Factors affecting Vietnamese commercial banks’ profitability from 2012 to 2020, 2022

THE STATE BANK OF VIETNAM MINISTRY OF EDUCATION AND TRAINING

BANKING UNIVERSITY OF HO CHI MINH CITY

GRADUATION THESIS

FACTORS AFFECTING VIETNAMESE COMMERCIAL BANKS’

PROFITABILITY FROM 2012 TO 2020

MAJOR: FINANCE – BANKING

CODE: 52340201

Student: Tran Thanh Tam

Student ID: 050606180327

Academic advisor: Dr. Ho Thi Ngoc Tuyen

Ho Chi Minh City, May 2022

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ABSTRACT

The purpose of this thesisis to provide an analysis of factors affecting the

profitability of 22 commercial banks in Vietnam from 2012 to 2020 using Pooled

OLS, FEM, REM, FGLS methods. The scope of the study is to aim at finding and

analyzing the degree of impact of specific bank factors, industry-specific factors

and macro-economic factors on the profitability of 22 commercial banks in

Vietnam. The study cannot avoid the limitations because of the selection may

not fully reflect the content and the meaning of all factors affect profitability or may

not fully represent all commercial banks in Vietnam. Understanding the factors

influencing the performance of the bank not only receives much attention from

scholars, but also from shareholders, administrators and authorities, because it

assists policy makers and administrators in formulating strategies and policies to

ensure the stability and sustainability of banking system's operation, as well as to

avoid the risk of banking system crisis. Assessing the profitability of a

commercial bank always raises questions, because of their diversity. Many

researchers consider that profitability can provide a picture of the bank's business

results.

Obtained result showed that ROA of commercial banks in Vietnam was

affected positively and statistically significant by liquidity ratio, equity ratio, income

diversification ratio, GDP and inflation rate; while non-performing loan, operating cost

and loan balance have negative impact on ROA. In contrast, Bank size do not affect

ROA and is not statistically significant.

Likewise, ROE of commercial banks in Vietnam was affected positively and

statistically significant by Bank size, liquidity ratio, income diversification ratio, GDP

and inflation rate; while equity ratio, non-performing loan and operating cost have

negative impact on ROE. By contrast, loan balance do not affect ROE and is not

statistically significant.

Keywords: the factors, commercial banks, profitability, ROA, ROE.

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GUARANTEE

My name is: TRAN THANH TAM

Born: January 3rd, 2000

MSSV: 050606180327

Grade: HQ6-GE12

As a 4th class student of the High-quality program of Banking University of Ho

Chi Minh City. I hereby declare that the thesis is: “FACTORS AFFECTING

VIETNAMESE COMMERCIAL BANKS’ PROFITABILITY FROM 2012 TO

2020”.

Academic advisor: Dr. Ho Thi Ngoc Tuyen

The thesis is carried out at Banking University of Ho Chi Minh City. This thesis

is the author's own research work, the research results are honest, in which there are no

previously published contents or contents made by others except for the cited

quotations. Sufficient source in the thesis. I take full responsibility for my honorary

statement.

Ho Chi Minh City, May 30

th, 2022

Author

Tran Thanh Tam

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ACKNOWLEDGEMENT

I would like to express my sincere thanks to the Board of Directors, Faculty of

Finance, Faculty of Banking, lecturers, officials of departments and functional

departments of Banking University of Ho Chi Minh City for helping me to equip my

knowledge, create the most favorable conditions during the study and implementation

of this thesis.

With respect and gratitude, I would like to express my gratitude to Dr. Ho Thi

Ngoc Tuyen for encouraging, guiding, and helping me throughout the entire process so

that the thesis research process can be completed in the best way.

Best regards!

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TABLE OF CONTENT

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

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

ACKNOWLEDGEMENT............................................................................................. iii

TABLE OF CONTENT .................................................................................................iv

ABBREVIATION LIST............................................................................................... vii

LIST OF TABLES ...................................................................................................... viii

LIST OF PICTURES......................................................................................................ix

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

1.1. Background of the study ....................................................................................1

1.2. Research objectives............................................................................................2

1.2.1. General objectives.......................................................................................2

1.2.2. Specific objectives ......................................................................................2

1.3. Research questions.............................................................................................2

1.4. Subject and scope of the study...........................................................................2

1.4.1. Subject of the study.....................................................................................2

1.4.2. Scope of the study .......................................................................................2

1.5. Research methodology.......................................................................................2

1.6. Contribution of the topic....................................................................................3

1.7. Structure of the thesis.........................................................................................3

CHAPTER 2. THEORETICAL BASIS AND LITERATURE REVIEW ..............5

2.1. Theoretical basis about commercial bank..........................................................5

2.2. Theoretical basis about commercial bank profitability......................................5

2.2.1. Definition of bank profitability ...................................................................5

2.2.2. Factors affecting commercial bank profitability.........................................7

2.3. Theoretical framework.......................................................................................7

2.3.1. Agency theory .............................................................................................7

2.3.2. Relative market power ................................................................................8

2.3.3. Balance portfolio theory..............................................................................8

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2.3.4. Trade-off theory ..........................................................................................9

