Factors affecting financial performance of commercial banks in vietnam, 2021

MINISTRY OF EDUCATION

AND TRANDING

STATE BANK OF VIETNAM

BANKING UNIVERSITY HCMC

KIM THỊ QUẾ CHI

FACTORS AFFECTING FINANCIAL PERFORMANCE

OF COMMERCIAL BANKS IN VIETNAM

GRADUATION THESIS

SPEACIALITY: FINANCE – BANKING

CODE: 7340201

HO CHI MINH CITY, 2021

MINISTRY OF EDUCATION

AND TRANDING

STATE OF VIETNAM

BANKING UNIVERSITY HCMC

KIM THỊ QUẾ CHI

FACTORS AFFECTING FINANCIAL PERFORMANCE

OF COMMERCIAL BANKS IN VIETNAM

GRADUATION THESIS

SPEACIALITY: FINANCE – BANKING

CODE: 7340201

Instructor

DR. LÊ HÀ DIỄM CHI

HO CHI MINH CITY, 2021

i

ABSTRACT

“Factors affecting financial performance of commercial bank in Vietnam”

using data from 31 commercial banks on a panel data sample from 2012 to 2020.

The independent variables are EA (equity to asset ratio), SIZE (natural log of total

asset), FATA (asset quality), LLR (loan loss reserves), and LIQ (liquidity), while

the dependent variables are EA (equity to asset ratio), SIZE (natural log of total

asset), FATA (asset quality), LLR (loan loss reserves), and LIQ (liquidity). GDP

(economic growth) and INF are macro parameters (inflation). The CAMEL safety

framework is also used to assess the dependent variables on financial performance.

The goal of this study was to figure out and quantify the impact of common factors

on the financial performance of commercial banks in Vietnam. The S-GMM

regression model is used in this study to examine the factors affecting the financial

performance of 31commercial banks in Vietnam from 2010 to 2020. At the 1% level

of significance, the results show that EA, SIZE, CIR, LOAN, CPI, and GDP have a

positive effect on ROA, whereas FATA and LIQ have a negative effect. ROA was

not statistically significant for LLR or NPL. The results for ROE show that EA,

SIZE, CIR, LOAN, CPI, and GDP have a positive effect on ROE, but FATA and

NPL have a negative effect. The remaining LLR and LIQ are statistically

insignificant in relation to ROE. Finally, when it comes to NIM, the results show

that EA, SIZE, LLR, CIR, NPL, and LOAN have a positive effect, whereas LIQ and

CPI have a negative effect. FATA and GDP, on the other hand, have no statistical

significance. Based on this, the author has proposed solutions to improve financial

performance at commercial banks in Vietnam.

Keywords: Financial performance, CAMEL, Commercial Bank, Vietnam.

ii

GUARANTEE

My name is Kim Thi Que Chi, and I am a student at the Banking University

of Ho Chi Minh City, class HQ5 – GE08, student number: 030805170052.

I hereby declare that the thesis topic "Factor affecting the financial

performance of commercial banks in Vietnam" majoring in Finance - Banking, is

my own research work that I directed Dr. Le Ha Diem Chi's scientific advisor. The

data and research findings in this thesis are honest, with no previously published or

made by others except for fully cited citations in the thesis.

HCM City, 23 November, 2021

Author

KIM THI QUE CHI

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ACKNOWLEDGEMENTS

First of all, I would like to thank the teachers of Banking University of Ho

Chi Minh City - who have imparted valuable knowledge to me during the four years

of the University. Thank you for giving me the opportunity to meet and study at

Banking University of Ho Chi Minh City.

Next, I would like to express my sincere thanks to Ms. Le Ha Diem Chi who

was the instructor who guided me throughout the process of making my internship

report until my graduation thesis. Thank you for always taking the time and

dedication to guide me every step of the way. Besides, there are valuable comments

and suggestions to improve my research paper.

Finally, I would like to express my heartfelt appreciation to my family and

friends, who have always helped, accompanied, and supported me over the years.

With limited knowledge and circumstances, this thesis cannot avoid many flaws. As

a result, I am looking forward to receiving teacher guidance so that I can improve

my knowledge and serve my work in the future.

Sincerely thank everyone!

