Factors determining net interest margins of the commercial banks in vietnam

FACTORS DETERMINING NET INTEREST MARGINS
OF THE COMMERCIAL BANKS IN VIETNAM

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

In finance

By

Ms. Do Thi Thanh Huyen

ID: MBA03015

International University - Vietnam National University HCMC

February 2013

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THESIS
FACTORS DETERMINING NET INTEREST MARGINS
IN THE COMMERCIAL BANKS IN VIETNAM

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

In Finance

by
Ms. Do Thi Thanh Huyen
ID: MBA03015
International University - Vietnam National University HCMC

February 2013

Under the guidance and approval of the committee, and approved by all its members,
this thesis has been accepted in partial fulfillment of the requirements for the degree.

Approved:

---------------------------------------------Chairperson

---------------------------------------------Committee member

---------------------------------------------Committee member

--------------------------------------Committee member

--------------------------------------Committee member

--------------------------------------Committee member
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Acknowledge

To complete this thesis, I have been benefited from the following people:

I would like to express my appreciation and say thank my supervisor, Dr. Nguyen
Kim Thu for her careful guidance and support me to complete this thesis.

I also would like to thank all lecturers for teaching me, giving me interesting
knowledge and all office staffs for their support me during two years at International
University.

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Plagiarism Statements

I would like to declare that, apart from the acknowledged references, this
thesis either does not use language, ideas, or other original material from anyone; or
has not been previously submitted to any other educational and research programs or
institutions. I fully understand that any writings in this thesis contradicted to the
above statement will automatically lead to the rejection from the MBA program at
the International University – Vietnam National University Hochiminh City.

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Copyright Statement

This copy of the thesis has been supplied on condition that anyone who
consults it is understood to recognize that its copyright rests with its author and that
no quotation from the thesis and no information derived from it may be published
without the author’s prior consent.
© Đỗ Thị Thanh Huyền/ MBA03015/2013

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Table of Contents

Acknowledge .. ......................................................................................................... i
Plagiarism Statements .............................................................................................. ii
Copyright Statement ............................................................................................... iii
Table of Contents .................................................................................................... iv
List of Abbreviations .............................................................................................. vi
List of Tables . ....................................................................................................... vii
List of Figures.... .................................................................................................. viii
Abstract ............. .................................................................................................... ix
CHAPTER 1.
INTRODUCTION ..................................................................................................1
1. Background. ...................................................................................................1
2. Research objectives ........................................................................................2
3. Research method ............................................................................................2
4. Scope and limitation of the study....................................................................2
5. Research structure ..........................................................................................3
CHAPTER 2............................................................................................................4
OVERVIEW OF VIETNAMESE BANKING SYSTEM ......................................4
1. Growth of Vietnamese banking system .......................................................4
2.

Vietnamese commercial banks performance:……………………………..6

CHAPTER 3 ...........................................................................................................9
LITERATURE REVIEW .......................................................................................9
1. Previous international studies .........................................................................9

2. Previous researches in Vietnam ....................................................................13
CHAPTER 4.......................................................................................................... 14
DATA AND METHODOLOGY .......................................................................... 14
1. Sampling design ........................................................................................... 14
2. Data collection methods ................................................................................ 14
3. Variables ...................................................................................................... 14
4. Framework: ..................................................................................................17
CHAPTER 5………………………………………………………………………..18
FINDINGS ............................................................................................................ 18
1. Descriptive statistics…………………………………………………………18
2. Empirical results .......................................................................................... 19

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CONCLUSIONS ...................................................................................................25
1. Summary of the thesis .................................................................................. 25
2. Limitations ...................................................................................................25
3. Main implications......................................................................................... 26
4. Suggestion for future research ...................................................................... 26
REFERENCES .....................................................................................................28

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List of Abbreviations
ABBank

An Binh Commercial Joint Stock Bank

ACB

Asia Commercial Joint Stock Bank

Agribank

Vietnam Bank for Agriculture and Rural Development

Baovietbank

Bao Viet Joint Stock Commercial Bank

BIDV

Bank of Investment and Development of Vietnam

BVSC

Bao Viet Securities Company

Eximbank

Export and Import Joint Stock Commercial Bank

JSCBs

Joint-stock commercial banks

MHB

Mekong Housing Joint Stock Commercial Bank

NIM

Net interest margins

ROA

Return on Assets

ROE

Return on Equity

Sacombank

Saigon Thuong Tin Commercial Joint Stock Bank

SBV

The State Bank Of Vietnam

SOCBs

State-owned commercial banks

Southern Bank

Southern Bank

VCBS

Vietcombank Securities Co., LTD.

