Factors affecting bank profitability - The case of commercial banks in Vietnam: Bachelor thesis of Banking and Finance / Vu Thu Ha ; supervisor Nguyen Duy Linh

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

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

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

ii

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

iii

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!

iv

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

v

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

vi

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

vii

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