The effect of bank capital and ownership structure on bank performance: evidence in Vietnam

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE EFFECT OF BANK CAPITAL AND OWNERSHIP STRUCTURE ON BANK PERFORMANCE: EVIDENCE IN VIETNAM BY NGUYEN THI VIET ANH HO CHI MINH CITY, DECEMBER 2015 VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE EFFECT OF BANK CAPITAL AND OWNERSHIP STRUCTURE ON BANK PERFORMANCE: EVIDENCE IN VIETNAM o0o Thesis Instructor: Dr Nguyen Thi Thuy Linh Student: Nguyen Thi Viet Anh CLASS 20 Ho Chi Minh City, December 2015 DECLARATION I, Nguyen Thi Viet Anh hereby declare that this thesis is my own work under the guidance of instructor, Dr Nguyen Thi Thuy Linh It has not yet been presented and will not be presented to any similar or other degrees Date: 2nd December 2015 Signature Nguyen Thi Viet Anh i ACKNOWLEDGEMENTS First and foremost, I would like to express my sincere thanks to my main supervisor, Dr Nguyen Thi Thuy Linh, for her candid comments, helpful hints and valuable scientific guidance during times of deployment, research and completion of this thesis I am greatly indebted to the Board of Directors, the teachers and all staff in Vietnam-Netherlands Programme for M.A in Development Economics– VNP, for their directly teaching, conveying knowledge and experiences as well as supporting me and my class-mates necessary information in the last two years I express my heartfelt thanks to General Director of Asia Commercial Bank - Mr Do Minh Toan, the Board of Managers of ACB Saigon Branch – Mr Ngo Tan Long and Ms Bui Thi Anh Hoa for advice and creation of all favorable conditions for my work to attending VNP I am grateful to Dr Pham Phu Quoc and Dr Truong Dang Thuy, who suggested research topic and gave me enthusiastic guidance in the early stages of writing the concept note and thesis research design I greatly express my special thanks to my colleagues at The Center for Corporate Credit and Financial Institutions – Asia Commercial Bank, ACB Securities Company – ACBS, for supporting me in collecting data; colleagues at ACB Saigon Branch, especially Corporate Department, for being always cooperative, enthusiastically supporting and encouraging me I would like to acknowledge the enthusiastic help of fellow practitioners VNP Class 20, especially these members, Nguyen Son Kien, Vo Tan Thanh Diep, ii Nguyen Le Phuong Linh, Nguyen Phuong Tram and Vu Thi Thuong, for being my close companions during the last two school years Finally, I wish to dedicate this thesis for my family, my parents, siblings, especially my dear husband, Nguyen Hoang Than for trust, love, sharing, help, following, encouragement and being always beside me I would also like to thank my lovely children, little daughter, Nguyen Hoang Viet Ha and little son, Nguyen Hoang Quan You are the endless motivation that helps me overcome all difficulties and move forward iii ABSTRACT This study aimed at assessing the impact of capital structure and ownership structure on Vietnamese bank performance The study used secondary data of fortynine Vietnamese banks with 387 observations in the period 2005-2014, employing Feasible General Least Square as well as Discoll-Kraay Robust for cross-sectional dependenceestimation Empirical results show that capital structure is significantly and positively related to Vietnamese bank performance Meanwhile, ownership structure impact negatively on profitability of Vietnamese banks (measuring by returns on total assets) The findings indicate that the profitability of the Private Banks is higher than the State-owned ones Keys words:Bank performance, Capital structure, Ownership structure, Net Interest Margin, Returns on Assets, Returns on Equity iv TABLE OF