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CONTENTS

ABSTRACT..............................................................................................................i

GUARANTEE........................................................................................................ ii

ACKNOWLEDGEMENTS ................................................................................. iii

CONTENTS............................................................................................................iv

LIST OF ACRONYMS ...................................................................................... viii

LIST OF DIAGRAMS...........................................................................................ix

LIST OF TABLES ..................................................................................................x

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

1.1. REASONABLE FOR RESEARCH.........................................................1

1.2. OBJECTIVES OF STUDY.......................................................................2

1.2.1. General objective.............................................................................. 2

1.2.2. Specific objective ............................................................................. 2

1.3. RESEARCH QUESTION.........................................................................2

1.4. SUBJECT AND SCOPE OF THE STUDY ............................................3

1.4.1. Research Subject .............................................................................. 3

1.4.2. Scope of the study ............................................................................ 3

1.5. RESEARCH METHODOGY ..................................................................3

1.6. CONTRIBUTIONS ...................................................................................4

1.7. STRUCTURE OF RESEARCH...............................................................4

CONCLUSION CHAPTER 1................................................................................6

CHAPTER 2: LITERATURE ...............................................................................7

2.1. OVERVIEW OF FINANCIAL PERFORMANCE OF JOINT STOCK

COMMERCIAL BANKS................................................................................7

2.1.1. Definition of financial performance................................................. 7

2.1.2. The indicators reflect the financial performance of commercial banks

.......................................................................................................... 8

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2.1.3. Indicators reflecting the financial performance of joint stock

commercial banks according to the safety framework CAMEL..................... 10

2.2. FACTORS AFFECTING THE FINANCIAL PERFORMANCE OF

COMMERCIAL BANKS..............................................................................16

2.2.1. Macro factor................................................................................... 16

2.2.2. Bank specific .................................................................................. 18

2.3. Overview of the studies to the thesis......................................................19

2.3.1. Domestic studies .............................................................................. 19

2.3.2. Forgein studies....................................................................................22

CONCLUSION CHAPTER 2..............................................................................31

CHAPTER 3: RESEARCH METHODS............................................................32

3.1. DATA COLLECTION: ..........................................................................32

3.2. RESEARCH MODELS ..........................................................................33

3.3. DESCRIPTION VARIABLE AND RESEARCH HYPOTHESIS .....34

3.3.1. Dependent variable ...................................................................... 34

3.3.1.1 ROA (Return on assets).................................................................. 34

3.3.1.2 ROE (Return on Equity)................................................................. 35

3.3.1.3 NIM (Net Interest Margin)............................................................. 35

3.3.2. Independent variables.................................................................. 36

3.3.2.1 Capital adequacy (EA) ................................................................... 36

3.3.2.2 Bank size (SIZE)............................................................................ 36

3.3.2.3 Asset quality (FATA)..................................................................... 37

3.3.2.4 Loan Loss Reserves (LLR) ............................................................ 37

3.3.2.5 Management quality (CIR) ............................................................ 38

3.3.2.6 Bad Debt Ratio (NPL).................................................................... 38

3.3.2.7 Loan (LOAN)................................................................................. 38

3.3.2.8 Liquidity (LIQ)............................................................................... 39

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3.3.2.9 Inflation rate (CPI) ......................................................................... 39

3.3.2.10 Economic Growth (GDP)............................................................... 40

3.4. RESEARCH PROCESS .........................................................................44

3.5 RESEARCH METHODS........................................................................45

3.5.1. Ordinary Least Squares (OLS)....................................................... 45

3.5.2. Fixed Effect Model (FEM)............................................................. 46

3.5.3. Random Effect Model (REM)........................................................ 46

3.5.4. Feasible Generalized Least Square (FGLS)................................... 46

3.5.5. System Generalized Model of Moments (S-GMM) ...................... 47

3.5.6. Check for suitable model selection ................................................ 47

CONCLUSION CHAPTER 3..............................................................................50

CHAPTER 4: RESEARCH RESULTS AND DISCUSSION...........................51

4.1. DESCRIPTIVE STATISTICAL............................................................51

4.2. CORRELATION ANALYSIS................................................................54

4.3. MULTICOLLINEARITY TEST...........................................................58

4.4.ESTIMATED THE THE POOLED OLS, FEM, REM MODELS ....59

4.5. SELECTION TEST OF 3 MODELS POOLED OLS AND FEM......63

4.6.ESTIMATED THE FGLS ......................................................................66

4.7. DEFECT TESTING OF MODEL .........................................................67

4.7.1. Check the endogeneity of the variables in the model. ...................67

4.7.2. Check the suitability of the GMM model. ......................................69

4.7.3. Regresion S-GMM model ................................................................71

4.8. DISCUSS RESEARCH RESULTS........................................................74

4.8.1. Capital adequacy (EA)........................................................................78

4.8.2. Bank size (SIZE).................................................................................80

4.8.3. Asset quality (FATA) .........................................................................81

4.8.4. Loan loss reservers (LLR)..................................................................82

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4.8.5. Management quality (CIR).................................................................83