VIB

Vietnam International Joint Stock Bank

Vietcombank

Joint Stock Commercial Bank for Foreign Trade of Vietnam

VietinBank

Vietnam Bank for Industry and Trade

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List of Tables

Table 1. Descriptive statistics of all variables of entire sample................................ 19
Table 2. Descriptive statistics of all variables of SOCBs ......................................... 19
Table 3. Descriptive statistics of all variables of JSCBs .......................................... 19
Table 4. Correlation of independent variables ......................................................... 20
Table 5. Redundant Fixed Effect Tests……………………………………………21
Table 6. Hausman Test result………………………………………………………21
Table 7. Fixed effect model ………………………………………………………22

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List of Figures

Figure 1. Number of commercial banks in Vietnam from 2006 to 2012 .....................4
Figure 2. Total assets of SOCBs and JSCBs from 2008 to 2011 ................................5
Figure 3. Interest rate stipulated by SBV from 2/2008 to 12/2011 .............................6
Figure 4. Bad debt ratios of Vietnamese banking system from 2007 to June 2012 .....7
Figure 5. The percentage of bad debt according to bank types at 31/3/2012...............8

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Abstract
This study investigates the factors determining the net interest margins of 33
Vietnamese commercial banks during the period 2008-2011. Based on the literature
reviews, market power, managerial risk aversion, interest rate risk, credit risk,
management quality and implied payment are the independent variables in the
model. Fixed effects model will be chosen to run regression of panel data. The
empirical analysis points out that managerial risk aversion, credit risk, management
quality and implied payment are statistically significant in explaining bank’s net
interest margins. Among four significant variables said above, only management
quality has negative relationship with net interest margins. Additional, there is no
evidence to conclude that both market power and interest rate risk are significant to
net interest margins.

Keywords: net interest margins, Vietnamese commercial banks.

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CHAPTER 1
INTRODUCTION
1.

Background.
Becoming the fiftieth member of the World Trade Organization is the

Vietnam’s remarkable economic event in 2007. The Vietnamese economy has
accessed to the global market and has gained many achievements. The public data
released by World Bank showed that Vietnam GDP growth rate rose from 8.23% in
2006 to a peak 8.46% in 2007 and the inflation rate was only 8.30% in this same year.
Enterprises have many opportunities not only to develop their domestic market but
also to expand into international market. However, five years later, the economy was
falling down so fast and there has been no signal for complete recovery. In 2011,
GDP growth rate stood at 5.89%, lower than 6.78% in 2010, and 6.31% in 2008. The
inflation rate soared to 23.12% in 2008, much higher than previous year and was
recorded at 18.67% in 2011. Unstable macroeconomic environment makes the
business of enterprises in general and banking system in particular become more
difficult than ever before. Thus, Vietnamese commercial banks not only find the way
to survive, to face to the competition pressures from the foreign financial institutions,
to meet many international standard regulations; but also take an important role in
saving enterprises and economic recovery.
Bank acts as “an intermediary between the demanders and suppliers of funds.”
(Ho and Saunders, 1981, p.583). In recent years, Vietnamese commercial banks seem
to perform this function inefficiently. Companies who are in tremendous need of
capital must suffer high lending interest rates. Although the State Bank of Vietnam