CONTENTS DECLARATION I ACKNOWLEDGEMENTS .II ABSTRACT IV LIST OF TABLES VIII LIST OF FIGURES IX LIST OF ABBREVIATIONS X CHAPTER 1:INTRODUCTION .1 1.1 Problem Statement 1.2 Research Objectives .4 1.2.1 General research objective 1.2.2 Specific research objectives .5 1.3 Research questions 1.4 Significances of the study 1.5 Scope of the Study 1.6 Thesis structure CHAPTER 2:LITERATURE REVIEW 2.1 Introduction 2.2 Conceptual Definitions 2.2.1 Capital Structure 2.2.2 Ownership structure 2.2.3 Bank performance 2.3 2.3.1 Theoretical review 11 Capital structure theory developed by Modigliani and Miller (MM Model) 11 2.3.2 The trade – off theory 12 2.3.3 Agency cost theory 13 2.4 2.4.1 Empirical review 14 Bank capital structure and Bank performance .14 v 2.4.2 2.5 Ownership structure and bank performance 17 Conceptual Framework .19 CHAPTER 3:RESEARCH METHODOLOGY 20 3.1 Introduction 20 3.2 scope of Study 20 3.3 Epirical model 21 3.3.1 Bank performance measures: 21 3.3.2 The Models 23 3.4 Methodology 30 3.4.1 The Pooled OLS method 30 3.4.2 The Fixed Effects Model (FEM) .31 3.4.3 The Random Effects Model (REM) 32 3.4.4 Relevant tests to choose the most appropriate estimation method 33 3.4.5 The Feasible Generalized Least Square (FGLS) 34 3.4.6 Discoll-Kraay Robust for cross-sectional dependence – XTSCC 35 3.4.7 Problem of Endogeneity 36 CHAPTER 4:EMPIRICAL FINDINGS AND ANALYSIS .37 4.1 Introduction 37 4.2 The overview on Vietnamese banks 37 4.3 Descriptive statistics .44 4.4 Empirical results 47 4.4.1 Explanatory variables and bank performance 47 4.4.2 Control variables and bank performance 49 4.5 Robustness test - common panel data methods 50 CHAPTER 5:CONCLUSIONS AND POLICY IMPLICATIONS .56 5.1 Main findings 56 5.2 Policy implications .56 vi 5.3 Limitation of the study 58 5.4 Suggestions for further studies 58 REFERENCES 59 APPENDIX 69 vii LIST OF TABLES Table 2-1 – Indirect performance indicators for financial institutions .9 Table 3-1 Definitions of variables in equation 3.2 28 Table 4-1 Summary statistics for variables 45 Table 4-2 Correlation 46 Table 4-3 Vif index 46 Table 4-4 Results from feasible generalized least square (fgls) and discoll-kraay robust for cross-sectional dependence (xtscc) 47 Table 4-5 Regression result of nim model 51 Table 4-6 Regression result of roa model 52 Table 4-7 The results of f test and breusch – pagan test 53 Table 4-8 Hausman test 53 Table 4.9 Test of heteroskedasticity 54 Table 4.10 Test of autocorrelation 54 viii APPENDIX B: PANEL REGRESSION MODEL B.1 Estimation results of model - NIM Figure B.1.1: The pooled OLS model 72 Figure B.1.2: The FEM model 73 Figure B.1.3: The REM Model 74 Figure B.1.4: The FGLS 75 B.2 Estimation results of model - ROA Figure B.2.1: The pooled OLS model 76 Figure B.2.2: The FEM Model 77 Figure B.2.3: The REM Model 78 Figure B.2.4: The FGLS 79 APPENDIX C: RESULTS OF BREUSCH – PAGAN LM TEST Figure C.1: Breusch – Pagan LM Test for Pooled OLS and REM of model 1NIM Figure C.2: Breusch – Pagan LM Test for Pooled OLS and REM of model – ROA 80 APPENDIX D: RESULTS OF HAUSMAN TEST Figure D.1: Hausman test for FEM and REM of model – NIM 81 Figure D.2: Hausman test for FEM and REM of model – ROA 82 APPENDIX E: TEST OF HETEROSKEDASTICITY Figure E.1: Test of heteroskedasticity of model – NIM Figure E.2: Test of heteroskedasticity of model – ROA APPENDIX F: TEST OF SERIAL CORRELATION Figure F.1: Test of serial correlation of model – NIM 83 Figure F.2: Test of serial correlation of model – ROA Figure F.3: Test of serial correlation of model – ROE 84 APPENDIX G: ROBUST WITH CROSS-SECTIONAL DEPENDENCE Figure G.1: Robust with Cross-sectional dependence of model – NIM 85 Figure G.2: Robust with Cross-sectional dependence of model – ROA 86