Factors affecting the financial stability of viet nam commercial bank

THE STATE BANK OF VIET NAM MINISTRY OF EDUCATION AND TRAINING BANKING UNIVERSITY HO CHI MINH CITY NGUYỄN NGỌC BẢO PHƯƠNG FACTORS AFFECTING THE FINANCIAL STABILITY OF VIET NAM COMMERCIAL BANKS GRADUATION THESIS MAJOR: FINANCE AND BANKING CODE: 52340201 HO CHI MINH CITY, 2021 THE STATE BANK OF VIET NAM MINISTRY OF EDUCATION AND TRAINING BANKING UNIVERSITY HO CHI MINH CITY NGUYỄN NGỌC BẢO PHƯƠNG FACTORS AFFECTING THE FINANCIAL STABILITY OF VIET NAM COMMERCIAL BANKS GRADUATION THESIS MAJOR: FINANCE AND BANKING CODE: 52340201 SUPERVISOR TRẦN NGUYỄN MINH HẢI, PHD HO CHI MINH CITY, 2021 i COMMITMENT The author commits an honorary statement about your scientific thesis, specifically as follows: Full name of the author: Nguyễn Ngọc Bảo Phương Born on October 6, 2000 in Khanh Hoa, Viet Nam Hometown: Khanh Hoa, Viet Nam Currently a 4th year student majoring in Finance and Banking, Banking University Ho Chi Minh City While studying at Banking University Ho Chi Minh, the author declares that The thesis: Factors affecting the financial stability of Viet Nam commercial banks Major in: Finance - Banking Code: 52340201 Science supervisor: Trần Nguyễn Minh Hải, PhD This thesis has never been submitted to any anywhere else before The thesis is the author's own research work The research results are reliable, in which there are no previously published contents or contents made by others except for cited sources fully in the thesis Ho Chi Minh City, September 2021 The Author Nguyễn Ngọc Bảo Phương ii ACKNOWLEDGMENT Firstly, the author would like to thank the academic staff and support staff of Banking University Ho Chi Minh City because of their dedicated teaching and support It is a great honor and pride for the author to become a student at Banking University Ho Chi Minh City Secondly, the author would like to express the deep gratitude to the Supervisor, Dr Trần Nguyễn Minh Hải, who wholeheartedly supported, patiently guided and encouraged the author during doing this thesis Finally, the author would love to express big thank to family and friends who always give unconditional encouragement to the author during studying iii LIST OF ABBREVIATIONS Abbreviation Meaning CIR Cost to income ratio CD The customer loan balance (before provision) to deposits DEPTA Deposit rate EAT Earning after tax rate FEM Fixed Effects Model GDP Gross domestic product GLS Generalized Least Squares IMF International Monetary Fund INF Inflation rate LLP The ratio of loan loss provisions to total assets NIM Net Interest Margin OLS Ordinary Least Square OECD Organization for Economic Co-operation Development REM Random Effects Model ROA Return on Assets SBV The State Bank of Viet Nam SIZE The bank size WB World Bank WDI World Development Indicators iv LIST OF TABLE AND FIGURE LIST OF TABLE Table 2.1 Summary of relevant empirical studies 17 Table 2.2 Summary of variables used frequently in relevant studies 20 Table 3.1 Variables in the research model 28 Table 3.2 Data sources of the variables 31 Table 4.1 Descriptive Statistics 36 Table 4.2 Correlation matrix 37 Table 4.3 Test results using GLS model and OLS, FEM, REM 39 Table 4.4 Summary of research results using GLS model 45 LIST OF FIGURE Figure The z-score of Viet Nam commercial banks in the period of 2010 - 2020 29 v CONTENT COMMITMENT i ACKNOWLEDGMENT ii LIST OF ABBREVIATIONS iii LIST OF TABLE AND FIGURE iv CHAPTER INTRODUCTION 1.1 Reasons for choosing the topic 1.2 Research objectives and questions 1.2.1 Overall research objectives 1.2.2 Specific research objectives 1.2.3 Research question 1.3 Research scope and subject 1.3.1 Research subject 1.3.2 Research scope 1.4 Research methodology 1.4.1 The approach methods 1.4.2 Data collection methods 1.4.3 Data processing methods 1.5 Framework of the research process 1.6 New contributions 1.6.1 In empirical literature 1.6.2 In practice 1.7 The composition of the thesis CHAPTER LITERATURE REVIEWS 2.1 The financial stability of commercial banks 2.1.1 Definition 2.1.2 The importance of financial stability of commercial banks 10 2.1.3 Factors affecting the financial stability of commercial banks 11 2.2 Measuring financial stability using the z-score model 14 2.2.1 The z-score model 14 vi 2.2.2 The advantages and disadvantages of the z-score model 15 2.3 The relevant emprical studies 17 2.4 The general regression model for population 20 2.5 Summary of chapter 21 CHAPTER RESEARCH METHODS 23 3.1 The approach methods 23 3.1.1 Research model of factors affecting