(SBV) imposed a ceiling deposit interest rate in the hope of dragging down lending
interest rates, the access to banking loans remains harsh for companies. In the mean
time, the interest rate spreads (i.e., the difference between lending interest rates and
deposit interest rates) brings huge profits to commercial banks. This is the largest
component of a bank’s net interest income and leads to the ratio net interest margins
(NIM), which measures the return on bank’s earning assets, is high. Accordingly,
commercial banks have been criticized to have maintained high net interest margin
and no difficulty sharing with companies. Despite net interest margins being one of
the major determinants of bank profits, little is known of the determinants of
Vietnamese trading bank interest margins. Why Vietnamese commercial banks need


to maintain high NIM or which variables have strong impact on NIM become the
interesting questions for all those who care about bank sector in Vietnam. Therefore,
in this context, the study will help to explain the queries above. It is likely that the
NIM reflects the costs such as the implied interest payments that the banks have to
offer to its customers. Those non-interest expenses must be accounted for in the net
interest margins. Besides, the high credit risk also partly contributes to the high net
interest margin, as credit risk premium increases in the current economic downturn.
Consequently, the principal objective of this research is to empirically test the model
of bank interest margin determination in the context of Vietnamese banking system.
Based on the findings of the research, the SBV would be able to have effective
solutions (instead of the administrative measures) to reduce the lending rates.
2.

Research objectives
Based on the above-mentioned problems, this research is formulated towards

the following objectives:


To identify the factors determining the net interest margins of 33 Vietnamese
commercial banks.



To examine the impact of determinants on 33 Vietnamese commercial banks
during the period 2008-2011.



To give some recommendations to the State Bank of Vietnam (SBV) and
commercial banks.

3.

Research method
This research will use quantitative method and cover 33 Vietnamese

commercial banks operating during the period from 2008 to 2011. There are various
sources to collect data: banks audited financial statements, public data of World
Bank, annual reports of SBV, and market researches of some securities companies in
Vietnam. All data are published on the official websites of those above-mentioned
institutions. The Eviews software version 6 is used to run regression the data.
4.

Scope and limitation of the study
This study is limited to 33 Vietnamese commercial banks. Foreign

commercial banks and foreign bank branches are beyond the scope of this study.

This study is also limited to the period from 2008 to 2011. From the analysis
mentioned above, this is the period of time in which there have been numerous
fluctuations in the operations of the Vietnamese banking system and of the whole

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economy. This is also the period in which banking operation and the interest rate
policy of the SBV received special attention from businesses.
5.

Research structure
This research includes five chapters and conclusions.
Chapter 1 gives the background and justifies the reasons of conducting this

study. Chapter 2 provides an overview of the banking system in Vietnam, and then
review key theories and empirical studies related to the model development of net
interest margins in chapter 3. Chapter 4 discusses the model used in this research and
explains the relationship between dependent and independent variables. Chapter 5
discusses the results of the regression. Finally, the conclusion will summary all
results mentioned in chapter 5, also the implications, limitations and suggestion for
future researches.

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CHAPTER 2
OVERVIEW OF VIETNAMESE BANKING SYSTEM

This chapter will look around the operation of Vietnamese banking system in

recent years. The achievements banks get, as well as the problems they are facing to
will be considered herein. These characteristics of Vietnamese banking system help
in understanding and explaining for later analysis in the next chapters.
1. Growth of Vietnamese banking system
Though the Vietnamese banking system is quite young compared with others
in the world, it has been growing very fast. The number of commercial banks
increases dramatically, rising from 8 banks in 1991 to 85 banks in 2007 and 98 banks
in 2012. Although VCB, Vietinbank, MHB were equitized, SBV still sort them into
group State-owned commercial banks (SOCBs). Therefore, of those 98 banks, there
are 50 branches of foreign banks, 5 foreign banks, 4 joint-venture banks, 34 jointstock commercial banks (JSCBs), and 5 SOCBs. In the period of 2006-2012, the
Vietnamese banking system has increasingly attracted foreign attention. The number
of foreign banks in Vietnam has increased by 77 percent in this period (see Figure 1).
120

