Luận văn thạc sĩ UEH determinants of bank profitability in vietnam, does foreign presence matter

UNIVERSITY OF ECONOMICS

HO CHI MINH CITY

VIETNAM

INSTITUTE OF SOCIAL STUDIES

THE HAGUE

THE NETHERLANDS

VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN

DEVELOPMENT ECONOMICS

DETERMINANTS OF BANK PROFITABILITY IN

VIETNAM: DOES FOREIGN PRESENCE MATTER?

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

TRUONG UY PHAP

Academic Supervisor

Dr. DUONG NHU HUNG

HCM city, December 2014

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CERTIFICATION

“I hereby claim that the substance of this thesis has not ever been submitted for any

degree and has not been currently submitted for any other degree.

I certify that to the best attempt of my knowledge and support received during the

preparation phrase of this thesis and all resources have been acknowledged in this

thesis”.

TRUONG UY PHAP

Date: … December 2014

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ACKNOWLEDGEMENT

I would not be able to write and finish my thesis without the help and support

of people surrounding me.

Above all, I would like to express my greatest appreciation to my supervisor,

Dr. Duong Nhu Hung, for his precious comments, advices and guidance,

encouragement during the writing period. Without his guidance, my thesis would

not be completed.

I would also like to offer my special thanks to Dr. Truong Dang Thuy for the

econometric guidance and valuable suggestions that help to develop this thesis.

Besides my mentors, special thanks also to all the lecturers at the Vietnam –

Netherlands Program for their expert knowledge and sharing during the coursework

phrase.

In addition, I really appreciate my friends and people who are always beside

me and provide supports for my thesis.

Last, but not least, I am very deeply grateful to my family. Without their

warm encouragement and patience, I would not be possible to complete well this

thesis.

TRUONG UY PHAP

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ABSTRACT

The present paper seeks to examine the determinants of bank profitability in

Vietnam during the period 2004–2013. The empirical findings suggest that credit

risk, non-interest income, operating expense and liquidity variables have a

statistically significantly impact on bank profitability. The empirical findings

suggest that credit risk and expense preference behaviour are negatively related to

banks' profitability, while non-interest income and liquidity have a positive impact.

During the period under study, the results suggest that inflation has a negative

impact on bank profitability, while the impacts of economic growth and money

supply have not significantly explained the variations in the profitability of the

Vietnamese banks. Besides, foreign presence from the macroeconomic view and

enterprise view do not show the significant relationship with bank profitability. In

other words, the opening up policy to allow more foreign entry entering into

domestic banking market and relaxing of foreign ownership restriction in local

banks are considered unclear for policy implications.

Key words: bank profitability, foreign presence, ownership, Vietnam, determinants

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ABBREVIATION

SBV State Bank of Vietnam

SOBs State-Owned Banks

JSBs Joint Stock commercial banks

JVBs Joint Venture banks

FOBs 100% foreign-owned banks

GMM Generalized method of moments

FEM Fixed Effect Model

REM Random Effect Model

OLS Ordinary Least Square

LSDV Least Square Dummy Variable

GDP Gross Domestic Product

WTO World Trade Organization

FS Foreign Shareholding

FSP Foreign Strategic partner

FP Foreign presence

ROA Return on Assets

NIM Net interest margin

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TABLE OF CONTENTS

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

1.1. Problem statement ............................................................................................ 1

1.2. Research objective............................................................................................ 3

1.3. Research questions ........................................................................................... 3

1.4. The scope of the study...................................................................................... 3

1.5. Structure of the study........................................................................................ 4

CHAPTER 2: LITERATURE REVIEWS .............................................................. 5

2.1. Theory of Bank profitability’s determinant...................................................... 5

2.2. Foreign presence/ ownership and its impact on bank profitability ................ 10

CHAPTER 3: RESEARCH METHODOLOGY AND DATA ............................ 16

3.1. Research methodology ................................................................................... 16

3.1.1. Estimation panel regression model:................................................................ 16

3.1.2. Test for an appropriate panel data regression choice ..................................... 18

3.2. Model specification ........................................................................................ 20

3.3. Variable measurement and test hypothesis..................................................... 25

3.3.1. Bank profitability definition ........................................................................... 25

3.3.2. Internal determinants...................................................................................... 26

3.3.3. External determinants..................................................................................... 29

3.3.4. Foreign presence and foreign shareholding.................................................... 30

3.4. Estimation strategy & Data collection............................................................ 32

CHAPTER 4: RESEARCH RESULTS & DISCUSSION ................................... 35

4.1. Vietnam banking background......................................................................... 35

4.2. Descriptive statistic of the sample .................................................................. 39

4.3. Empirical results & findings discussion ......................................................... 45

4.3.1. Result of Test for panel regression model...................................................... 45

4.3.2. Empirical results............................................................................................. 46

4.4. Discussion of findings.................................................................................... 48

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4.4.1. Overall model ................................................................................................. 48

