Other external factor effecting the bank profitabi- 123docz.net

CHAPTER 1: THEORETICAL FRAMEWORK AND RESEARCH

1.2. General review of Bank profitability

1.2.4. Other external factor effecting the bank profitability

However, it can be seen that usually determinants of bank profitability are divided into two groups which are the internal or banks specific group and the external or macro-economic group. Internal factors are related to the bank

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management level and are controllable. The internal factors can be different between different banks. Meanwhile external factors are uncontrollable since they are about the market and economy condition which can have the same effect on every banks. In addition to the internal factors mentioned above, there are some external factors effecting the bank profitability such as:

Annual growth of GDP

There are mixed results regarding the effect of economic growth which is measured by GDP growth on profitability. Nevertheless, it is believed that the loan portfolio as a majority of bank assets can be negatively affected by the bad economic conditions. A low asset quality can force the bank the make banks increase the provision that reduces the bank reported income. On the other hand, when the economy experiences positive growth, banks can benefit from the improvement of customers‟ business and credit solvency (Athanasoglou et al., 2008).

Inflation rate (INF)

Recent studies all suggested that inflation rate has a positive relationship to banks‟ returns. When the inflation rate is high which lead to higher risk, the bank‟s management level anticipates inflation expectations and adjust interest rates of lending and borrowing to achieve higher profits.

1.1. Developing the Hypotheses and conceptual model

From the perspective of bank definition, it is important to see that a bank with multiple function as BIDV would make it hard for the examination of profitability, given the pure fact that the elements of commercial function differ vastly from those of investment field. Furthermore, the profit flow from investment also has longer term of maturity, making it hard to give out practical implications. To ensure the focal point and efficiency of this study in understanding the profitability of BIDV, it is suggested to concentrate on commercial bank aspect only. In the other words, the study would omit the

profit flow from investment activity and would merely track the profitability of BIDV from the deposit and lending operation. This limitation of study scope also helps improving the effectiveness of making comparison of BIDV performance with other commercial banks, since the number of investment bank in Vietnam is highly scarce and limited function.

The above discussion reveals that the profitability of commercial bank is controlled by a wide range of elements which vary significant across the different cycle of economy. When it comes to details of each element, there existed dispute on how the profit of commercial bank would correspond with the changes of the element itself, as well as the relative correlation of the elements. For instance, one might wonder whether it is better off to announce high dividend ratio for creating positive financial indication so that performance of the subsequent period would see a rise or would it be better to delay dividend payment to facilitate profit making capacity. The same question might be raised for other indicators of the bank, with each constituting the important decision making by bank. Meanwhile, the existing literature in Vietnam remain limited which make it hard for the manager to refer to and to develop a relevant strategy in attempt of profit maximization.

For such as bank with diversified operation as BIDV, the shortage of theoretical support makes every decision a risky bet to the bank.

By way of conclusion, controversy over the relationship between factors of profitability suggests that it is important to access full understanding on the practical research. The study with employment of secondary data is required to reflect the current profit making capacity of typical Vietnamese bank as BIDV as well as related factors acting as forcing determinants

Based on the factors retrieved from literature, the study comes to the hypotheses that:

H1a: Non-performing loan rate holds significantly negative relationship with the bank profitability

H1b: Capital Adequacy ratio holds significantly positive relationship with the bank profitability

H1c: Loan to deposit ration holds significantly positive relationship with the bank profitability

H1d: Loan Loss Provision ration holds significantly negative relationship with the bank profitability

H1e: Total Assets holds significantly positive relationship with the bank profitability

H1f: Dividend payment ratio holds significantly positive relationship with the bank profitability

From the factors mentioned in this study, it proposes a regression formula for measuring bank profitability as the following

Model 1: ROA t = β 0 + β 1 NPLR t + β 2 CAR t + β 3 LDR t + β 4 LLPR t + β 5 LnTA + β 6 DR +ε t

Model 2: ROE t = β 0 + β 1 NPLR t + β 2 CAR t + β 3 LDR t + β 4 LLPR t + β 5ln LnTA + β 6 DR +ε t

Of which:

ROA t: Return on Assets at time t ROE t: Return on Equity at time t β 0: Constant term

β 1 - β 4: Coefficient of variables

NPLR t : Non-perfoming Loan ratio at time t CAR t : Capital Adequacy ratio at time t LDR t : Loan to Deposit ratio at time t LLPR t : Loan Loss Provision ratio at time t

LnTA t : Natural Logarithmic Total Asset at time t

DR t : Dividend Ratio at time t ε t: Error efficient

Other external factor effecting the bank profitability

Internal factors effecting the bank profitability

Brief of BIDV profit making performance in 2006-2017