100

5
5

80

4

5

Joint-venture banks

5
44

60

5

5

31

45

53

53

55

41

Joint-stock commercial
banks

40

20

0

Branchs of foreign banks and
wholly foreign-owned banks

37

34

5

5

40

39

37

37

34

5

5

5

5

5

State-owned commercial
banks

2006 2007 2008 2009 2010 2011 2012

Figure 1. Number of commercial banks in Vietnam from 2006 to 2012

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Source: website of SBV (www.sbv.gov.vn), BVSC (www.bvsc.com.vn), and VCBS
(www.vcbs.com.vn).
In addition, commercial banks in Vietnam have grown in both total assets and
equity. As of the end of 2012, website of SBV updated figures about the total assets
of the commercial banking system as VND 5,085,850 billion, up by 3.84% compared
to VND 4,897,774 billion at the end of 2011 (Source: The report of the National
Financial Supervisory Commission 2012). However, there exist differences among
two major banking groups in the growth rates of total assets. While SOCBs are
gradually losing their leader position, JSCBs have an enormous increase in asset
growth rate. For instance, the asset growth rate of ACB, HDB, and Eximbank in
2011 were 37.91%, 98.91% and 40.01% respectively, while this rate of the two
SOCBs - Agribank and BIDV- are 4.68% and 10.78%, respectively (Source: author’s
calculation)
5,000,000
4,500,000
4,000,000
3,500,000
3,000,000

Financial institutions assets

2,500,000

SOCBs (5 banks)

2,000,000

JSCBs (31 banks)

1,500,000
1,000,000
500,000
0
2008

2009

2010

2011

Figure 2. Total assets of SOCBs and JSCBs from 2008 to 2011 (unit: billion)
(Source: Financial reports of 5 SOCBs and 31 JSCBs from 2008 to 2011)
In terms of equity capital, to satisfy the requirement of the SBV on
commercial banks’ minimum chartered capital of VND 3,000 billion, stated in
Decree 141/2006/ND-CP in 2010, chartered capital of most banks except BaoViet
Bank and PG Bank, reached VND 3,000 billion at the end of 2011. Some SOCBs
have the equity capital far above the required level, such as BIDV with capital of
28,251 billion VND, Agribank with capital of 21,103 billion VND and Vietinbank
with capital of 20,230 billion VND. By raising the chartered capital, banks will

enhance their competitiveness and maintain the Capital Adequacy Ratio (CAR) of 9
percent regulated by the Decree 13/2010/TT-NHNN.
2. Vietnamese commercial banks performance:
With some remarkable changes as said above, Vietnamese banking sector
was expected to develop strongly or at least to be stable. However, recently,
commercial banks have to face with problems related to interest rate race and bad
debts. To curb high inflation rates, the SBV implemented the tight monetary policy
in 2008 with a series of solutions. Firstly, VND base deposit rate was applied, from
12% to 14% per year at the first half year of 2008. Next, other tools of monetary
policy were used simultaneously, such as higher reserve requirement and the
issuance of VND 20,300 billion of compulsory SBV bills to withdraw money out of
circulation. Facing with increasing difficulty in capital mobilization, banks rushed to
raise interest rates and provided promotion to encourage deposits from individuals
and organizations. Some small-sized banks adjusted their VND mobilizing interest
rates up to 18% to 19% per annum. Large-sized banks also push their rates to high
point to keep customer’s feet. Besides that, being controlled maximum 150% of the
base interest rate, or within a cap of 18% per annum, banks add more extra fees into
VND lending interest rate to cover the high mobilizing interest rate. Therefore, both
real mobilizing interest rate and lending interest rate increased very high. From 2009
until now, SBV continuously enacts many decrees to stop the interest rate race and
keep it stable.

