Factors affecting loan loss provision of joint-stock commercial banks in VietNam, 2022

MINISTRY OF EDUCATION AND TRAINING THE STATE BANK OF VIETNAM

HO CHI MINH UNIVERSITY OF BANKING

LAM THI DO HUYEN

FACTORS AFFECTING LOAN LOSS PROVISION OF JOINT￾STOCK COMMERCIAL BANKS IN VIETNAM

GRADUATION THESIS

MAJOR: FINANCE –BANKING

CODE: 52340201

HO CHI MINH CITY, 2022

MINISTRY OF EDUCATION AND TRAINING THE STATE BANK OF VIETNAM

HO CHI MINH UNIVERSITY OF BANKING

LAM THI DO HUYEN

FACTORS AFFECTING LOAN LOSS PROVISION OF JOINT￾STOCK COMMERCIAL BANKS IN VIETNAM

GRADUATION THESIS

MAJOR: FINANCE –BANKING

CODE: 52340201

SUPERVISOR

NGUYEN THI MY HANH, Ph.D

HO CHI MINH CITY, 2022

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ACKNOWLEDGEMENTS

In order to research this topic completely, the author would like to express the

sincerest gratitude to the supervisor who has dedicated and worked with the author

throughout the research process.

In addition, the author also would like to express the deepest gratitude to staff,

and lecturers for teaching me useful knowledge as well as helping me have better

research skills for this study at Ho Chi Minh University of Banking. However, with

limited knowledge and limited time, the thesis cannot avoid mistakes. Hence, I look

forward to receiving guidances and comments from lectures to complete and improve

my thesis.

Thank you very much!

Ho Chi Minh City, 2022

Author

Lam Thi Do Huyen

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AUTHOR’S DECLARATION

I hereby confirm that this thesis entitled “Factors affecting loan loss provision of

joint-stock commercial banks in Vietnam”, is my own work, and none of this work has

been published before submission.

Ho Chi Minh City, 2022

Author

Lam Thi Do Huyen

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ABSTRACT

This study focuses on the impact of macro and micro factors on loan loss

provision of Vietnamese commercial banks between 2011 and 2020. The data used

for the study was secondary data, collected from independent audited financial

statements of 25 Vietnamese joint-stock commercial banks. The study used the

Generalized Least Squares model for panel data to identify factors, including

internal and external factors, that affect the loan loss provision ratio of Vietnamese

joint-stock commercial banks. The results showed that the loan loss provision ratio

(LLP) was favorably correlated with bank size, net interest margin, non-performing

loans, and credit risk coefficient, return on asset ratio harms the provision. For

macroeconomic factors, the GDP rate has a negative impact on the provision of

commercial banks. These variables are all statistically significant at the 10%

meaning. In addition, the study has not found a correlation between loan growth and

debt to equity ratio (are not statistically significant for the research model) with

LLP dependent variables in the period 2011-2020.

Key word: Loan loss provision, Joint-stock commercial banks, Vietnam.

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TABLE OF CONTENTS

LIST OF TABLES .........................................................................................................10

LIST OF PICTURES, GRAPHS....................................................................................11

LIST OF ACRONYMS..................................................................................................12

CHAPTER 1. INTRODUCTION ..............................................................................13

1.1 Reasons for choosing the topic.........................................................................13

1.2 Research objective............................................................................................14

1.2.1 General objectives......................................................................................14

1.2.2 Specific objectives.....................................................................................14

1.3 Research questions ...........................................................................................14

1.4 Research scope .................................................................................................15

1.5 Research methods.............................................................................................15

1.5.1 Research methods......................................................................................15

1.5.2 Research process........................................................................................16

1.6 Structure of the research...................................................................................17

CHAPTER 2. LITERATURE REVIEW ...................................................................19

2.1 Credit risk .........................................................................................................19