financial stability of Viet Nam commercial banks… 23 3.1.2 Research variable selection 24 3.2 Data collection methods 29 3.2.1 Research scope 29 3.2.2 The data sources 30 3.3 Data processing methods 31 3.4 Summary of chapter 35 CHAPTER RESEARCH RESULTS AND DISCUSSIONS 36 4.1 Research result descriptive statistics 36 4.2 Research results 38 4.2.1 The final model chosen 38 4.2.2 Test results 39 4.3 Discussions 42 4.4 Summary of chaper 45 CHAPTER RECOMMENDATIONS AND CONCLUSIONS 47 5.1 Recommendations 47 5.2.1 Recommendations for commercial banks 47 5.2.2 Recommendations for the State Bank of Viet Nam 49 5.3 Conclusions 49 5.4 Thesis limitations and research direction 51 5.4.1 Limitations of the thesis 51 5.4.2 The research direction 51 5.5 Summary of chapter 52 vii THESIS SUMMARY i TÓM TẮT KHÓA LUẬN iii REFERENCES v APPENDIX xi APPENDIX xii APPENDIX xix CHAPTER INTRODUCTION The content of chapter identifies the research problem as the factors affecting the financial stability of Viet Nam commercial banks Accordingly, the reasons for choosing the topic, research subjects, research objectives, research scope, research methods, research contributions and research processes are presented in detail in chapter 1.1 Reasons for choosing the topic Commercial banks systems play intermediary role to facilitate saving and capital formation in the economy These activities are involved in transforming maturity of investments and providing insurance to depositors potential liquidity needs which make banks more fragile (Diamond & Dybvig, 1983) History has shown that banks were at the center of the global financial crisis in 2008, and any negative fluctuation in the banksing system has caused enormous damage to the economy in a long time Therefore, countries around the world are always looking for solutions to assess and measure the financial stability of commercial banks in the context of globalization and interconnectedness Studying on financial stability also contributes to a better understanding of the organizational complexity, size, and optimal types of operations commercial banks need to weather another financial crisis (Kiemo et al., 2019) Schinasi (2004) expressed that financial stability can be thought of in terms of the financial system’s ability Anginer et al (2014) believed that a banks's financial stability is a stable state in which the banksing system effectively performs functions such as resource allot, risk dispersion, and income distribution In which, a financial system is in a range of stability whenever it is capable of facilitate (rather than impeding) the performance of an economy, and of dissipating financial imbalances that arise endogenously or as a result of significant adverse and unanticipated events Boyd & Graham (1986), Hannan & Hanweck (1988) and Hesse & Cihak (2007) introduced zscore as the probability of a banks default to measure the financial stability of commercial banks The z-score is a model of evaluating financial stability performance, it x Rahman, M M., Hamid M K., & Khan, A M (2015) Determinants of Banks Profitability: Empirical Evidence from Bangladesh International Journal of Business and Management, 10(8) Ramskyi, A., & Budnichenko, I (2018) Financial stability of a banks – factor of stability of banksing system European scientific journal of Economic and Financial innovation, 2617-8648 Rajhi, W., & Hassairi, S A (2013) Islamic banks and financial stability: a comparaty empirical analysis between mena and Southeast Asian Countries Universite du Sud- Toulon Var, 37, 149-177 Roy, A D (1952) Safety first and the folding of assets Econometrica, 20(3), 431 Sufian, F., & Habibullah, M S (2012) Globalizations and banks performance in China Research in International Business and Finance, 26(2), 221–239 Schinasi, G J (2004) Defining Financial Stability IMF Working Paper Retrieved on September, 2021 from https://www.imf.org/external/pubs/ft/wp/2004/wp04187.pdf Swamy, V (2014) Bank Size, Credit and the Sources of Bank Market Risk Bis Working Paper, 238 Tabak, B., Fazio, D., & Cajueiro, D (2012) The relationship between banksing market competition and risk-taking: Do size and capitalization matter? Journal of Banking and Finance, 36(12), 3366–3381 Tsoukalas (2003) Macroeconomic Factors and Stock Prices in the Emerging Cypriot Equity Market Managerial Finance, 29(4), 87–92 Wassim, R., & Slim, A H (2013) Islamic banks and financial stability: A comparative empirical analysis between MENA and Southeast Asian countries EconPapers, 37, 149-177 Wellink, N (2002) Central