Determinants of bank profitability evidence from viet nam

MINISTRY OF EDUCATION AND TRAINING THE STATE BANK OF VIETNAM BANKING UNIVERSITY HO CHI MINH CITY TRAN THU HIEN DETERMINANTS OF BANK PROFITABILITY: EVIDENCE FROM VIETNAM GRADUATION THESIS MAJOR: FINANCE – BANKING CODE: 52340201 HO CHI MINH CITY, 2021 MINISTRY OF EDUCATION AND TRAINING THE STATE BANK OF VIETNAM BANKING UNIVERSITY HO CHI MINH CITY TRAN THU HIEN DETERMINANTS OF BANK PROFITABILITY: EVIDENCE FROM VIETNAM GRADUATION THESIS MAJOR: FINANCE – BANKING CODE: 52340201 SUPERVISOR NGUYEN THI MY HANH, Ph.D HO CHI MINH CITY, 2021 ACKNOWLEDGEMENTS In order to research this topic completely, the author would like to express the sincerest gratitude to the supervisor who has dedicated and worked with the author throughout the research process In addition, the author also would like to express the deepest gratitude to staff, lecturers teaching many useful knowledge as well as helping me have a better preparation for this study in Banking University Ho Chi Minh City However, with limited knowledge and limited time, the topic cannot avoid mistakes Hence, I look forward to receiving guidance and comments from the lectures to complete and improve my thesis Thank you very much! Ho Chi Minh City, 2021 Author Tran Thu Hien AUTHOR’S DECLARATION I hereby confirm that this thesis entitled “Determinants of bank profitability: Evidence from Vietnam ”, is my own work, and none of this work has been published before submission Ho Chi Minh City, 2021 Author Tran Thu Hien ABSTRACT This study focuses on the impact of macro and micro factors on bank profitability of Vietnamese commercial banks between 2011 and 2020 The data used for the study was secondary data, collected from independent audited financial statements of 28 Vietnamese commercial banks The macro data is collected from the World Bank's data warehouse The study used the Generalized Least Squares model for panel data to identify factors, including internal and external factors, that affect the profitability of Vietnamese commercial banks Specifically, it affects the profitability on assets (ROA) and the profitability on equity (ROE) The results showed that the return on equity (ROE) and the return on total assets (ROA) were favorably correlated with bank size, equity size, deposit size, and inflation and were inversely correlated with the ratio of non-interest income to total income These variables are all statistically significant at the 1% meaning In addition, the study has not found a correlation between credit and tax risks, GDP growth rate, and profitability of Vietnamese commercial banks in the period 2011-2020 TABLE OF CONTENTS LIST OF TABLES LIST OF PICTURES, GRAPHS 10 LIST OF ACRONYMS 11 CHAPTER 1: INTRODUCTION 12 1.1 Reasons for choosing the topic 12 1.2 Research objectives 14 1.3 Research questions 14 1.4 Research scope 14 1.5 Research method 14 1.6 Research structure 15 CONCLUSIONS OF CHAPTER 16 CHAPTER 2: LITERATURE REVIEW 17 2.1 Theoretical framework 17 2.1.1 Commercial bank 17 2.1.2 Bank profitability 17 2.1.2.1 Bank profitability 17 2.1.2.2 Indicators to measure profits of commercial banks 21 2.1.3 Factors affecting bank profits of commercial banks 23 2.1.3.1 External environment 23 2.1.3.2 Internal environment 25 2.2 Empirical review 26 2.2.1 Studies in the world 26 2.2.2 Studies in Vietnam 30 CONCLUSIONS OF CHAPTER 33 CHAPTER 3: RESEARCH METHOD AND DATA 34 3.1 Research method 34 3.2 Research models 34 3.3 Research variables and data 36 3.3.1 Research variables 36 3.3.1.1 Dependent variables 36 3.3.1.2 Independent variables 37 3.3.2 3.4 Data 43 Data Analysis Methods 44 3.4.1 Statistical Description 44 3.4.2 Estimation and selection of the appropriate model 44 3.4.3 Defect analysis 45 CONCLUSIONS OF CHAPTER 46 CHAPTER 4: RESEARCH RESULTS AND DISCUSSION 47 4.1 Situation of bank profitability of Vietnamese commercial banks in the period 2011-2020 47 4.1.1 Current status of business