The impact of liquidity creation on bank profitability: Empirical evidence from Vietnamese commercial banks, 2022

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM

BANKING UNIVERSITY OF HO CHI MINH CITY

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NGUYỄN NGỌC THANH TRÚC

THE IMPACT OF LIQUIDITY CREATION ON BANK

PROFITABILITY: EMPIRICAL EVIDENCE FROM

VIETNAMESE COMMERCIAL BANKS

GRADUATION THESIS

MAJOR: FINANCE – BANKING

CODE: 7340201

HO CHI MINH CITY, 2022

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM

BANKING UNIVERSITY OF HO CHI MINH CITY

------------------------------

NGUYỄN NGỌC THANH TRÚC

THE IMPACT OF LIQUIDITY CREATION ON BANK

PROFITABILITY: EMPIRICAL EVIDENCE FROM

VIETNAMESE COMMERCIAL BANKS

GRADUATION THESIS

MAJOR: FINANCE – BANKING

CODE: 7340201

SUPERVISOR

NGUYỄN DUY LINH, Ph.D

HO CHI MINH CITY, 2022

COMMENTS OF THE SUPERVISOR

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Ho Chi Minh City, …/…/2022

Supervisor

Ph.D Nguyễn Duy Linh

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ABSTRACT

Research data: The final thesis will focus on studying the impact of

liquidity creation on the profitability of twenty-three commercial banks in Vietnam

in the period from 2009 to 2020. Reliable secondary data are extracted from the

financial statements of commercial banks previously disclosed to the public.

Purpose: To build a regression model to estimate the impact of liquidity

creation represented by the “cat fat” measure on bank profitability, the research on

the topic aims to investigate and find the impact of liquidity creation on the

profitability of commercial banks in Vietnam. Several variables represent bank

characteristics including bank size, capital ratio, debt ratio, deposit ratio, expense

ratio, provision ratio, real GDP growth rate, and treasury bill interest rate. In

particular, the author performed regressions on the components of liquidity creation

and examined each one affected bank profitability. Including research variables

such as liquidity creation, bank-specific variables, and macro variables. Based on

the collected data on the factors, the study examines the impact of these factors on

the performance of twenty-three commercial banks in Vietnam, including two

variables: depends on return on assets (ROA) and return on equity (ROE).

Design/methodology/approach: The authors examined how liquidity

creation influences the profitability of commercial banks in Vietnam from 2009 to

2020 by constructing regression models for regression analysis. The multivariate

regression models used are the Pooled Ordinary Least Squares (POLS) method, the

Fixed Effects Model (FEM), and the Random Effects Model (REM), respectively.

Finally, the author uses the Feasible Generalized Least Squares (FGLS) method to

overcome the phenomena.

Findings: Using panel data for the period 2009-2020, the research results

show the negative impact of liquidity creation on bank profitability in Viet Nam, for

both dependent variables, ROA and ROE. In nine independent variables, in each

ROA and ROE model, only six variables affect the regression model while the other

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three variables have no significant influence.

Implications: With the results achieved, it will help banks and other related

agencies to evaluate, manage and operate more effectively, as well as contribute to

an empirical study for the future. Assist them in identifying key variables

influencing bank profitability in Vietnam, particularly the influence of liquidity

creation. The findings will support banks and other associated agencies in better

evaluating, managing, and running their businesses and provide an empirical study

for future research.

Keywords: Commercial banks, profitability, ROE, bank size, capital, loans,

deposits, loan ratio, deposit ratio, GDP growth, treasury bill rates, liquidity creation.

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COMMITMENT

My graduation thesis titled "The impact of liquidity creation on bank

profitability: Empirical evidence from Vietnamese commercial banks" is my

research work in the past time. The article is made with the guidance and dedicated

help of Ph.D Nguyen Duy Linh. The topic is my result after studying and

accumulating knowledge at Banking university of Ho Chi Minh City.

The author's research work and the research results are honest. The reference

part of the thesis clearly states the material and data used in the research work.

The substance of the thesis, as well as the results and software program, are

done honestly and plainly and have never been published before.

Ho Chi Minh City, …/…/2022

Author

Nguyễn Ngọc Thanh Trúc

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ACKNOWLEDGEMENTS

To complete this final thesis, I would like to thank the lecturers of Banking

University of Ho Chi Minh City. Especially the teachers who majored in Finance

and Banking during the years of studying here have taught me valuable knowledge

as a foundation for my career and later life. I would like to express my sincere

thanks to Ph.D Nguyen Duy Linh, who has always accompanied and supported me

during my research work. Thanks to that, the research was completed on schedule

and completed my graduation thesis most conveniently.

