1172 factors affecting bank profitability the case of commercial banks in vietnam bachelor luận văn TCNH vu thu ha supervisor nguyen duy linh tp HCM đh

MINISTRY OF EDUCATION AND TRAINING

STATE BANK OF VIETNAM

HO CHI MINH UNIVERSITY OF BANKING

VU THU HA

FACTORS AFFECTING BANK PROFITABILITY: THE
CASE OF COMMERCIAL BANKS IN VIETNAM
GRADUATION THESIS
MAJOR: FINANCE AND BANKING
CODE: 7340201

HO CHI MINH CITY, 2022


VU THU HA

FACTORS AFFECTING BANK PROFITABILITY:
THE CASE OF COMMERCIAL BANKS IN
VIETNAM

GRADUATION THESIS
MAJOR: FINANCE AND BANKING
CODE: 7340201
SCIENCE INSTRUCTOR
Dr. NGUYEN DUY LINH

HO CHI MINH CITY, 2022

i

ABSTRACT
The thesis studies the factors affecting the profitability of Vietnamese
commercial banks through data of 14 commercial banks obtained from audited
financial statements and macro information from World Bank published in the period
from 2008 to 2020. The study selects return on assets (ROA) and return on equity
(ROE) as dependent variables. Through the results of the multivariable regression
model, the Random Effects Model (REM) was considered to be the most suitable.
However, the REM model has autocorrelation and heteroscedasticity. To overcome
these defects, the thesis implements regression model using the sum of Feasible
Generalized Least Squares (FGLS). Research results show that inflation rate and bank
size have a positive effect on bank profitability through both ROA and ROE models,
whereas, deposits to total assets ratio, noninterest income to operating income ratio,
liquidity creation have negative effects on both models. Loan loss provisions to loans
and leases ratio has a negative impact on bank returns through ROE model. However,
loans and leases to total assets ratio only has an inverse influence on ROA. Capital
positively affects Vietnamese commercial bank profitability through the ROA variable.
Macroeconomic indicator such as GDP has no impact on profitability of Vietnamese
commercial banks through neither ROA nor ROE. From the study results, the thesis
demonstrates the limitations of this study and suggests future research directions.
Keywords: Bank profitability, Commercial bank, Financial factors


DECLARATION
I declare that the graduation thesis is the work of my own at the university. The
survey data are collected from reality. Research results, information and data used in
the thesis have clear origins, are and have never been published in any research. I take
full responsibility for the truthfulness of this research thesis.

The author

Vu Thu Ha


ACKNOWLEGEMENT
First of all, I would like to express my deep gratitude to Dr. Nguyen Duy Linh the supervisor who directly guides my thesis, who has always spent plenty of time and
effort to guide, support and help me during the research process. I would also like to
express my sincere thanks to the teachers of the Banking University of Ho Chi Minh
City, who devotedly imparted knowledge during my study at the school. I am also very
grateful to my family, friends and relatives who have always been by my side to
encourage me throughout the process of completing the thesis. Despite many efforts,
but in this thesis, it is inevitable that there are shortcomings. I hope that the teachers
and those who are interested in the topic continue to have comments and suggestions to
help improve the topic.
I sincerely thank you!


CONTENTS
ABSTRACT................................................................................................................... i
DECLARATION.......................................................................................................... ii
ACKNOWLEGEMENT............................................................................................. iii
CONTENTS................................................................................................................. iv
LIST OF ABBREVIATIONS................................................................................... viii
LIST OF TABLES....................................................................................................... ix
LIST OF FIGURES...................................................................................................... x
CHAPTER 1: INTRODUCTION................................................................................ 1
1.1. INTRODUCTION.............................................................................................. 1
1.2. RESEARCH OBJECTIVE................................................................................ 2
1.3. RESEARCH QUESTION.................................................................................. 2

1.4. RESEARCH SUBJECT AND SCOPE............................................................. 3
1.5. RESEARCH METHODOLOGY...................................................................... 3
1.5.1. Regression method......................................................................................... 3
1.5.2. Data collecting method.................................................................................. 3
1.6. EXPECTED CONTRIBUTION........................................................................ 4
1.7. THE STRUCTURE OF RESEARCH.............................................................. 4
CHAPTER 2: LITERATURE REVIEW.................................................................... 6
2.1. THEORETICAL BASIS OF BANK PROFITABILITY................................. 6