activities of Vietnamese commercial banks 47 4.1.2 Current status of the profitability of Vietnamese commercial banks 49 4.2 Research results 51 4.2.1 Descriptive statistics 51 4.2.2 Determinants of bank profitability (ROE) 52 4.2.3 Determinants of bank profitability (ROA) 58 CONCLUSIONS OF CHAPTER 65 CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 66 5.1 Conclusions 66 5.2 Recommendations 67 5.3 Limitations of the thesis 68 REFERENCES 70 APPENDICES 75 LIST OF TABLES Table 2.1: Summary of international studies 29 Table 2.2: Summary of domestic studies 32 Table 3.1: Expected signs of variables in the model 43 Table 4.1: Some indicators on the current status of business activities of Vietnamese commercial banks 47 Table 4.2: Average ROA and ROE of Vietnamese commercial banks 49 Table 4.3: Descriptive statistics of the variables in the model 51 Table 4.4: Check for multicollinearity of the independent variables in the model 52 Table 4.5: Correlation matrix of independent variables in model ROE 52 Table 4.6: Fixed Effect Model and F-test result 53 Table 4.7: Testing FEM and REM models using Hausman 54 Table 4.8: Generalized Least Squares remediation model 55 Table 4.9: Research results compared to expectations 56 Table 4.10: Correlation matrix of independent variables in model ROA 58 Table 4.11: Summary of research results from three models Pooled OLS, FEM and REM 60 Table 4.12: Testing FEM and REM models using Hausman 61 Table 4.13: Generalized Least Squares remediation model 62 Table 4.14: Research results compared to expectations 63 10 LIST OF PICTURES, GRAPHS Picture 3.1: Vietnam's GDP growth in the period 2011-2020 42 Picture 3.2: Vietnam's inflation rate in the period 2011-2020 42 Picture 4.1: Average ROA and ROE of Vietnamese commercial banks 50 66 CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 5.1 Conclusions The "Determinants of Bank Profitability: Evidence from Vietnam" analysis focused on analyzing and assessing the impact of factors affecting the profitability of commercial banks in Vietnam Based on quantitative analysis, the study hopes to help banks consider their direction shortly so that they can achieve the most optimal profitability Using a system of methods from traditional assessment to the application of quantitative analysis techniques, together with data collected from consolidated financial statements of 28 Vietnamese commercial banks and macro indicators from the World Bank's data source and data from the International Monetary Fund, the author conducted a study on profitability and factors affecting the profitability of Vietnamese commercial banks between 2011 and 2020 With table regression analysis, FEM regression model, and GLS remediation model, the model's estimated results show variables related to bank size, capital structure, deposit size, income diversification, and inflation to the profitability of Vietnamese commercial banks in the period 2011-2020 The study did not find out the impact of credit, tax, and economic growth risks on the profitability of Vietnamese commercial banks during this period The results of the study differed somewhat from most previous studies that found that income diversification harmed profitability That means that for Vietnamese commercial banks, the higher the ratio of non-interest income to total income, the lower the profitability in the period 2011-2020 This result raises questions about non-interest activities when banks diversify their income when non-interest expenses are not reasonable, it is unlikely to bring higher profits Analyzing the impact of factors inside the bank and macroeconomic factors on the profitability of commercial banks today will help managers have an overview of the state of the banking industry to make plans to improve profitability as well as the competitiveness of the commercial banking system Vietnam's trade is currently in 67 line with the innovative requirements of the trend of