Determinants of the capital adequacy ratio of Joint stock Commercial Banks in VietNam, 2022

MINISTRY OF EDUCATION

AND TRAINING

STATE BANK OF VIETNAM

HO CHI MINH UNIVERSITY OF BANKING

DANG VAN CHI

DETERMINANTS OF THE CAPITAL ADEQUACY

RATIO OF JOINT STOCK COMMERCIAL BANKS IN

VIETNAM

THE BACHELOR’S THESIS

MAJOR: BANKING – FINANCE

CODE: 7340201

Ho Chi Minh City, 2022

MINISTRY OF EDUCATION

AND TRAINING

STATE BANK OF VIETNAM

HO CHI MINH UNIVERSITY OF BANKING

DANG VAN CHI

DETERMINANTS OF THE CAPITAL ADEQUACY

RATIO OF JOINT STOCK COMMERCIAL BANKS IN

VIETNAM

THE BACHELOR’S THESIS

MAJOR: BANKING – FINANCE

CODE: 7340201

RESEARCH INSTRUCTOR

PhD. NGUYEN THI NHU QUYNH

Ho Chi Minh City, 2022

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DECLARATION

The thesis “Determinants of the capital adequacy ratio of joint stock

commercial banks in Vietnam” is my independent study under the guidance of Dr.

Nguyen Thi Nhu Quynh. The results of analysis and evaluation are all done by me

and do not copy the results of others. In the course of carrying out the study, I

consulted some other relevant research papers, the information cited in the thesis is

clearly stated the origin. I take full responsibility to the school if any wrongdoing is

found in this subject.

Ho Chi Minh City, June 2022

Author

DANG VAN CHI

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APPRECIATION

First of all, I would like to express my deep gratitude to PhD. Nguyen Thi

Nhu Quynh – who directly guided me throughout the graduation course, dedicatedly

instructed me, helped me find the direction of research, find documents and data to

serve the completion of this course. In addition, I also thanked the lectures at

Banking University of Ho Chi Minh City for imparting useful knowledge about

banking and finance as well as other skills in life, as the foundation for my future

career. Finally, I would like to sincerely thank my family and friends, who

encouraged me so that I could complete this graduation thesis in the best way.

The limitation of research time, knowledge and experience, errors in the

article are inevitable. Therefore, I look forward to the receive advice from the

lectures so that I can see the shortcomings, improve my knowledge and complete

this thesis perfectly.

Best regards.

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ABSTRACT

In recent years, the world and Vietnam have experienced unpredictable

economic changes. Banks must increasingly ensure stable development and be able

to withstand potential risks in order to not only motivate but also stabilize a

country's markets and social security. As a result, maintaining a reasonable capital

adequacy ratio (CAR) is a critical requirement for commercial banks. Therefore,

this thesis is conducted with the purpose of identifying factors affecting Vietnamese

joint stock commercial banks' capital adequacy ratios. In order to achieve the stated

goal, the thesis collects secondary data from 24 commercial banks in Vietnam from

2012 to 2021. The study conducted regression of panel data in 3 methods Pooled

OLS, FEM, REM, then performed tests to select the most suitable model and

examined the existence of defects in the model, including heteroscedasticity and

autocorrelation. To overcome those defects, the author uses feasible generalized

least squared method (FGLS) to ensure the effectiveness of the model. The

estimated result indicates that financial leverage (LEV) and economic growth

(GDP) have the positive impact on CAR. In contrast, return on assets (ROA), loans

(LOAN), operating cost (CIR), and exchange rate (EXR) has negative relationship

with CAR. Bank size (SIZE), customer deposits (DEP), loan loss reserves (LLR)

and liquidity (LIQ) have no statistical relationship with CAR. Based on the

findings, the thesis makes some recommendations to adjust and maintain the

appropriate CAR of joint stock commercial banks in Vietnam, bring efficiency not

only to the banking system and but also the economy.

Keyword: Capital adequacy ratios, Joint stock commercial bank, Feasible

generalized least squared method.

