The impact of credit growth on profitability and credit risk: The case of Vietnamese commercial banks, 2021

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM

BANKING UNIVERSITY OF HO CHI MINH CITY

NGUYEN TRAN THANH TRUC

THE IMPACT OF CREDIT GROWTH ON PROFITABILITY

AND CREDIT RISK: THE CASE OF VIETNAMESE COMMERCIAL BANKS

BACHELOR THESIS PROPOSAL

MAJOR: FINANCE – BANKING

NUMBER: 7340201

HCMC, NOVEMBER 2021

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM

BANKING UNIVERSITY OF HO CHI MINH CITY

NGUYEN TRAN THANH TRUC

THE IMPACT OF CREDIT GROWTH ON PROFITABILITY

AND CREDIT RISK: THE CASE OF VIETNAMESE COMMERCIAL BANKS

BACHELOR THESIS PROPOSAL

MAJOR: FINANCE – BANKING

NUMBER: 7340201

INSTRUCTOR:

DR. NGUYEN THI HONG VINH

HCMC, NOVEMBER 2021

i

ABSTRACT

The objectives of this study are to: (i) Study the impact of bad debt on profitability and

credit risk of Vietnamese commercial banks. (ii) Determination of effective credit

growth threshold Research using GMM dynamic panel data estimation to evaluate the

impact of credit growth on the performance of Vietnamese commercial banks in the

period 2012-2020. And Hansen's PTR threshold model (1999) to estimate credit growth

threshold.

The research results show that credit growth with a lag of 1 to 3 years has a positive

impact on ROA and has a positive effect on NPL This positive relationship shows that

lending is still a driving force for profitability. of Vietnamese commercial banks and an

excessive increase in outstanding loans will lead to a narrower amount of loanable credit

and an increase in bad debt. The study also finds the optimal credit growth threshold at

which the initial credit growth is also positive with ROA but beyond that point will be

opposite.

In addition, the thesis has made important contributions to Vietnam's policy makers in

stabilizing the banking system as well as to bank administrators in controlling credit

growth well to increase profits and minimize risks.

Keywords: Credit growth, credit growth threshold, Vietnamese commercial banks.

ii

PROMISE

The author declares that this thesis has never been submitted for a doctorate degree at

any university. 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 the cited sources. fully in the thesis.

The author assumes full responsibility for his honour statement.

Ho Chi Minh City, November 29, 2021

Author

Nguyễn Trần Thanh Trúc

iii

ACKNOWLEDGEMENTS

First of all, I would like to express my deep gratitude to Dr. Nguyen Thi Hong Vinh for

her dedicated guidance and wholehearted support in assisting me in performing

estimation techniques, providing research data, correcting errors even though she is

busy with work but always help me immediately when I need it. And importantly, her

research is a great source of inspiration and encouragement because of the

thoughtfulness, seriousness, and insight I recognize in each of her researchpapers.

I would also like to express my gratitude from the bottom of my heart to my mother

who sacrificed her time to take care of me, who was always busy from early morning

to late evening so that I could have precious time to do this thesis and not have to worry

about anything other than focusing on the thesis.

I would also like to thank every lecturer at Banking University of Ho Chi Minh City,

whether I have studied face-to-face or only read through books. The valuable

knowledge the teachers teach will follow me for the rest of my life.

I would like to thank my friends who studied at Banking University, especially Phong,

I learned a lot of virtues from you, enthusiasm, patience, curiosity, both competition

and support over a four-year period.

Finally, I thank the people who did not appear in my life directly, but have provided me

with immense spiritual support: Zen master Thich Nhat Hanh, Jared Diamond author of

Guns, Germs and Steel, Elon Musk CEO of SpaceX and Tesla, Megan Rapinoe

American professional soccer player. And most of all, I am extremely happy in every

moment of my life, including the difficult period when doing the thesis, because I have

learned the teachings of the Buddha.

iv

LIST OF ACRONYMS

GDP Gross domestic product

GMM Generalized method of moments

IMF International Monetary Fund

PTR Panel Threshold Regression

FEM Fixed Effect Model

REM Random Effect Model

SOCB State-Owned Commercial Bank

JSCB Joint Stock Commercial Bank

SBV State Bank of Vietnam

v

LIST OF TABLES

Table 2.1. Previous research summary.........................................................................22