Base interest rate

Refinancing interest rate

Discount interest rate

Figure 3. Interest rate stipulated by SBV from 2/2008 to 12/2011
(Source: SBV’s website http:// www.sbv.gov.vn)

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Dec-11

Oct-11

Aug-11

Jun-11

Apr-11

Feb-11

Dec-10

Oct-10

Aug-10

Jun-10

Apr-10

Feb-10

Dec-09

Oct-09

Aug-09

Jun-09

Apr-09

Feb-09

Dec-08

Oct-08

Aug-08

Jun-08

Apr-08

Feb-08

16
14
12
10
8
6
4
2
0

With regard to bad debts, this is really the urgent problems of Vietnamese
banking sector. Before 2008, Vietnam’s credit growth was too hot. This growth was
later reduced by the SBV’s tight monetary policy. However, in 2010, although the
global economy has not recovered completely from the 2008 financial crisis, it had to
suffer from the consequences of the debt crisis in the Euro zone in the second quarter
of 2010. Enterprises in Vietnam were also deeply influenced by the crisis, and
numerous enterprises had to do bankrupt or stop their operation. As a result, banks
find it extremely hard to collect their loans made in previous periods. The high
lending interest rate made it harder for companies to repay their debt. Consequently,
banks’ bad debts are growing. According to Chief Inspector of the State Bank of
Vietnam, Mr.Nguyen Huu Nghia’s statement dated 12/7/2012, the bad debts which
was calculated by SBV was 8.6% of total outstanding loans, much higher than 4.47%
reported by the credit institutions.
5.0%

4.47%

4.0%

3.5%

3.0%
2.0%

3.2%
2.2%

2.0%

3.6%

2.5%

1.0%
0.0%
2007

2008

2009

2010

2011

Q1.2012 Q2.2012

Figure 4. Bad debt ratios of Vietnamese banking system from 2007 to June 2012
(Source: Report of Vietnamese banking sector Q2.2012, Vietcombank Securities
Company – VCBS)
It is the fact that the percentage of bad debts in the state-owned banks is much
more than the others. They occupied 50% of bad debt ratio of whole credit market.
The next positions were commercial joint stock banks (27.8%), foreign banks (17.5%)
and the remains belonged to other financial institutions (4.2%). Most of state-owned
banks serve many customers who are state-owned corporations with inefficient
operations. It could be seen as one of the reason explaining why the state-owned
banks stood on top on bad debts ratio.

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4.20%

State-owned banks
17.50%
Commercial joint
stock banks
50.5%
27.80%

Foreign banks
Others

Figure 5. The percentage of bad debt according to bank types at 31/3/2012
(Source: VnEconomy’s website www.vneconomy.com)

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CHAPTER 3
LITERATURE REVIEW
1.

Previous international studies:
Determining the bank’s net interest margins is the attractive subject and

researched in many countries. Ho and Saunders (1981) are considered as the pioneers
in this subject. In their research, they viewed banks as the dealers in the credit market,

providing the services to depositors and loaners. Because the mismatching in
maturity of the deposits and bank loans, banks must face to two kinds of risks:
reinvestment risk and refinancing risk when a change in the short-term rate of
interest and a bank’s unmatched portfolio of the deposits and loans, it will face to
interest rate risk. For instance, having a long-term deposit, but no new loan demand,
bank will invest funds temporarily in money market. In this case, it will get trouble in
reinvestment risk if short-term rate fall. Or having a new loan demand but no inflow
of deposit, bank has to borrow funds from money market. Refinancing risk happens
as short-term rate raise. Hence, banks will determine the optimal interest spread in
order to cover the uncertainty in transactions and interest rate risk. Based on this
reasoning, the study by Ho and Saunders (1981) defined the pure spread (s) as a
function below
=
Where

measures the elasticity of demand and supply in the markets in

which the bank operates. Bank faces relatively inelastic demand and supply (high )
it may be able to exercise monopoly power, and earn a producer's rent by
demanding a greater spread than it could get if banking markets were competitive.
The second term in the model implies that, other things equal, the greater the degree
of risk aversion (measured by R), the larger the size of transactions (measured by Q),
and the greater the variance of interest rates (measured by