international economic integration 5.2 Recommendations The project is aimed at determining the relationship between independent variables and dependent variables as the profitability of the bank is represented by ROA and ROE variables The research helps commercial banking managers see the importance of factors in the model and the importance of bank profitability v For the State Bank The State Bank should continue to improve the legal framework for the operation of commercial banks, operate the open market flexibly, stabilize the currency market to match the practice in Vietnam and the trend of developing the banking sector in the integration period to improve financial capacity, the competitiveness of commercial banks In addition, the State Bank should have specific guiding documents synchronously in the implementation of regulations From there, there are timely correcting measures, avoiding mistakes, limiting the improper implementation of the spirit of the decisions that have been issued The State Bank should have appropriate interest rate and price policies through the effective use of monetary policy tools to stabilize the macroeconomics, promote growth, improve the policy of deposit interest rates, and lend flexibly in line with market changes The State Bank should regularly check and monitor overdue and bad debts of commercial banks to take appropriate measures to handle them promptly In addition, the State Bank should strengthen support, create conditions for financial institutions, legalize assets to recover bad debts for banks Set out specific plans to reduce bad debts by commercial banks v For commercial banks According to the results of the study, the ratio of equity to total assets has a positive impact on the profitability of the bank Raising equity and reasonably using this capital helps commercial banks improve their profitability Banks can increase 68 equity by issuing shares, issuing convertible bonds However, commercial banks need to be careful in increasing profitability by increasing equity because this is not the most effective option Commercial banks need to make good use of the funds raised Although the size of deposits has a positive impact on the profitability of the bank, this capital has a large input cost Therefore, banks need to balance credit and balance lending interest rates, because high lending rates are unlikely to bring high profits to banks After all, the credits also carry many potential risks when the economy is volatile The bank needs to have a specific and stable development plan According to the results of the study, the larger the scale, the higher the profitability of commercial banks However, besides increasing the scale, banks also need to pay attention to the quality of investment activities on a scale to ensure the efficiency it brings According to the results of the study, income diversification harms the profitability of commercial banks Therefore, banks need to balance non-interest expenses and non-interest income to maximize the bank's profits In addition, the bank also needs to clearly define the development objectives and orientations to have appropriate operation policies The business of commercial banks is sensitive and volatile in the face of changes in the macro-economy Through research, it can be seen that inflation has a positive effect on the profitability of banks Commercial banks need to update and effectively exploit information on the economic, political, and social situation to promptly set out the direction of operation to minimize losses due to objective causes due to the lack of information 5.3 Limitations of the thesis The sample focused on only 28 Vietnamese commercial banks with full data and high reliability, so it is not possible to represent the whole Vietnamese commercial banking system In addition, the sample is quite limited in terms of research time Therefore, there will be certain errors such as reducing the level