banks as guardians of financial stability Current Issues in Central Banking, 14, 19-45 Yong, T., & Christos, F (2013) Risk, capital and efficiency in Chinese Banking Journal of Banking and Finance, 23, 56-67 xi APPENDIX List of 28 commercial banks viet nam used for analysis and evaluation Number Name of banks Code An Binh Commercial Joint Stock Banks ABB Asia Commercial Joint Stock Banks ACB BAC A Commercial Joint Stock Banks BAB Bao Viet Joint Stock commercial Banks BaoViet Joint Stock Commercial Banks for Investment and Development of Viet Nam BID Viet Capital Commercial Joint Stock Banks BVB Viet Nam Thuong Tin Commercial Joint Stock Banks - Vietbanks CTG Viet nam Export Import Commercial Joint Stock - Eximbanks EIB Ho Chi Minh city Development Joint Stock Commercial Banks HDB 10 Kien Long Commercial Joint Stock Banks KLB 11 LienViet Commercial Joint Stock Banks – Lienviet Post Banks LPB 12 Military Commercial Joint Stock Banks MBB 13 The Maritime Commercial Joint Stock Banks MSB 14 Nam A Commercial Joint Stock Banks NAB 15 National Citizen Commercial Joint Stock Banks NVB 16 Orient Commercial Joint Stock Banks OCB 17 Petrolimex Group Commercial Joint Stock Banks PGB 18 Sai Gon Commercial Joint Stock Banks SCB 19 Saigon Banks for Industry & Trade SGB 20 Saigon-Hanoi Commercial Joint Stock Banks SHB 21 Southeast Asia Commercial Joint Stock Banks SSB 22 Saigon Thuong TinCommercial Joint Stock Banks - Sacombanks STB 23 Viet Nam Technological and Commercial Joint Stock Banks - techcombanks TCB 24 TienPhong Commercial Joint Stock Banks TPB 25 Viet A Commercial Joint Stock Banks VAB 26 Joint Stock Commercial Banks for Foreign Trade of Viet Nam VCB 27 Viet Nam International Commercial Joint Stock Banks VIB 28 Viet Nam Commercial Joint Stock Banks for Private Enterprise - VPBanks VPB xii APPENDIX Overseas empirical studies Currently, financial stability and factors affecting financial stability of commercial banks are increasingly interested and attracted many domestic and international studies Beck (2008) showed that the instability and fragility of financial institutions and individual commercial banks is becoming increasingly worrying because it puts the national financial safety net under great pressure A number of systemic banking and financial crises began with crises in individual banks Furthermore, the failure of large international banks with presence in some countries can have serious effects on crossborder financial activity (Herstatt, 1974) Ivičić et al (2008) studied the impact of specific macroeconomic variables and banking characteristics on the liquidity risk of banks in Central and Eastern European countries from 1996 to 2006 The individual regression estimates for each country provide empirical evidence that bank stability decreases during periods of high credit growth, inflation, and banking concentration A bank's liquidity risk is measured by the zscore, which measures the distance to bankruptcy In addition to the actual z-score, the study builds a conditional z-score that directly links bank failure risk with specific bank and macroeconomic indicators The measures of payment risk applied resulted in an increase in bank stability in all countries of Central and Eastern Europe during the study period Soedarmono et al (2011) examined whether Asian banks were morally at risk during the 1997 Asian crisis To measure earnings volatility and reflect bank risk strategies The study uses the standard deviation of return on average assets (SDROA) and return on average capital (SDROA) is calculated from the average return on assets (ROAA) taken from period (3 year average) Similarly, (SDROE) is calculated from return on average capital (ROAE) over years This approach is consistent with Agoraki et al (2011) To determine the bank's liquidity risk, the study uses a z-score based on ROAA xiii The z-score showed the standard deviation that a bank's ROAA must fall below the expected value before capital is completely exhausted Based on a sample of commercial banks from 12 Asian countries in the period 2001-2007, the research results show that higher bank market strength leads to higher volatility Although banks are better capitalized in less competitive markets, the risk of default is still higher Research results show that such behavior depends on the economic environment Higher economic growth contributes to neutralizing higher risks and higher volatility in less competitive markets Rahman et al (2012) researched the relationship between bank ownership structure and risk