), the larger bank margins

are.
The quarterly data from 1976 to 1979 of over 100 US commercial banks, and
cross-section regression were used in this study. Although not explicitly considered
in above equation, the research conducted an empirical study on the determinants of

actual bank margins (M), which comprise a pure spread (s) due to underlying

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transaction uncertainty, plus mark-up for implicit interest expense (IR), the
opportunity cost of required reserves (OR), and default premiums on loans (DP). It
was found that the pure spread and the implied interest expense were statistically
significant, which implied that the main determinants of the size of actual bank
margins were transactions uncertainty and markups to cover implicit payments to
depositors. Then, they tested whether these estimated spreads depend on interest rate
volatility and market structure or not.
Later studies on bank net interest margins have added more independent
variables to the model of Ho and Saunders. The next article done by R.W.McShane
and I.G.Sharpe (1985) continued to contribute new discoveries on NIM and its
determinants. In the case of Australian trading banks, the authors assumed the
uncertainty coming from the instantaneous short-term money market rate, wider than
that from the deposit and loan rates as stated in theory of Ho and Saunders (1981). In
addition, the factors chosen in this approach were the bank’s power in the loan and
deposit markets, interest rate volatility, and risk aversion, uncertainty of the
instantaneous money market risk-free interest rate and average size of transactions.
After running regression with the sample of 22 banks, from 1962 to 1982, they found
that there existed a stable non-linear relationship between NIM and those abovementioned factors. Moreover, upon the hypothesis of differences between business
and personal sectors, they found that in the Australian context, the more personal
business sector, the greater market power and the higher margins are.
Angbazo (1997) developed his model from the previous papers by adding
some risk factors. He concentrated on building a function in which NIM was a
function of those risks and bank specific variables. His sample consisted 286 US
commercial banks with assets equal or over USD 1 billion from 1989 to 1993 and
was estimated by generalized least squares (GLS). The regression’s results showed

the relationship between NIM and determinants by entire sample and by each bank
group. While the default risk proxy was significantly positive, the interest rate risk
was negative and significant to NIM. Three other proxies including capital base,
management quality, and non-interest bearing assets were significantly positive. For
result tested by each bank group, the author realized that the sensitivity of above
variables on NIM of each group was different. For instance, money-center and local
banks’ NIM has relationship with defaults risk, but regional and super-regional banks
did not. In the second part of his study, he continued to test whether off-balance sheet
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had effect on on-balance sheet portfolio risk and NIM or not. His analysis evidenced
that off-balance sheet indirectly led to higher NIM.
Joaquin Maudos and Juan Fernandez de Guevara (2004) indentified the
factors affecting to the interest margin in banking sectors in some Europe countries:
Germany, France, United Kingdom, Italy, and Spain from 1993 to 2000. The
researchers introduced some more variables such as: market power to capture
competitive conditions, operating costs, ect. Most of his variables were significant
and explained as follows. In European banks, the degree of concentration reduced
competition pressure and thus market power increased. Market interest volatility was
found to have a small effect on NIM. Like other result from many previous
researches, Joaquin Maudos and Juan Fernandez de Guevara also tested there was a
positive sign between NIM and implicit payment. One more important discovery in
this paper was that a decrease in level of average production costs would lead to
reduction in NIM.
Another research of Australian banks was provided by Barry William (2007),
who investigated the NIM of 22 domestic banks and 21 foreign subsidiary banks
operating from 1989 to 2001. Not only testing the application of the Ho and Saunders
(1981) model with the core variables- managerial aversion and interest rate risk, he
also considered the extended models like Angbazo (1997) and Joaquin Maudos and

Juan Fernandez de Guevara (2004) such as operating cost, liquidity, management
quality, credit risk, interaction between interest rate risk and credit risk, bank
operation size, implied payment, implied taxes and control variables, in order to have
a framework for Australian banking sector. After running descriptive statistics, he
found that the foreign banks had lower NIM, lower level of retail, but higher levels
of average capital than domestic Australian banks. Four major banks called the Big
Four banks have the lower operating cost, higher management quality, while the
others were very active in their retail banking. Consistent to Ho and Saunders (1981),
regression presented that interest rate volatility and management risk aversion related
positively on NIM. While McShane and Sharpe proposed NIM and market, power to
be positive, William found this relationship was negative in case of whole sample,
but positive consistently in case of NIM of big four banks in Australia. Continuously,
the higher management quality was, the lower NIM was. However, variable liquidity,
implied taxes was found to have no relationship, and credit risk was negative
significantly to NIM.
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Anthony Q.Q.Aboagye, S.K.Aknoena, T.O.Antwi-Asare and A.F.Gockel
(2008) explained the bank’s optimal spread between lending rate and deposits rate in
Ghana. Like other authors, their research relied on Ho and Saunders (1981)
framework and the model of Joaquin Maudos and Juan Fernandez de Guevara (2004).
The determinants here included the bank specific (the competitive structure of
markets, average operating costs, extent of risk aversion, volatility of money market
rates, riskiness of a bank’s loan portfolio, covariance of interaction between interest
rate risk and credit risk and the average size of credit and deposit operations),
industry characteristics (banking industries structure, the Lerner index, the
concentration, opportunity cost of non-earning bank reserves) and macroeconomic
variables (expected inflation and money supply). The quarterly data of 17 Ghanaian
banks was collected. Their finding were: the decrease in market power, bank