of meaning of independent variables, affecting the outcome of the model 69 In addition, the collection of updated data to 2020 is also difficult because the study is mainly based on secondary data from the financial statements of commercial banks, while some commercial banks not publish enough information The paper cannot include all the elements in the model, so the results of the elements in the model only make sense when the other factors are constant In addition, the study is based on factors in previous studies and no new factors have been included in the model 70 REFERENCES VIETNAMESE DOCUMENTS Nguyen Dang Don (2012), Nghiep vu ngan hang thuong mai, Nha xuat ban Lao dong Quoc Hoi (2010), No 47/2010/QH12 dated June 16, 2010 Law on Credit Institutions 28 Vietnamese commercial banks, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020 Financial statements ENGLISH DOCUMENTS Al-Muharrami, S., & Matthews, K (2009) Market power versus efficientstructure in Arab GCC banking Applied Financial Economics, 19(18), 1487-1496 Albertazzi, U., & Gambacorta, L (2009) Bank profitability and the business cycle Journal of Financial Stability, 5(4), 393-409 Alexiou, C., & Sofoklis, V (2009) Determinants of bank profitability: Evidence from the Greek banking sector Economic annals, 54(182), 93-118 Anbar, A., & Alper, D (2011) Bank specific and 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Commercial Bank Military Commercial Joint Stock Bank BVB CTG EIB HDB KLB LPB MBB Vietnam Maritime Commercial Joint Stock Bank MSB Nam A Commercial Joint Stock Bank National Citizen Commercial Bank Orient Commercial Joint Stock Bank Petrolimex Group Commercial Joint Stock Bank Sai Gon Joint Stock Commercial Bank Saigon Bank for Industry and Trade Saigon – Hanoi Commercial Joint Stock Bank Sai Gon Commercial Joint Stock Bank Vietnam Technological and Commercial Joint Stock Bank Tien Phong Commercial Joint Stock Bank Viet A Commercial Joint Stock Bank Viet Capital Commercial Joint Stock Bank Joint Stock Commercial Bank for Foreign Trade of Vietnam Vietnam International Commercial Joint Stock Bank Vietnam Prosperity Joint Stock Commercial Bank NAB NCB OCB PGB SCB SGB SHB STB TCB TPB VAB VCA/CAB VCB VIB VPB 76 APPENDIX DATA PROCESSING RESULTS 2.1 Regression results according to the Pooled OLS model Source SS df MS Number of obs = 280 F(8, 271) = 21.31 Model 62786743 078483429 Prob > F = 0.0000 Residual 997846012 271 003682089 R-squared = 0.3862 Adj R-squared = 0.3681 Root MSE = 06068 Total 1.62571344 279 Std Err .00582693 roe Coef t P>|t| [95% Conf Interval] size 0278035 013638 2.04 0.042 0009536 0546534 cr -.152736 2238586 -0.68 0.496 -.5934591 2879871 cap 0089717 015765 0.57 0.570 -.0220657 040009 nigi -.0434153 0052394 -8.29 0.000 -.0537304 -.0331002 topb -.0089097 0109371 -0.81 0.416 -.0304422 0126227 inde 0469972 0119608 3.93 0.000 0234492 0705451 gdp -.0006914 0030666 -0.23 0.822 -.0067288 0053459 inf 0025298 0006481 3.90 0.000 0012538 0038057 _cons -.504314 0688699 -7.32 0.000 -.639902 -.3687261 df MS Source SS Number of obs = 280 F(8, 271) = 151.24 Model 770716811 096339601 Prob > F = 0.0000 Residual 172631828 271 000637018 R-squared = 0.8170 Adj R-squared = 0.8116 Total 943348639 279 003381178 Root MSE = 02524 roa Coef Std Err size 0398952 0056726 t P>|t| [95% Conf Interval] 7.03 0.000 0287273 0510631 cr -.0619321 0931113 -0.67 0.507 -.2452457 1213814 cap 1797741 0065572 27.42 0.000 1668645 1926837 nigi -.0057693 0021793 -2.65 0.009 -.0100597 -.0014789 topb -.0001883 0045491 -0.04 0.967 -.0091445 0087679 inde -.0213948 004975 -4.30 0.000 -.0311893 -.0116003 gdp -.0003021 0012755 -0.24 0.813 -.0028133 002209 inf 0002486 0002696 0.92 0.357 -.0002821 0007793 _cons -.1638961 0286456 -5.72 0.000 -.2202923 -.1074999 77 2.2 Regression results according to the FEM model Fixed-effects (within) regression Number of obs = 280 Group variable: bank Number of groups = 28 R-sq: Obs per group: within = 0.5565 = 10 between = 