and the impact of state regulations on capital This empirical analysis is limited to Malaysian commercial banks for the period 1995-2008, including domestic banks and 12 foreign banks The study uses the z-score to measure the bank's riskiness, where the z-score is calculated as ROA (return before tax on assets) plus CAP (capital-to-asset ratio) divided by the standard deviation of (ROA) Five-year data are used to calculate the standard deviation of ROA with the expectation that the 5-year period is sufficient to reflect changes and fluctuations in bank profitability (Nash & Sinkey, 1997) The results show that the ownership structure of Malaysian banks has a positive effect on banks; shows that the influence of large shareholders in Malaysian banks helps to reduce risk and increase bank stability Family ownership and foreign ownership increase bank risk through higher bankruptcy risk while state ownership reduces risk and increases stability for banks Fu et al (2014) studied the relationship between competition and financial stability, using information and data from 14 Asia Pacific economies from 2003 to 2010 to examine the effects of competition Banks, concentration, regulations and institutions of countries on the fragility of banks are determined through the probability of bankruptcy and the z-score of banks The results show that more concentration leads to higher financial instability and lower market power also causes bank risk, after controlling for macroeconomic and bank-specific factors, regulations and institutions In terms of regulations and institutions, the results show that restrictions on market entry can xiv provide stability for banks, while higher deposit insurance schemes increase uncertainty stability of banks Chiaramonte et al (2016) evaluated the accuracy of the z-score, which is a widely used proxy variable to measure the financial stability of banks, based on a sample of banks European goods from 12 countries in the period 2001-2011 Specifically, the study analyzes the z-score and related variables in the CAMELS model, using the Probit regression model and additional log-log The results show that the ability to identify and predict risks of z-score, during the study period (2001 - 2011) and also in the crisis years (2008-2011) is at least as good as using the z-score using variables in the CAMELS model, but with the advantage that less data is needed for analysis Finally, Z-score proved to be more effective when applied to more complex banking business models such as the case of large banks and commercial banks Hammami & Boubaker (2015) examined the impact of ownership structure on banking risk, using information on the financial statements of 72 commercial banks from 10 Middle East and North Africa (MENA) countries from 10 countries in the Middle East and North Africa (MENA) 2000-2010 After controlling for bank idiosyncratic and country effects, the results show that concentrated ownership structure is associated with increased bank risk Furthermore, foreign banks have a higher risk than domestic banks; and state-owned banks are more stable For listed banks, family ownership ratio has a positive impact on credit risk Family owners often impose the most dangerous strategies when they hold a higher percentage of shares For unlisted banks, family and institutional ownership ratios have a negative effect on credit risk Thus, the effect of ownership on bank risk depends on whether the bank is listed or unlisted Nguyen et al (2012) searched to investigate the relationship between market power, revenue diversification, and examine the interaction between market power and revenue diversification that affects the financial stability of enterprises individual banks or not The study included 151 commercial banks from four South Asian countries, including Bangladesh, India, Pakistan, and SriLanka, the sampling period was from 1998 to 2008 The study used the GMM method to estimate the regression Financial stability xv is measured through the z-score The independent variables in the model include: bank size, cost management efficiency, marginal interest income, capital sources, bad debt ratio, listed banks Research results show that South Asian banks with greater market power focus on traditional interest income activities, however, these banks will be more stable if they focus on interest income and non-interest income Khouri & Arouri (2016) studied 59 Gulf Cooperation Council (GCC) banks, from 2004-2012 to study the relationship between banking and financial