Table 2.2. Summarizing the formula of variables and the sign expectation ................24

Table 4.1. Number of Vietnamese banks over time .....................................................40

Table 4.2. Statistical table describing the variables .....................................................58

Table 4.3. Correlation analysis matrix .........................................................................59

Table 4.4. Multicollinearity check................................................................................60

Table 4.5. Estimated results of the dependent variable ROA by GMM method..........61

Table 4.6. Results of estimating the dependent variable NPL by GMM method .......66

Table 4.7. Estimate threshold CGR dependent variable ROA .....................................71

Table 4.8. Regression results of the dependent variable ROA.....................................71

Table 4.9. Estimate threshold CGR dependent variable NPL......................................72

Table 4.10. Regression results of the dependent variable NPL....................................72

vi

LIST OF FIGURES

Figure 2.1. Supply curve shift ......................................................................................16

Figure 2.2. Demand curve shift ....................................................................................17

Figure 2.3. Productivity shift........................................................................................18

Figure 4.1. Asset size of Vietnamese joint stock commercial banks ...........................41

Figure 4.2. Deposit amount and deposit growth rate....................................................44

Figure 4.3. Classify customer deposits by term............................................................45

Figure 4.4. Bank profits over the years ........................................................................45

Figure 4.5. Outstanding loans and credit growth of the bank over the years...............48

Figure 4.6. ROA of joint stock commercial banks over the years ...............................49

Figure 4.7. ROE of joint stock commercial banks over the years................................51

Figure 4.8. NIM of joint stock commercial banks over the years................................52

Figure 4.9. Non-performing loan of Vietnam's banking industry over the years.........54

Figure 4.10. Structure of credit balance by industry ....................................................55

Figure 4.11. Provision ratio of Vietnam's banking industry over the years.................57

Figure 4.11. Non-linear model testing..........................................................................70

vii

LIST OF APPENDIXS

Appendix1: Estimation results of GMM dependent variable ROA model 1 ................A

Appendix 2: Result of GMM estimation of dependent variable ROA model............... B

Appendix 3: Result of GMM estimation of dependent variable NPL model................ C

Appendix 4: Estimation results of GMM dependent variable NPL model ...................D

Appendix 5: Threshold model checks for non-linearity between ROA and CGR^2 .... E

Appendix 6: Threshold model checks for nonlinearity between NPL and CGR^2 .......F

Appendix 7: Credit growth threshold with dependent variable ROA ...........................G

Appendix 8: Credit growth threshold with dependent variable NPL ............................H

viii

TABLE OF CONTENT

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

PROMISE.......................................................................................................................ii

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

LIST OF ACRONYMS.................................................................................................iv

LIST OF TABLES..........................................................................................................v

LIST OF FIGURES.......................................................................................................vi

CHAPTER 1 ...................................................................................................................1

1.1. The importance of research topic ........................................................................1

1.2. Relevant research situation and research problem ..............................................2

1.3. Research Objectives ............................................................................................3

1.4. Research Scope and Subject................................................................................4

1.5. Research Methods................................................................................................5

1.6. New contributions of the study............................................................................6

1.7. Research process and structure of the thesis .......................................................6

CHAPTER 2 ...................................................................................................................9

2.1. Concept of credit growth, profitability and credit risk .......................................9

2.1.1. Concept of credit growth ..............................................................................9

2.1.2. Concept of profitability and credit risk ......................................................10

2.2. Theoretical basis of credit growth .....................................................................13

2.2.1. Theory of macroeconomic factors..............................................................13

2.2.2. Theory of bank-specific factors..................................................................15

2.3. Review of previous studies................................................................................19

CHAPTER3 ..................................................................................................................23

3.1. Research models................................................................................................23

3.1.1. Model of the impact of credit growth on bank profitability .................26

3.1.2. Model of the impact of credit growth on credit risk..................................31

3.1.3 Credit growth threshold model....................................................................34

3.2. Research Methods..............................................................................................34

3.3. Research data .....................................................................................................35

3.4. Data collection source .......................................................................................35