4.8.6. Bad dept ratio (NPL) ..........................................................................84

4.8.7. LOAN .................................................................................................85

4.8.8. Liquidity (LIQ)...................................................................................87

4.8.9. Inflation (CPI).....................................................................................88

4.8.10. Economic growth (GDP)....................................................................89

CONCLUSION CHAPTER 4..............................................................................91

CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS.....................92

5.1 CONCLUSION.........................................................................................92

5.2 PROPOSE RECOMMENDATIONS.....................................................93

5.2.1. Solutions for improving capital adequacy...................................... 93

5.2.2. Bank size expansion ....................................................................... 94

5.2.3. The solution to the bad debt problem............................................. 94

5.2.4. Limit liquidity risk ......................................................................... 94

5.2.5. Improve credit quality .................................................................... 95

5.3 LIMITATIONS OF THE TOPIC AND RESEARCH

DIRECTIONS ................................................................................................95

CONCLUSSION CHAPTER 5............................................................................96

REFERENCES......................................................................................................97

APPENDIX..........................................................................................................101

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LIST OF ACRONYMS

Acronyms English

ROA Return on asset

ROE Return on equity

NIM Net Interest Margin

EA Equity to asset ratio

SIZE Natural log of total asset

FATA Asset quality

LLR Loan loss reserves

CIR Management quality

NPL Bad dept ratio

INF Infaltion

GDP Economic growth

FIP Financial performance

OLS Ordinary Least Squares

FEM Fixed Effect Model

REM Random Effect Model

VIF Variance Inflation Factors

FGLS Feasible Generalized Least Square

GMM Generalized method of moments

ix

LIST OF DIAGRAMS

Figure 1 Process study ........................................................................................... 44

Figure 2 Relationship between EA and NIM......................................................... 78

Figure 3 Relationship between EA and ROA........................................................ 89

Figure 4 Relationship between EA and NIM......................................................... 89

Figure 5 Relationship between SIZE and ROA..................................................... 91

Figure 6 Relationship between SIZE and ROE .................................................... 91

Figure 7 Relationship between SIZE and NIM..................................................... 91

Figure 8 Relationship between FATA and ROA.................................................. 92

Figure 9 Relationship between FATA and ROE .................................................. 92

Figure 10 Relationship between LLR and NIM .................................................... 93

Figure 11 Relationship between CIR and ROA..................................................... 94

Figure 12 Relationship between CIR and ROE ..................................................... 94

Figure 13 Relationship between CIR and NIM ..................................................... 94

Figure 14 Relationship between NPL and ROE .................................................... 95

Figure 15 Relationship between NPL and NIM .................................................... 95

Figure 16 Relationship between LOAN and ROA ............................................... 96

Figure 17 Relationship between LOAN and ROE................................................ 96

Figure 18 Relationship between LOAN and NIM................................................ 97

Figure 19 Relationship between LIQ and ROA.................................................... 98

Figure 20 Relationship between LIQ and NIM .................................................... 98

Figure 21 Relationship between CPI and ROA .................................................... 99

Figure 22 Relationship between CPI and ROE..................................................... 99

Figure 23 Relationship between CPI and NIM..................................................... 99

Figure 24 Relationship between GDP and ROA ................................................ 100

Figure 25 Relationship between GDP and ROE................................................. 100

x

LIST OF TABLES

Table 2.1 Summary of criteria for assessing financial performance of commercial

banks ...................................................................................................................... 15

Table 3.1 List of Commercial banks in Vietnam....................................................42

Table 3.2 Summary of research on financial performance .....................................51

Table 4.1 Summary of Descriptive statistics ......................................................... 51

Table 4.2 Correlation between ROA and independent variables........................... 54

Table 4.3 Correlation between ROE and independent variables........................... 55

Table 4.4 Correlation between NIM and independent variables ........................... 56

Table 4.5 Multicollinearity VIF............................................................................. 58

Table 4.6 Estimated of Model 1 (Pooled OLS, FEM and REM)........................... 59

Table 4.7 Estimated of Model 2 (Pooled OLS, FEM and REM)........................... 60

Table 4.8 Estimated of Model 3 (Pooled OLS, FEM and REM)........................... 62

Table 4.9 Modified Wald Test for ROA................................................................ 65

Table 4.10 Modified Wald Test for ROE .............................................................. 65

Table 4.11 Modified Wald Test for NIM............................................................... 65