0.3044 avg = 10.0 overall = 0.3388 max = 10 corr(u_i, Xb) roe = -0.7030 Coef Std Err t F(8,244) = 38.26 Prob > F = 0.0000 P>|t| [95% Conf Interval] size 1128966 0222108 5.08 0.000 0691473 1566459 cr -.0348329 3179873 -0.11 0.913 -.6611832 5915174 cap 082597 0174018 4.75 0.000 0483201 1168739 nigi -.0479699 0038183 -12.56 0.000 -.0554909 -.0404489 topb 0044664 0078841 0.57 0.572 -.0110632 019996 inde 068532 0188319 3.64 0.000 0314381 1056258 gdp 0004988 0020932 0.24 0.812 -.0036242 0046218 inf 0044881 0005648 7.95 0.000 0033757 0056006 _cons -1.388331 1356725 -10.23 0.000 -1.65557 -1.121093 sigma_u 0695309 sigma_e 04122784 rho 73987426 (fraction of variance due to u_i) F test that all u_i=0: F(27, 244) = 12.71 Prob > F = 0.0000 78 Fixed-effects (within) regression Number of obs = 280 Group variable: bank Number of groups = 28 R-sq: Obs per group: within = 0.8372 = 10 between = 0.8011 avg = 10.0 overall = 0.7647 max = 10 corr(u_i, Xb) = -0.7013 Std Err t F(8,244) = 156.86 Prob > F = 0.0000 roa Coef P>|t| [95% Conf Interval] size 0537077 0096968 5.54 0.000 0346077 0728077 cr 024297 1388265 0.18 0.861 -.2491543 2977483 cap 2291074 0075973 30.16 0.000 2141428 2440719 nigi -.0047709 001667 -2.86 0.005 -.0080544 -.0014874 topb 0004476 003442 0.13 0.897 -.0063323 0072275 inde 0047688 0082216 0.58 0.562 -.0114256 0209632 gdp 0000203 0009138 0.02 0.982 -.0017797 0018204 inf 0009014 0002466 3.66 0.000 0004157 001387 _cons -.4962479 0592318 -8.38 0.000 -.6129187 -.3795771 sigma_u 03226952 sigma_e 0179992 rho 76270927 (fraction of variance due to u_i) F test that all u_i=0: F(27, 244) = 10.70 Prob > F = 0.0000 79 2.3 Regression results according to the REM model Random-effects GLS regression Number of obs = 280 Group variable: bank Number of groups = 28 R-sq: Obs per group: within = 0.5436 = 10 between = 0.2990 avg = 10.0 overall = 0.3636 max = 10 corr(u_i, X) roe = (assumed) Coef Std Err z Wald chi2(8) = 267.93 Prob > chi2 = 0.0000 P>|z| [95% Conf Interval] size 0783638 0189012 4.15 0.000 0413182 1154095 cr -.1449362 2892978 -0.50 0.616 -.7119496 4220771 cap 0551983 0166426 3.32 0.001 0225794 0878173 nigi -.0479661 0039521 -12.14 0.000 -.0557121 -.0402201 topb 0041753 0081704 0.51 0.609 -.0118383 020189 inde 0517013 0160027 3.23 0.001 0203366 0830661 gdp -.0001115 0021794 -0.05 0.959 -.0043831 00416 inf 0034671 0005361 6.47 0.000 0024163 0045179 _cons -.964462 1079765 -8.93 0.000 -1.176092 -.752832 sigma_u 04140408 sigma_e 04122784 rho 50213285 (fraction of variance due to u_i) 80 Random-effects GLS regression Number of obs = 280 Group variable: bank Number of groups = 28 R-sq: Obs per group: within = 0.8290 = 10 between = 0.8503 avg = 10.0 overall = 0.8063 max = 10 Wald chi2(8) = 1187.60 Prob > chi2 = 0.0000 corr(u_i, X) = (assumed) roa Coef Std Err size 050584 0081029 z P>|z| [95% Conf Interval] 6.24 0.000 0347026 0664654 cr -.0322949 1252955 -0.26 0.797 -.2778695 2132797 cap 2123306 0072951 29.11 0.000 1980326 2266287 nigi -.0052902 0017606 -3.00 0.003 -.0087409 -.0018395 topb 0008469 0036408 0.23 0.816 -.0062888 0079827 inde -.0147612 0068681 -2.15 0.032 -.0282224 -.0013 gdp -.0001984 0009725 -0.20 0.838 -.0021044 0017076 inf 0004152 0002358 1.76 0.078 -.000047 0008774 _cons -.3098029 0457483 -6.77 0.000 -.3994679 -.220138 sigma_u 01587156 sigma_e 0179992 rho 4374303 (fraction of variance due to u_i) ... Bank, Nam A Bank, NCB Bank, OCB Bank, PG Bank, SCB Bank, SAIGONBANK, SHB Bank, Sacombank, Techcombank, TPBank, VietABank, Viet Capital Bank, Vietcombank, VIB Bank, VPBank in the 10 years from. .. statements of twenty-eight Vietnamese commercial banks including ABBank, ACB Bank, Agribank, Bac A Bank, BIDV, BAOVIET Bank, VietinBank, Eximbank, HDBank, Kienlongbank, LienVietPostBank, MBBank, MSB Bank, ... choosing the topic "Determinants of bank profitability: Evidence from Vietnam" The project was studied to analyze the factors affecting bank profitability of Vietnamese commercial banks From that, the