stability, performance and credit growth The GMM method is used to estimate the dynamic table model Bankspecific factors used in the study include: board size, foreign ownership structure, bank size, loan-to-deposit ratio, and bad debt ratio Macro factors include the growth of GDP (GDP), inflation rate (INF) Financial stability is measured by the z-score The study shows that credit growth does not seem to affect the financial stability of banks to a certain extent, however when credit growth is higher banks become less stable The research results show that there is a need for closer supervision to monitor and control loan growth and provide warnings about potential risks related to credit growth Swamy (2014) studied 58 commercial banks in India, over a 12-year period from 1996-2009 to examine the correlation of bank stability measures The study uses VAR model to study bank stability and confirms the importance of specific variables such as liquidity, asset quality, capital adequacy and profitability The obtained results of the study are to analyze the stability of the banking system, the relationship between banking stability and financial stability, the resilience of the banking system and financial stability The study shows that the financial system specifically the Indian banking system is consistently stable compared to other countries Madi (2016) studied UK PLC banks and construction associations of the period before and during the financial crisis, before the financial crisis from 2005 - 2006, during the financial crisis from 2008 - 2010 The aim is to see if these types of institutions differ in the factors that determine their financial stability The study uses z-score to measure financial stability The independent variables in the model include: cost-to-income ratio, income diversification, bank lending behavior, bank size, economic growth GDP The xvi regression results highlight a positive and statistically significant relationship between GDP and financial stability of UK banks Income diversification contributes to financial stability There is no relationship between lending behavior and financial stability An increase in the expense-to-income ratio will have a negative impact on financial stability At the same time, an increase in bank size also leads to a decrease in financial stability Shortly, most of the empirical studies show that micro and macro factors affect the financial stability of commercial banks These studies have also made an impact in recent decades, inspiring in the recommendations of international organizations such as WB, IMF and in the reality of financial stability in the world Accordingly, the study of factors affecting the financial stability of commercial banks in order to ensure sustainable development of the commercial banking system xvii Domestic empirical studies Nguyễn Minh Hà & Nguyễn Bá Hướng (2016) determined the factors affecting the risk of bank bankruptcy in Viet Nam using the z-score method, thereby suggesting appropriate policies to enhance stability and soundness in the banking sector operations of a joint stock commercial bank in Viet Nam The study uses data of 23 Viet Nam joint stock commercial banks with 115 observations from 2009-2013 The study found factors that have a negative relationship with bank failure risk such as: credit growth, the ratio of loan loss provisions to total assets for bad debts, ratio of net interest income, equity to total assets, income diversification, state ownership, number of years of operation of banks and listed banks Factors that have a positive relationship with bank failure risk include cost management efficiency and scale Võ Xuân Vinh & Trần Thị Phương Mai (2015) examined the profitability and risk issues of Viet Nam commercial banks and the impact of income diversification The study uses regression estimation method for panel data with a sample of 37 Viet Nam commercial banks in the period 2006 - 2013 The z-score, (RAROA) and (RAROE) used as bank risk measurement variables The results showed that the more diversified banks are, the higher the profitability, but the risk-adjusted return decreases Nguyễn Đăng Tùng & Bùi Thị Len (2015) used descriptive statistical methods to assess the financial situation of banks listed on the Viet Nam stock market through asset growth, credit growth, profit after tax and bad debt ratio – are the factors that greatly affect the future performance of banks In addition, the study uses the Altman Z'' 40 model to assess the bankruptcy risk of the Viet Nam commercial