concentration, bank total assists, bank equity, inflation and bank staff expenses,
capital expenditure and administrative expenses over total assets would decrease
NIM, while the bank liquidity, central bank lending rate, bank management
efficiency would increase NIM.
Ahmet Ugur and Hakan Erkus (2010) investigate the net interest margins of
both domestic and foreign banks in Turkey. Firstly, they run regression to find the
effect of bank specific factors on the bank spreads, including NIM, bank size, risk
aversion, loan quality, liquidity risk, bank market share, operating costs, personnel
expenses, and management quality. Then, the constant term in the first model called
“pure spread” would become the dependent variable in the second regression. In this
regression, the independent variables were volatility of interest rates, the ratio of
budget deficit to GDP, GDP growth rate, inflation rate and two crisis dummy
variables to capture the effect of the financial crisis in Turkey in two years. The
authors run the descriptive statistics and the panel data random effect model. They
found that the foreign bank had higher internet margin due to their higher operating
costs. However, they also had higher personnel expenses and management quality,
while their market shares were smaller than domestic banks. While NIM and market
share had a negative sign, the bank size, operating costs, and risk adverse affect
positively on NIM. The liquidity ratio was not significant factor in the model. For
the second model, Ahmet Ugur and Hkan Erkus (2010) realized that only inflation
rate significantly affected on the pure spread.

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2.

Previous researches in Vietnam
Ngo Dang Thanh (2010) evaluated the efficiency of Vietnamese banking

system by using Data Envelopment Analysis- DEA. This method calculated the
limited production capacity based on the inputs and compares the current output to
evaluate the effective use of resources. The author focused on analyzing 22
commercial banks in Vietnam in the year of 2008 and chose the inputs as wages,
interest and similar expenses, and other expenses; while the outputs were total asset,
interest and similar income and other incomes. The result showed the way for
Vietnamese banking system to increase its efficiency is managing their lending
activities.
Nguyen Thuy Duong and Tran Hai Yen (2011) analyzed the determinants of
credit growth of commercial banks in Vietnam in 2011. The dataset was collected
from some banks Vietnam in quarter 1, 2, 3 of 2011. They assumed that the credit
growth depends on state ownership, foreign ownership, ROE, liquidity, deposit,
spread between loan interest and deposit interest. Based on the regression model, the
changes in credit growth have positive relationship with deposit and liquidity. Vice
versa, when the spreads increases, the credit growth decreases. In addition,
Vietnamese commercial banks or foreign banks in Vietnam are equally affected, so
two variables state ownership and foreign ownership are not significant.
In summary, the topic “determinants to net interest margins” is one of the
greatest interesting issues in many countries: Europe, Emerging market. They mostly
based on the basic model of Ho and Saunders (1981) and developed their own model,
which are suitable to practice in their countries. Whereas, Vietnam does not have
many studies of this problem. Most of them just evaluate banks performance by
using financial ratios, or only focus on some specific activities of bank, such as
determinants of credit growth, financial structure and bank performances. After
examining the theoretical framework and related empirical studies on bank interest
margins such as Angbazo (1997), Barry William (2007), this paper selects several
factors which are thought to be more appropriate to the determination of net interest
margins in Vietnamese banking system.

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