2.1.1 Definition ...................................................................................................19

2.1.2 Classification .............................................................................................20

2.1.3 Causes of credit risk...................................................................................21

2.1.3.1 Causes from banks..............................................................................21

2.1.3.2 Causes from customers .......................................................................21

2.1.3.3 Objective causes..................................................................................22

2.1.4 Consequences of credit risk .......................................................................22

2.1.4.1 As for banks' operations......................................................................22

2.1.4.2 As for customers .................................................................................22

2.1.4.3 As for the economy.............................................................................23

2.1.5 Credit risk measurement ............................................................................23

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2.2 Loan loss provision...........................................................................................24

2.2.1 Definition ...................................................................................................24

2.2.2 Objects of provisioning..............................................................................25

2.2.3 Measure loan loss provision ......................................................................26

2.2.3.1 Specific provision ...............................................................................26

2.2.3.2 General provision................................................................................30

2.2.4 Meaning of loan loss provision..................................................................31

2.3 Factors affecting loan loss provision................................................................32

2.3.1 Macro factors - GDP growth .....................................................................32

2.3.2 Micro factors..............................................................................................33

2.3.2.1 Bank size .............................................................................................33

2.3.2.2 Net interest margin..............................................................................34

2.3.2.3 Return on Assets .................................................................................34

2.3.2.4 Loan growth ........................................................................................35

2.3.2.5 Non-performing loan...........................................................................35

2.3.2.6 Credit risk coefficient..........................................................................35

2.3.2.7 Debt to equity ratio .............................................................................36

2.4 Previous studies relating to loan loss provision ...............................................36

2.4.1 Foreign studies...........................................................................................36

2.4.2 Domestic studies........................................................................................40

CHAPTER 3. RESEARCH METHODS AND DATA..............................................43

3.1 Research method...............................................................................................43

3.2 Research model.................................................................................................43

3.3 Research variables............................................................................................44

3.3.1 Dependent variables...................................................................................44

3.3.2 Independent variables................................................................................45

3.3.2.1 Bank-specific variables.......................................................................45

3.4 Research data....................................................................................................52

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3.4.1 Panel data regression methods...................................................................54

3.4.1.1 Fixed effects model.............................................................................54

3.4.1.2 Random effects model ........................................................................55

3.4.1.3 Statistical Description .........................................................................56

3.4.1.4 Estimation and selection of the appropriate model.............................57

3.4.1.5 Defect analysis....................................................................................57

CHAPTER 4. RESEARCH RESULTS AND DISCUSSION ...................................59

4.1 Current status of operations and provisioning of Vietnamese joint-stock

commercial banks from 2011 to 2020........................................................................59

4.1.1 Current status of business activities of Vietnamese joint-stock commercial

banks ....................................................................................................................59

4.1.2 Situation of provisioning for loan losses in Vietnamese joint-stock

commercial banks...................................................................................................61

4.2 Research results................................................................................................63

4.2.1 Descriptive statistics..................................................................................63

4.2.2 Correlation analysis ...................................................................................65

4.2.3 Regression results......................................................................................67

4.2.3.1 Pooled OLS model..............................................................................67

4.2.3.2 Fixed Effects Model............................................................................68

4.2.3.3 Random Effects Model .......................................................................69

4.2.4 Model selection test ...................................................................................69

4.2.4.1 Selection test between the Pooled OLS model and Fixed effects model

(FEM) .............................................................................................................69

4.2.4.2 Selection test between Fixed effects model (FEM) and Random

effects model (REM)..........................................................................................70

4.2.5 Test defect model.......................................................................................71

4.2.5.1 Testing for the heteroskedasticity phenomenon .................................71

4.2.5.2 Testing for the chain correlations .......................................................72

4.2.6 Estimation results by FGLS.......................................................................72

4.2.7 Discussion..................................................................................................74

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CHAPTER 5. CONCLUSIONS AND RECOMMENDATIONS .............................79

5.1 Conclusions ......................................................................................................79

5.2 Recommendations ............................................................................................80

5.3 Limitations of the research ...............................................................................82

REFERENCES...............................................................................................................83

APPENDIX ...................................................................................................................88