4.4.2. Internal determinants...................................................................................... 49

4.4.3. External determinants..................................................................................... 52

4.4.4. Foreign presence............................................................................................. 53

CHAPTER 5: CONCLUSION................................................................................ 55

5.1. Conclusion ...................................................................................................... 55

5.2. Recommendations .......................................................................................... 57

5.3. Limitations & suggestion for future studies................................................... 58

APPENDIX A: INFORMATION OF BANK OBSERVATION SAMPLE.......... 62

APPENDIX B: SUMMARY OF SOME MAIN EMPIRICAL LITERATURE

REVIEWS ........................................................................................................... 71

APPENDIX C: DESCRIPTIVE SUMMARY ANALYSIS.................................... 77

APPENDIX D: PANEL REGRESSION MODEL.................................................. 79

APPENDIX E: RESULTS OF BREUSCH – PAGAN LM TEST......................... 87

APPENDIX F: RESULTS OF HAUSMAN TEST.................................................. 89

APPENDIX G: RESULT OF ROBUST STANDARD ERROR (FIX

HETEROSKEDASTICITY)..................................................................................... 91

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LIST OF FIGURES

Figure 2.1: Analytical framework of determinants of bank profitability..................15

Figure 4.1: Trend of foreign presence in Vietnam....................................................38

Figure 4.2: Average bank’ equity by different levels of foreign presence ...............42

Figure 4.3: Average bank’ total assets by different levels of foreign presence ........42

Figure 4.4: Average bank’ return on asset by different levels of foreign presence ..43

Figure 4.5: Average bank’ net interest margin by different levels of foreign presence

...................................................................................................................................43

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LIST OF TABLES

Table 3.1: Tests for choosing the appropriate panel regression model.....................20

Table 3.2: Definition, notation and expected signs of relevant variables.................22

Table 3.3: Data collection sources............................................................................34

Table 4.1: Numbers of banking institutions in Vietnam (2004-2013)......................37

Table 4.2: Performance of banking industry and its contribution to Vietnam

economy ....................................................................................................................39

Table 4.3: Summary statistics for all variables in this research................................40

Table 4.4: Correlation analysis among independent variables .................................44

Table 4.5: Results of F test and Breusch – Pagan Test.............................................45

Table 4.6: Results of Hausman Test .........................................................................45

Table 4.7: Result of Test for heteroskedasticity .......................................................46

Table 4.8: Results of the final models.......................................................................47

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CHAPTER 1: INTRODUCTION

1.1. Problem statement

In the world of financial liberalization during the last few decades, in terms of

facilitating the critical roles of international trade, the rise of international banks has

become important significantly. Banks have expanded multinationally by not only

establishing foreign susidiaries and branches as local incoporation formation but also by

taking over estabished foreign banks. As other corporations, banks have always operated

with the aims of profit maximization. The foreign banks operates in developing

countries will be considered as the same strategy afterward. However, to what extent

will the foreign bank operating in particular country yield a better return than those

domestic competitors, or vise-versa? This is the question leading to many reseaches

conducted recently.

There have been some researches regarding the impact of the internal factors such

as bank specific characteristics (size, risk level, liquidity status and so on) and external

factors such as inflation, GDP from the country-specific factors on banking profitability

(Pasiouras and Kosmidou, 2007). These determinants have been anlayzed not only in a

series of pooled countries but also in a single country. However, to integrate the effect of

foreign ownership structure into this link is critically necessary especially for developing

countries where they are concentrating on the progress of financial liberalization and

seeking for foreign entry to enhance the domestic market. As part of the privatization

and financial liberalization strategy, more and more developing countries allow foreign￾owed banks or greenfield bank (Bonin et al, 2005) to operate in their domestic market.

As stated in their study, privatization of banking sector, particularly in developing

countries is usally accompany with complex procedures and phrases. These may

dramatically change the whole banking sector operation in which they would affect to

the value of banking, growth rate, risk exposures and defintely performance of banks.

Some markets such as China followed a more prudent approach where they open a

certain limit of foreign investor in their domestic commercial bank so-called strategic

partner program (Shen et. al., 2009). Since foreign banks represent one of bank

ownership type besides domestic state-owned or private-owned banks, will foreign

ownership, either at greenfield bank or at domestic bank, with the role of strategic

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