banking system through the financial statement data of 39 commercial banks in the period 2008 - 2013 The results show that the average Z'' index of the commercial banks is within the safe limit, the volatility decreases over the years and there is a difference between the different capital size groups through the One way ANOVA test The group of banks with the largest and smallest capital size has Z'' smaller than the other two groups xviii Hồng Cơng Gia Khánh & Trần Hùng Sơn (2015) used data from 25 Viet Nam commercial banks with 214 observations in the period from 2005 to 2013, to examine the relationship between financial market development and risks of financial institutions in Viet Nam Commercial Bank The study uses z-score as a measure of credit risk, liquidity risk and market risk of commercial banks In addition, the study also uses Kohler's (2015) method to divide the z-score into two variables (RAROA), which reflects risk-adjusted profitability and (RACAR), which reflects the size of equity over total assets for risk Research results show that financial market development in Viet Nam tends to increase the bank's risk Factors such as asset structure, capital adequacy, and asset size reduce bank risk Profitability tends to increase bank risk, suggesting that banks tend to engage in high-risk activities in search of higher returns The study also shows that economic growth is inversely related to risk The research results did not find a relationship between operational efficiency, income diversification and exposure to bank risk Nguyễn Thanh Dương (2013) studied a sample of 36 commercial banks in Viet Nam in the period 2006-2011 and used quantitative methods to determine the impact of specific criteria on bank risk The results show that the ratio of provision expense for credit risk to net interest income and the ratio of net interest income to average total assets are positively related to bank risk; while the ratio of equity to total mobilized capital; and short-term loan-to-deposit ratio is inversely related to bank risk The study also affirms that the increase in equity is a prerequisite to protect the bank against the risk of bankruptcy, and gives suggestions on policies and improves the risk management level of the banking system improve the function of asset and capital management In general, most of the empirical studies show that micro and macro factors affect the financial stability of commercial banks These studies have also made an impact in recent decades, inspiring in the recommendations of international organizations such as WB, IMF and in the reality of financial stability in the world Accordingly, the study of factors affecting the financial stability of commercial banks in order to ensure sustainable development of the commercial banking system xix APPENDIX Steps to perform quantitative analysis using STATA 14 in the study on financial stability of 28 Viet Nam commercial banks from 2010-2020 Step 1: Import data from excel file into STATA, with table data format Step 2: Run descriptive statistics with the SUMMARIZE command for the variables in the model to exclude variables with inappropriate values that may affect the research results Step 3: Implement a simple regression model with Ordinary Least Squares (OLS) model to perform CORR and VIF tests to check for multicollinearity xx Testing for the phenomenon of heteroskedasticity P-value>5%: Accept H0 (there is not enough basis to reject H0) There is no phenomenon of heteroskedasticity in the regression model Wooldridge test for autocorrelation P-valuechi2=0,000) and violates the autocorrelation (Prob > F=0,000) Therefore, the author chooses the GLS model to overcome these heteroskedasticity and autocorrelation Step 7: Run the GLS regression model to see the results and select the independent variables that have an impact on the dependent variable with significance (p-value) less than or equal to 10% xxiv ... Determining the factors affecting the financial stability of Viet Nam commercial banks ▪ Determine the degree of influence of these factors on the financial stability of commercial banks in Viet Nam. .. affect the financial stability of Viet Nam commercial banks, in which this result from the GLS model shows that The impact of factors affecting the financial stability of Viet Nam commercial banks... financial stability of Viet Nam commercial banks 1.2.3 Research question - What factors can affect the financial stability of commercial banks? - How these factors affect the financial stability of Viet