In addition, I would also like to share my joy and express my gratitude to my

family and friends who have always supported and encouraged me throughout the

process of writing this thesis. In the process of implementing the thesis, due to the

limitations of knowledge, shortcomings are inevitable. I look forward to receiving

suggestions from teachers, and friends to improve the topic. At the same time, it

creates a better premise and a direction for future research.

Finally, I would like to wish the lecturers always have good health, and

happiness and always achieve much success in their work as well as in their lives.

Sincerely thanks!

Ho Chi Minh City, …/…/2022

Author

Nguyễn Ngọc Thanh Trúc

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TABLE OF CONTENTS

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

COMMITMENT................................................................................................... iii

ACKNOWLEDGEMENTS ................................................................................. iv

TABLE OF CONTENTS .......................................................................................v

LIST OF ABBREVIATIONS .............................................................................. ix

LIST OF FIGURES ................................................................................................x

LIST OF TABLES ................................................................................................ xi

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

1.1. BACKGROUND OF THE RESEARCH...................................................1

1.2. OBJECTIVES OF THE RESEARCH.......................................................4

1.2.1. General objectives ..................................................................................4

1.2.2. Specific objectives...................................................................................4

1.3. RESEARCH QUESTIONS.........................................................................4

1.4. RESEARCH SUBJECTS AND SCOPE....................................................4

1.4.1. Research subject .....................................................................................4

1.4.2. Research scope .......................................................................................5

1.5. RESEARCH METHODOLOGY...............................................................5

1.6. CONTRIBUTION OF THE RESEARCH ................................................6

1.6.1. Literature gap .........................................................................................6

1.6.2. New contributions...................................................................................7

1.7. STRUCTURE OF THE RESEARCH .......................................................7

CONCLUSION CHAPTER 1................................................................................9

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CHAPTER 2: THEORETICAL BASIS AND LITERATURE REVIEW ......10

2.1. DEFINITION OF COMMERCIAL BANK............................................10

2.2. PROFITS OF COMMERCIAL BANKS ................................................10

2.2.1. The concept of bank profitability ..........................................................10

2.2.2. Profit measurement criteria of commercial banks ...............................11

2.3. CREATE LIQUIDITY OF COMMERCIAL BANKS ..........................13

2.3.1. Definition of liquidity creation of commercial banks...........................13

2.3.2. Liquidity creation theories....................................................................13

2.3.3. Create liquidity and metrics .................................................................15

2.3.3.1. The role of creating liquidity with commercial banks...................15

2.3.3.2. Indicator for measurement of liquidity creation............................16

2.3.3.3. Steps to calculate liquidity creation variable ................................17

2.4. EMPIRICAL STUDIES ON THE IMPACT OF LIQUIDITY

CREATION ON BANK PROFITABILITY .....................................................20

2.4.1. Domestic studies...................................................................................20

2.4.2. Foreign studies .....................................................................................22

2.5. OTHER FACTORS AFFECTING THE PROFITABILITY OF

COMMERCIAL BANKS ...................................................................................25

2.5.1. Bank-specific factors.............................................................................25

2.5.2. Macro factors........................................................................................27

CONCLUSION CHAPTER 2..............................................................................29

CHAPTER 3: METHODOLOGY.......................................................................30

3.1. RESEARCH PROCESS ...........................................................................30

3.2. RESEARCH MODEL AND RESEARCH HYPOTHESIS...................32

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3.2.1. Research model....................................................................................32

3.2.2. Research hypothesis..............................................................................33

3.3. DATA COLLECTION..............................................................................42

CONCLUSION CHAPTER 3..............................................................................43

CHAPTER 4: RESEARCH RESULTS AND DISCUSSION...........................44

4.1. DESCRIPTIVE STATISTICS RESULT FROM THE VARIABLES .44

4.1.1. Return on total assets (ROA)................................................................46

4.1.2. Return on equity (ROE) ........................................................................47

4.1.3. Liquidity creation (LC).........................................................................48

4.1.4. Bank size (SIZE)....................................................................................51

4.1.5. Capital ratio (CAP) ..............................................................................53

4.1.6. Total loans and leases to total assets (LOANS)....................................54

4.1.7. Deposit ratio (DEP)..............................................................................55

4.1.8. Cost-to-income ratio (COST) ...............................................................56

4.1.9. Loan loss provisions (LLP)...................................................................57

4.1.10. The annualized growth rate of real GDP (GDP) .................................59

4.1.11. Treasury bill rates (TB) ........................................................................60

4.2. CORRELATION ANALYSIS..................................................................61

4.3. MULTI-COLLINEARITY TEST............................................................62

4.4. REGRESSION ANALYSIS......................................................................64

4.4.1. Estimated the POOLED OLS, FEM, REM models...............................64

4.4.2. POOLED OLS, FEM, and REM model selection test ..........................68

4.5. HETEROSCEDASTICITY AND AUTOCORRELATION TEST ......70

4.6. FIX RESEARCH MODELS.....................................................................71