2.2. FACTORS AFFECTING BANK PROFITABILITY...................................... 8

2.2.1. Bank-specific factors...................................................................................... 8
2.2.1.1. Liquidity creation..................................................................................... 8
2.2.1.2. Bank size................................................................................................ 10
2.2.1.3. Capital................................................................................................... 11
2.2.1.4. Loans and leases.................................................................................... 12
2.2.1.5. Deposits................................................................................................. 13
2.2.1.6. Noninterest income................................................................................ 13
2.2.1.7. Loan loss provisions.............................................................................. 14
2.2.2. Macroeconomic factors................................................................................ 15
2.2.2.1. Gross Dometic Product (GDP).............................................................. 15
2.2.2.2. Inflation................................................................................................. 16
2.4. RESEARCH GAP............................................................................................ 18
CHAPTER 3: METHODOLOGY............................................................................ 20
3.1. RESEARCH PROCESS.................................................................................. 20
3.2. RESEARCH DATA.......................................................................................... 22
3.3. RESEARCH METHODOLOGY.................................................................... 24
3.3.1. Descriptive statistics.................................................................................... 24
3.3.2. Correlation analysis...................................................................................... 24

3.3.3. Regression analysis...................................................................................... 25
3.4. RESEARCH MODEL...................................................................................... 25


3.5. VARIABLE DEFINITION.............................................................................. 26

3.5.1. Dependent variables..................................................................................... 26
3.5.2. Independent variables.................................................................................. 27
CHAPTER 4: RESULT.............................................................................................. 34
4.1. DESCRIPTIVE STATISTICS......................................................................... 34
4.2. CORRELATION ANALYSIS.......................................................................... 37
4.3. MULTICOLLINEARITY TESTING............................................................. 39
4.4. REGRESSION RESULT OF ROA................................................................. 40
4.4.1. Regression analysis result summary............................................................. 40
4.4.2. Choosing suitable regression model............................................................. 42
4.4.2.1. Pooled OLS and REM regression.......................................................... 42
4.4.2.2. FEM and REM....................................................................................... 42
4.4.3. Regression defect testing.............................................................................. 43
4.4.3.1. Heteroscedasticity.................................................................................. 43
4.4.3.2. Autocorrelation testing.......................................................................... 44
4.5. REGRESSION RESULT OF ROE................................................................ 46
4.5.1. Regression analysis of ROE result summary............................................... 46
4.5.2. Choosing suitable regression model............................................................. 48
4.5.2.1. Pooled OLS and FEM............................................................................ 48
4.5.2.2. FEM and REM....................................................................................... 48
4.5.3. Regression defect testing.............................................................................. 49


4.5.3.1. Heteroscedasticity.................................................................................. 49

4.5.3.2. Autocorrelation testing.......................................................................... 50
4.5.4. Fixing regression model defect.................................................................... 50
4.6. RESEARCH DISSCUSION........................................................................... 51
CHAPTER 5: CONCLUSION AND RECOMMENDATION................................ 58
5.1. CONCLUSION................................................................................................. 58
5.2. RECOMMENDATION.................................................................................... 59
5.2.1. Recommendation for liquidity creation........................................................ 59
5.2.2. Recommendation for bank scale.................................................................. 60
5.2.3. Recommendation for deposit controlling..................................................... 60
5.2.4. Recommendation for lending activity credit risk managing.........................61
5.2.5. Recommendation for capital strengthening.................................................. 61
5.2.6. Recommendation for targets following inflation control.............................. 62
5.3. LIMITATION OF THE TOPIC AND FUTURE RESEARCH DIRECTION
....................................................................................................................................63
5.3.1. Limitation..................................................................................................... 63
5.3.2. Future research direction.............................................................................. 64
REFERENCES........................................................................................................... 65
APPENDIX................................................................................................................. 74