2.4. The meaning of profit assessment......................................................................9

2.5. The indicators reflect the profitability of commercial banks...........................10

2.5.1. Return on assets – ROA ............................................................................10

2.5.2. Return on equity – ROE............................................................................11

2.6. Literature review..............................................................................................12

2.6.1. Foreign studies ..........................................................................................12

2.6.2. National studies.........................................................................................14

CONCLUSION OF CHAPTER 2 .................................................................................19

CHAPTER 3. RESEARCH METHODS ...............................................................20

3.1. Research model................................................................................................20

3.1.1. Research model .........................................................................................20

3.1.2. Method of determining variable................................................................21

3.2. Research hypothesis.........................................................................................22

3.3. Research data ...................................................................................................28

3.4. Selection of regression model and tests...........................................................29

3.5. Research Process..............................................................................................31

CONCLUSION OF CHAPTER 3 .................................................................................32

CHAPTER 4. RESEARCH RESULTS AND DISCUSSION...............................34

4.1. Descriptive statistics ........................................................................................34

4.1.1. Check the correlation between variables ..................................................37

4.1.2. Multicollinearity diagnostics.....................................................................37

4.2. Analysis of factors affecting ROA...................................................................38

4.2.1. Regression results......................................................................................38

4.2.2. Model choice .............................................................................................39

4.2.3. Testing the hypothesis violations of the FEM ..........................................40

4.2.3.1. Heteroskedasticity diagnostics...........................................................40

4.2.3.2. Autocorrelation test ............................................................................41

4.2.3.3. Fix the defects of the model ...............................................................41

4.2.3.4. Discuss the influence of factors on ROA ...........................................42

4.3. Analysis of factors affecting ROE ...................................................................45

4.3.1. Regression results......................................................................................45

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4.3.1.1. Model choice ......................................................................................47

4.3.2. Testing the hypothesis violations of the FEM ..........................................47

4.3.2.1. Heteroskedasticity diagnostics...........................................................47

4.3.2.2. Autocorrelation diagnostics................................................................48

4.3.2.3. Fix the defects of the model ...............................................................48

4.3.2.4. Discuss the influence of factors on ROE ...........................................48

CONCLUSION OF CHAPTER 4 .................................................................................51

CHAPTER 5. CONCLUSION AND RECOMMENDATIONS ...........................52

5.1. Conclusion .......................................................................................................52

5.2. Recommendations............................................................................................52

5.2.1. Bank size (SIZE).......................................................................................52

5.2.2. Liquidity ratio (LIQ) .................................................................................53

5.2.3. Equity ratio (CAP) ....................................................................................54

5.2.4. Loan ratio (TLA).......................................................................................55

5.2.5. Non-performing loan (NPL) .....................................................................56

5.2.6. Operating Efficiency (CIR).......................................................................56

5.2.7. Income diversification (IDR)....................................................................57

5.2.8. Economic growth (GDP)...........................................................................58

5.2.9. The inflation rate (INF).............................................................................58

5.3. Limitation of the study.....................................................................................59

CONCLUSION OF CHAPTER 5 .................................................................................61

CONLUSION OF THE THESIS...................................................................................62

REFERENCES ..............................................................................................................63

APPENDIX…………………………………………………………………………...69

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ABBREVIATION LIST

Abbreviation Meaning

FEM Fixed effect model

GDP Gross domestic product

INF Inflation

Pooled OLS Pooled Ordinary Least Squares

REM Random effect model

ROA Return on asset

ROE Return on equity

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LIST OF TABLES

Table 2-1. Summary previous studies...........................................................................16

Table 4-1. Descriptive statistics of variables in the regression model ..........................34

Table 4-2. Correlation matrix between variables..........................................................37

Table 4-3. Test results for multicollinearity..................................................................37

Table 4-4. Summarize the results of regression analysis with ROA.............................38

Table 4-5. F test, Breusch -Pagan and Hausman model selection for variable ROA ...39

Table 4-6. The results of Heteroskedasticity diagnostics with ROA ............................40

Table 4-7. Autocorrelation test results of ROA ............................................................41

Table 4-8. ROA regression model results after fixing ..................................................41

Table 4-9. Summarize the results of regression analysis with ROE .............................45

Table 4-10. F test, Breusch-Pagan and Hausman model selection for variable ROE...47

Table 4-11. The results of Heteroskedasticity diagnostics with ROE...........................47

Table 4-12. The results of Autocorrelation diagnostics with ROE ...............................48

Table 4-13. ROE regression model results after fixing.................................................48