Table 4.12 Wooldridge test - ROA autocorrelation test ........................................ 66

Table 4.13 Wooldridge test - ROE autocorrelation test......................................... 66

Table 4.14 Wooldridge test - NIM autocorrelation test......................................... 66

Table 4.15 Estimated the FGLS............................................................................. 67

Table 4.16 Endogenous testing .............................................................................. 69

Table 4.17 Sargan Hansen and Arellano-Bond Test.............................................. 70

Table 4.18 S-GMM regression results of Model 1 ................................................ 71

Table 4.19 S-GMM regression results of Model 2 ................................................ 72

Table 4.20 S-GMM regression results of Model 3 ................................................ 73

Table 4.21 Research results of Model 1................................................................. 75

Table 4.22 Research results of Model 2................................................................. 76

Table 4.23 Research results of Model 3................................................................. 77

1

CHAPTER 1: INTRODUCTION

1.1. REASONABLE FOR RESEARCH

In today's economy, the banking industry is critical to a country's

development. In 2017, Vietnamese banks joined the World Trade Organization

(WTO). After joining, the weaknesses of Vietnamese banks, such as low financial

capacity and competition, have become more apparent. The Vietnamese banking

system is still young, management experience is limited, the scale is small, and

banking system risks are always present, threatening the Vietnamese banking

system's health. The global economic crisis in 2008 clearly demonstrated that

Vietnam's growth rate was slower than that of other markets.

In order to carry out credit institution restructuring, it is done quickly and

dramatically so that the risk of banking system failure is avoided, political security,

social order, and safety are preserved, and people's trust in the banking system

restructuring program is consolidated. So, between 2011 and 2015, the Governor of

the State Bank signed Decision No. 734/QD-State Bank on promulgating the

Banking Sector Action Plan to implement the Project "Restructuring the Banking

System." credit institutions. And with the goal of maximizing profits, while

operating stably and safely against market fluctuations, commercial banks in

Vietnam are always interested in the financial performance of banks in aspects such

as structure capital, asset quality, profitability, liquidity and operational efficiency

of the bank...

As a result, it is critical to evaluate and identify the current issues affecting

the financial performance of commercial banks in Vietnam. Because it will aid

2

decision-making for managers, policymakers, bankers, and investors. As a result, it

serves as a foundation for developing a reasonable policy framework for controlling

bank operations in Vietnam during the integration phase. As a result, it is clear that

assessing the financial performance of commercial banks in Vietnam at this stage is

critical, as it allows managers to effectively restructure the banking system has a

scientific basis, is oriented toward merger and consolidation...

Stemming from the above reasons, the author has chosen to carry out the

research topic "Factors affecting the financial performance of commercial

banks in Vietnam" to study to show the factors that have affected the financial

performance of the Bank, besides, there are proposed methods to improve the

financial performance of commercial banks in Vietnam.

1.2. OBJECTIVES OF STUDY

1.2.1. General objective

The general objective of this study is to study the factors affecting the

financial performance of commercial banks in Vietnam.

1.2.2. Specific objective

 Build models based on previous studies.

 Verify the impact of these factors on the financial performance of Vietnam

Joint Stock Commercial Bank.

 Check the direction of impact.

 Proposing solutions and recommendations for joint stock commercial banks

to improve the financial performance of Vietnam joint stock commercial banks,

limiting the impact on the financial performance of commercial banks.

1.3. RESEARCH QUESTION

This thesis is carried with the expectation to find answers for four main

question listed here in below:

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 What are the determining factors affecting the financial performance of

commercial banks in Vietnam?

 What model and method to measure the financial performance of commercial

banks in Vietnam?

 How is the impact of the financial performance of commercial banks in

Vietnam?

 Based on the research results, what solutions to improve the financial

performance of commercial banks in Vietnam?

1.4. SUBJECT AND SCOPE OF THE STUDY

1.4.1. Research Subject

The object of this research is financial performance of commercial banks, the

factors affecting the financial performance of commercial banks in Vietnam.

1.4.2. Scope of the study

Data research was carried out on 31 Vietnam Joint Stock Commercial Banks.

The study used data collected from 2010-2020.

1.5. RESEARCH METHODOGY

To overcome the weaknesses of each method and increase the reliability of

the research results, the study uses both qualitative methods, quantitative methods,

and other methods simultaneously. In which, a quantitative method is used to detect

the relationship and correlation between variables, a qualitative method is used to

verify the results of data analysis.

Methods of data collection: developing research models, designing research

samples and collecting data for research. To have data for the research, the author

used the method of collecting secondary data by taking the data published on the