LIST OF ABBREVIATIONS
Abbreviation

Meaning

GDP

Gross Domestic Product

FEM

Fixed Effect Model

REM

Random Effect Model

OLS

Ordinary Least Square

GLS

Generalized Least Squares

FGLS

Feasible Generalized Least Squares

ROA

Return on Assets

ROE

Return on Equity


LIST OF TABLES
Table

Name of Table

Page

2.1

Summary of factors affecting bank profitability

17

3.1

Liquidity creation categorizing and weighting

29

3.2

Summarizing variables

32

4.1

Descriptive statistics

34

4.2

Matrix of correlation between variables

38

4.3

Result of multicollinearity testing

39

4.4

Summarizing regression models of ROA

41

4.5

Result of Lagrange test on ROA

42

4.6

Result of Hausman test on ROA

43

4.7

Result of heteroscedasticity testing on ROA

44

4.8

Result of autocorrelation testing on ROA

44

4.9

FGLS regression analysis of ROA

45

4.10

Summarizing regression models of ROE

47

4.11

FEM regression analysis of ROE result

48

4.12

Result of Hausman test on ROE

49

4.13

Result of heteroscedasticity testing on ROE

49

4.14

Result of autocorrelation testing on ROE

50

4.15

FGLS regression analysis of ROE

51

4.16

Summarizing suitable regression models of ROA and ROE

52

LIST OF FIGURES
Figure
3.1

Name of Figure
Research process

Page
22


1

CHAPTER 1: INTRODUCTION
This chapter introduces the overview of the research, the reasons for choosing
the topic, the research objectives, the research questions, the subjects and scope of the
study, the research method, and the main content of the thesis.
1.1. INTRODUCTION
Banking system is one of the essential factors contributing to the development
of the economy. Banking is an important link in the process of leading the prosperity
of a country. In recent years, we have witnessed the domestic banking system's
increasingly complete and growing development. Therefore, a matter of concern and
top priority is the performance of banks. Well-functioning banks reflect the circulation
and high efficiency of capital flow in the economy, creating financial resources for the
state, jobs for the people, and connection between economic subjects. So, the analysis
and measurement of profitability and related influencing factors are necessary to assess
the overall performance and business situation for proposing policies and measures to
improve the economy. The activities of commercial banks as business organizations
are based on the economic accounting regime with the goal of producing a profit. In
fact, to realize the long-term overarching goal of commercial banks, which is to

maximize profits, there are many commercial banks that do not currently set the goal of
profit but instead implement the goals of improving productivity and quality of
products, improve the reputation of commercial banks, expand the market in both
depth and breadth, etc. Therefore, the effective targets of profit are not important but
rather the criteria related to the objectives of commercial banks, we cannot conclude
that commercial banks are operating inefficiently. As such, short-term performance and
effectiveness metrics may be at odds with long-term performance metrics, but their
purpose is to achieve long-term performance targets.


However, not all commercial banks invest in-depth. On the contrary, most are
aiming for the immediate goals of survival and profit. The goals are still not easily
achieved, because commercial banks often face a number of barriers. Consequently,
starting from practical requirements in learning about the effect of financial factors on
the profitability of Vietnamese commercial banks, the author chooses the topic
"Factors affecting the bank profitability: The case of commercial banks in
Vietnam”. The research results will clarify the impact of determinants on the financial
situation of Vietnamese commercial banks. Besides, the thesis will argue and give
governance implications for bank administrators.
1.2. RESEARCH OBJECTIVE
The main objective of this research is to investigate the impact of potential
factors on bank profitability. Especially, this thesis estimates the impact of liquidity
creation on bank profitability, which is a new factor that has not been considered much
yet in other previous studies. To achieve this general goal, this study sets out the
following specific research objectives:
 To systematize the theoretical basis of the factors affecting the bank profitability
of the commercial banks in Vietnam.
 To analyze and evaluate the impact of each factor on the bank profitability.
 To give recommendations to help bank managers regulate appropriate policies.
1.3. RESEARCH QUESTION

To successfully complete the research objectives, the study must answer the
following questions respectively:
 What is profitability of commercial bank? How is it measured? How to measure
factors influencing bank profitability, including liquidity creation?


