
Loans and regulations affect the profitability of banks
Nguyễn Việt
Hùng (2008)
Analysis factors affecting business performance of
32 commercial banks in Vietnam (2001– 2005)
The inputs and outputs cost factors
DEA NPL ratio, Total
loans/Total assets ratio, deposits / total loans ratio, total costs / total revenues ratio, income from interest rate / income from operations ratio have negative impact on the business performance
of banks
Market shares, equity to total assets ratio has positive impact on the business performance of banks
39 commercial banks in Vietnam (2005-2013)
Dependent variable:
ROE, ROA Independent variable:
cost / revenue ratio, deposit / loan ratio, capital / total assets ratio, market share, loan / total assets, ratio of overdue debts and total residual debt
Tobit regression model
The higher the NPL ratio, the lower the operating efficiency The higher theratio of loans / total assets,the higher operational efficiency Total operating expenses / revenue ratio negatively correlated with ROE; The higher theSelf-financing ratio, the lower the ROE
Source: Compiled from relevant research
SUMMARY OF CHAPTER 2
In this chapter, the authors introduce the theoretical foundations, and measurement method of credit risk in commercial banks The authors also analyze the causes and effects of credit risk on general economy, business performance of commercial banks In general, previous researches in Vietnam and abroad on the factors influencing credit risk and the impact of credit risk on business performance were also reviewed by the authors It's also the foundation for research in the following chapters
Trang 10CHAPTER 3 METHODOLOGY
3.1 RESEARCH METHODOLOGY
Based on the theoretical foundation of credit risk and business performance of commercial banks, the authors select and identify key research issues, using quantitative research methods To be specific, the authors use multivariate regression models through Pooled regression model, Fixed effect, Random effect and use the GMM method to solve the endogenous regression on panel data In addition, the authors also use the methodological interpretation, synthesis, comparison and analysis method to achieve research objectives
3.2 FACTORS AFFECTING CREDIT RISK MODEL
Recent studies on this issueuse dynamic tabular data (Dynamic Panel Data), for example, Cheng and Kwan (2000); Calderon and Chong (2001); Salas and Saurina(2002); Beck and Levine ( 2004), Santos-Paulino and Thirlwall (2004); Carstensen and Toubal (2004); Athanasoglou et al (2009); and Merkl and Stolz (2009).The authorsselect multivariate regression model which is consistent with previous studies, our model, which is based on the model of Hasna Chaibi and Zied Ftiti (2015), identifies factors affecting the commercial banks RRTD:
NPL it = α+ γNPL i,t-1 + β j X i,t + vi + ε i,t (1)
Where:
α: is the intercept
NPLi,t-1: the NPL ratio of bank iin year t NPL ratio was used to measure the degree credit risk (Vania Andriani, Sudarso Kaderi Wiryono, 2015)
γ : is the impact of negative loss ratio in the year t
Xi,t : the vector of independent variables, including macroeconomic variables and bank specific variables Bank specific variables:ETAi,t , LEVi,t , SIZEi,t , EFFi,t , ROEi,t , NIIi,t , PLLi,t; macroeconomic variables: GGDPt , INRt , INFt , UNRt , EXRt
βj: the impact of independent variables on NPL ratio
vi: unobserved characteristic among banks
εi,t: is the accumulation of the structure
The lagged variable of the dependent variable - NPL – has a correlation with v Therefore, if we apply the smallest quadratic OLS methodology, an unbalanced and unstable estimation will be likely to occur The (1) regression equation will be stabilized if it is estimated by GMM (Generalized Method of Moments) introduced by Arellano and Bond (1991)
* Bank internal variables:
(1) Loan loss reserve (LLR) = Loan loss reserve/Total loans
Hypothesis 1: There is a positive correlation between Loan loss reserve and the NPL ratio
(2) EFF- Operating inefficiency = Operating expenses/Operating income
Hypothesis 2: There is a positive correlation between operating inefficiency and NPL ratio
(3) Leverage (LEV) = Total liabilities/Total assets
Hypothesis 3: There is a positive correlation between leverage and NPL ratio
(4) Non-interest income (NII) = Non-interest income/Total income
Hypothesis 4: There is an inverse correlation between non-interest income and NPL ratio
(5) Bank size (SIZE ) = Natural log of total assets