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CONTENTS

ABBREVIATIONS LIST............................................................................................ viii

TABLES AND FIGURES LIST.....................................................................................ix

CHAPTER 1. INTRODUCTION ....................................................................................1

1.1. THE NECCESITY OF THE RESEARCH ..........................................................1

1.2. OBJECTIVES AND RESEARCH QUESTIONS ...............................................3

1.2.1. Objectives..........................................................................................................3

1.2.2. Research questions............................................................................................3

1.3. RESEARCH SUBJECTS AND SCOPE..............................................................4

1.3.1. Research subjects..............................................................................................4

1.3.2. Research scope ..................................................................................................4

1.4. DATA AND RESEARCH METHODOLOGY...................................................4

1.5. CONTRIBUTION OF THE THESIS ..................................................................5

1.6. STRUTURE OF THE THESIS............................................................................6

SUMMARY OF CHAPTER 1....................................................................................6

CHAPTER 2. THEORETICAL BASIC AND LITERATURE REVIEW ......................8

2.1. THEORETICAL BASIS OF CAPITAL ADEQUACY RATIO.........................8

2.1.1. Concept of capital adequacy ratio.....................................................................8

2.1.2. Standard for measuring capital adequacy ratio .................................................9

2.1.2.1. The Basel Accords .........................................................................................9

2.1.2.2. Legal framework in Vietnam .......................................................................13

2.1.3. The role of capital adequacy ratio...................................................................15

2.2. OVERVIEW OF RELATED STUDIES............................................................16

2.2.1. Foreign studies................................................................................................16

2.2.2. Vietnamese studies..........................................................................................21

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2.2.3. Research gap ...................................................................................................23

2.3. FACTORS AFFECTING THE CAPITAL ADEQUACY RATIO ...................24

2.3.1. Internal financial criteria of banks ..................................................................24

2.3.1.1. Bank size ......................................................................................................24

2.3.1.2. Customer deposit..........................................................................................24

2.3.1.3. Loans............................................................................................................25

2.3.1.4. Financial leverage ........................................................................................26

2.3.1.5. Liquidity.......................................................................................................26

2.3.1.6. Loan loss reserves........................................................................................27

2.3.1.7. Profitability ..................................................................................................28

2.3.1.8. Operating cost ..............................................................................................28

2.3.2. The macroeconomics factors...........................................................................29

2.3.2.1. Economic growth rate ..................................................................................29

2.3.2.2. Exchange rate ...............................................................................................30

SUMMARY OF CHAPTER 2..................................................................................31

CHAPTER 3. RESEARCH METHODOLOGY ...........................................................32

3.1. RESEARCH PROCESS.....................................................................................32

3.2. METHODOLOGY.............................................................................................34

3.2.1. Regression model............................................................................................34

3.2.1.1. Pooled ordinary least square (Pooled OLS).................................................34

3.2.1.2. Fixed effect model (FEM)............................................................................35

3.2.1.3. Random effect model (REM).......................................................................35

3.2.2. Model selection test.........................................................................................36

3.2.3. Check the defects of the model .......................................................................37

3.2.3.1. Detecting multicollinearity in the model .....................................................37

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3.2.3.2. Checking heteroscedasticity in the model....................................................37

3.2.3.3. Testing for autocorrelation...........................................................................37

3.2.4. Overcome the model's defects.........................................................................38

3.3. RESEARCH MODEL........................................................................................38

3.4. DATA.................................................................................................................43

SUMMARY OF CHAPTER 3..................................................................................44

CHAPTER 4. ANALYSIS THE RESEARCH RESULTS............................................45

4.1. DESCRIPTIVE STATISTICS...........................................................................45

4.1.1. Descriptive statistics........................................................................................45

4.1.2. Correlation analysis.........................................................................................50

4.1.3. Multicollinearity test .......................................................................................51

4.2. REGRESSION RESULT...................................................................................52

4.2.1. Regression result by Pooled OLS, FEM and REM.........................................52

4.2.2. Evaluate the suitability of the model...............................................................54

4.2.2.1. F-test.............................................................................................................54

4.2.2.2. Hausman test ................................................................................................55

4.2.2.3. Testing defects in the model ........................................................................55

4.2.3. Estimated result by feasible generalized least squared (FGLS) method.........57

4.3. DISCUSSING RESEARCH RESULTS............................................................58

SUMMARY OF CHAPTER 4..................................................................................62

CHAPTER 5. CONCLUSIONS AND RECOMMENDATIONS .................................64

5.1. CONCLUSION..................................................................................................64

5.2. RECOMMENDATION .....................................................................................65

5.2.1. Recommendations commercial banks.............................................................65

5.2.2. Recommendations for government and central banks....................................67

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5.3. LIMITATIONS OF THE STUDY AND SUGGESTIONS FOR FUTURE

RESEARCH..............................................................................................................68

SUMMARY OF CHAPTER 5..................................................................................69

REFERENCES..................................................................................................................i

APPENDIX 1 .................................................................................................................vii

APPENDIX 2 ............................................................................................................... viii