 How to build and test models to estimate the effect of each determinant
affecting the bank profitability of commercial bank?
 What solutions are offered so that banks can improve their profitability to
ensure sustainable development of the banks?
1.4. RESEARCH SUBJECT AND SCOPE
The subjects of this study are financial determinants affecting bank profitability.
The study collects financial indicators’ data from financial statements of 14
Vietnamese commercial banks during 2008 - 2020.
1.5. RESEARCH METHODOLOGY
Research method used in the thesis is a quantitative method using Stata software
to test the research hypotheses. The author also uses data collecting method to collect
data, supporting the research purpose.
1.5.1. Regression method
Quantitative analysis method: This is the official research of the topic to draw
conclusions. In this method, the author tests the variables using many different
econometric models, including a regression model with balanced panel data along with
impact estimates Pooled OLS, Fixed Effect, Random Effect,… In order to be suitable
for testing, in this thesis, the author uses a multivariate regression model of balanced
panel data.
1.5.2. Data collecting method
The author collects research data from audited consolidated

financial

statements, annual reports of each bank published on the bank's website, the
VietstockFinance website and World Bank. The analytical data includes internal


characteristics of banks and macroeconomic factors of the Vietnamese economy with a
sample of 14 banks in the period 2008-2020.
1.6. EXPECTED CONTRIBUTION
The research results of the thesis have scientific and practical significance:.
 Firstly, the research contributes to identifying the factors having impact on the
profitability of Vietnamese commercial banking system in the period 20082020, especially liquidity creation. In addition, the study contributes to
supplementing empirical evidence for future scientific research references.
 Secondly, this is a study with the aim of re-testing previous research results with
research data of 14 Vietnamese commercial banks in the system, helping readers
have a better overview of financial indicators influencing profitability of the
system

of

commercial

banks

in

Vietnam,

thereby

making

some

recommendations to improve the operational efficiency of the bank.
1.7. THE STRUCTURE OF RESEARCH
To achieve the research objectives, the author divides the content into five
specific chapters:
Chapter 1: Introduction
Through Chapter 1, the author introduces the overview of the research topic,
including reasons for choosing the topic research, research objectives and questions,
research subjects and scope, research methodology, practical contribution.
Chapter 2: Literature review
This chapter presents the theoretical basis as well as practical evidence through
previous research. From there, the author mentions the research’s gaps.
Chapter 3: Data and methodology of research


This section presents research methods, procedures, and construction methods,
scale construction, sampling method, information collection process, processing tools
data, and data analysis techniques used in the research process.
Chapter 4: Empirical results
This chapter shows and interprets the results of the formal quantitative research
the analysis and processing of data collected through Stata software, including results
of sample descriptive statistics, regression analysis, testing of hypotheses Theory...
Then, give an explanation of the impact of independent variables on the dependent
variables.
Chapter 5: Conclusion and recommendations
In this last section, relevant conclusions about the research problem are
drawn. This study will suggest some solutions for bank administrators and list a few
points of direction for future research.
Summary of Chapter 1

Chapter 1 displays an overview of issues related to the research topic, including
objectives and tasks of research, research problems and questions, research objects and
scope research, research methods and data, and the contributions of the study. From the
above content, the topic "Factors affecting bank profitability: The case of commercial
banks in Vietnam" is both scientific and practical. This serves as the basis for further
research steps. It is an in-depth research on the theoretical basis, research methods, and
data collection to produce research results and provide solution implications.


CHAPTER 2: LITERATURE REVIEW
Chapter 2 exhibits theoretical basis of the topic related to bank profitability and
practical evidence of financial indicators affecting bank profitability and also indicates
research gaps.
2.1. THEORETICAL BASIS OF BANK PROFITABILITY
According to Helhel (2015), banking sector is the financial system's most
essential component. Stability and long-term economic growth are aided by a welldeveloped banking sector. Banks always seek to maximize revenue while also
attempting to generate liquidity and security margins in order to reduce risk. Therefore,
determining the indicators affecting bank profitability is a crucial issue to determine
the banking policies that need to be implemented in order to achieve the desired
performance.
According to Demirgỹỗ-Kunt et al. (2001), bank profitability can be considered
as a main indicator of bank performance since they create the difference between
interest savings deposits received from interest and deposits that borrowers pay on their
loans. Bank’s profitability is also defined as a bank's net after-tax income or net
earnings (Rose, 2002). Economists can use plenty of measurements to calculate the
bank profitability. One of them is using financial ratios, such as return on assets
(ROA), return on equity (ROE), and Net Interest Margins (NIM). ROA and ROE were
used to determine bank profitability in studies of Naceur (2003), Mamatzakis and
Remoundos (2003), Peters et al. (2004), Staikouras and Wood (2003), Pasiouras and
Kosmidou (2007), Athanasoglou et al. (2008), Heffernan and Fu (2008), Rahman

(2015). Especially through the above studies, ROA and ROE are used most frequently
in academic studies to measure operational efficiency. According to Rasiah (2010),
when analyzing the performance of any particular bank, it is often useful to consider


ROA and ROE. Profitability, according to Rushdi and Tennant (2003), is able to be
quantified in a variety of ways, including return on assets, return on equity.
Furthermore, particularly in the current economic circumstances, understanding the
financial metrics of a bank's success is a vital aspect of running a developing bank. The
ratios of return on assets (ROA) and return on equity (ROE) can be generated to
evaluate how profitable a bank is. Hassan (1999), Samad (2001) state that ROA and
ROE are bank’s performance indicators.
The bank is able to determine its operational efficiency and capacity to convert
assets into net income using return on assets (ROA). ROA is estimated by the ratio of
operating profit to total assets (Rushidi et al., 2003). Although external activity might
affect ROA, it generally represents management's capacity to generate return by using
bank's assets (Athanasoglou et al., 2005). In other words, it demonstrates how
effectively the company's resources are utilised to create revenue. It also reflects how
effective a company's management is in generating net revenue from all of the
institution's resources (Khrawish, 2011). According to Wen (2010), a greater ROA
indicates that the firm is more efficient in its resource utilization.
According to Nguyễn Minh Kiều (2009), ROE is used as a financial ratio to
evaluate profitability in a company. The profit in this ratio is the net return to
shareholders, derived from the company's income statement, calculated over a certain
period (a month, a quarter, a semi-annual, or a year). The capital in this ratio is
common equity. ROE presents the amount of profit this company generates for every
$100 of equity. If this ratio has a positive value, the company is profitable. If it has a
negative value, the company will make a loss (Nguyễn Thị Ng ọc Trang and Nguy ễn
Thị Liên Hoa, 2007). In other words, ROE reflects the effective use of equity and the
return that shareholders receive when investing in the bank. Therefore, ROE is one of

the indicators that investors are interested in and often used as a basis for assessing the


bank's operational efficiency and profitability, helping potential investors make
decisions. A high return on equity indicates that the bank is making better use of its
shareholders' money, as well as a healthy balance of equity and debt.
In this study’s limitation, the author only uses the most two common financial
indicators (ROA and ROE) to reflect the bank profitability.
2.2. FACTORS AFFECTING BANK PROFITABILITY
2.2.1. Bank-specific factors
2.2.1.1. Liquidity creation
One of the determinants that have a great effect on profitability of bank is
liquidity creation. According to Berger and Bouwman (2009), Allen and Carletti
(2012), one of the main functions of banking institutions in any economy is liquidity
creation. Liquidity creation is known as bank liquidity transformation. The bank makes
short-term liquid liabilities (e.g demand deposits) to support long-term illiquid assets
(e.g, business loans) to create liquidity for their clients (Diamond and Dybvig, 1983).
Deep and Schaefer (2005) mentioned a similar notion but with the name "liquidity
transformation gap”. It is the difference between liquidity of liabilities (liquid
liabilities) and liquidity of assets (liquid assets). If this difference is positive, the bank
is investing liquid liabilities into illiquid assets or, in short, the bank's liquidity creation
is happening. In other words, if a bank holds more liquid liabilities (for example, shortterm equity) than it holds more liquid assets (for example, short-term loans), it suffers a
liquidity creation. At that time, banks mainly mobilized short-term liabilities to invest
in long-term assets. Measuring bank’s liquidity creation ability comes from the study
of Deep and Schaefer (2005) when building a specialized liquidity measure to calculate
the 200 largest banks in the US from 1997 to 2001. Inheriting the method of Deep and
Schaefer (2005), Berger and Bouwman (2007, 2009) have developed four ways of
calculating liquidity creation, with four ways of handling and classifying on balance