Factors affecting vietnamese commercial banks’ profitability from 2012 to 2020

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 MAJ.

THE STATE BANK OF VIETNAM MINISTRY OF EDUCATION AND TRAINING

BANKING UNIVERSITY OF HO CHI MINH CITY

Ho Chi Minh City, May 2022

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

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 30th, 2022 Author

Tran Thanh Tam

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!

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

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

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

ABBREVIATION LIST

Pooled OLS Pooled Ordinary Least Squares

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

LIST OF PICTURES

Picture 1 Descriptive statistics 70

Picture 2 Correlation matrix between variables 70

Picture 3 Test results for multicollinearity 70

Picture 4 Pooled OLS output with ROA 70

Picture 5 REM output with ROA 70

Picture 6 FEM output with ROA 70

Picture 7 Breusch and Pagan Lagrangian test with ROA 70

Picture 8 Hausman test with ROA 70

Picture 9 Heteroskedasticity diagnostics with ROA 70

Picture 10 Autocorrelation diagnostics with ROA 70

Picture 11 FGLS output with ROA 70

Picture 12 Pooled OLS output with ROE 70

Picture 13 FEM output with ROE 70

Picture 14 REM output with ROE 70

Picture 15 Breusch and Pagan Lagrangian test with ROE 70

Picture 16 Hausman test with ROE 70

Picture 17 Heteroskedasticity diagnostics with ROE 70

Picture 18 Autocorrelation diagnostics with ROE 70

Picture 19 FGLS output with ROE 70

CHAPTER 1 INTRODUCTION 1.1 Background of the study

The rapid pace of globalization and free trade in recent years has created many great changes in the international economic environment Multinational and transnational companies have expanded their operations and have increasingly influenced countries around the world, and international capital flows have also been increasing sharply In addition, the strong development of technology, "Scientific Revolution 4.0" has brought many opportunities and challenges for the development of the Vietnamese economy in general and the system of joint stock Vietnamese commercial bank in particular

Joint Stock Commercial Banks or any other business operates with the goal of maximizing profitability and growth For banks, profitability is of great significance, associated with business performance, indicating the development direction of banks

In addition, profitability is the basis for banks to make business decisions Improving profitability is a condition for joint-stock commercial banks to preserve capital, a condition for joint-stock commercial banks to expand lending markets, and invest in technology innovation attract customers However, between profitability and risk there is a trade-off relationship, the higher the profitability, the higher the risk Therefore, bank managers must always balance the trade-off between risk and return when analyzing ratios measuring profitability achieved and accepted risk

For the economy Bank is one of the important components of the economy, the profitability of the bank is the driving force, the economic lever of the society Therefore, if the bank operates effectively, ensures financial stability and growth, and has high profitability, it will be the factor that makes the financial sector healthy, contributes to monetary stability, and curbs inflation development, economic growth

In an international competitive environment, improving the profitability of each bank

is the best way to help the banking system develop in a sustainable way, thereby promoting the development of the national economy and increasing the country's reputation

Profit is also an important indicator to evaluate the success or failure of banking activities, governance, and strategic activities of managers and is one of the factors to

Therefore, stemming from practical requirements in understanding the performance of Vietnamese commercial banks through profit targets, and knowing the factors affecting their goals, leaders will have Appropriate policies to maximize benefits from available resources, minimize costs that may arise The author chooses the topic "Factors affecting Vietnamese commercial bank’s profitability from 2012 to 2020" as the research topic

Proposing solutions to improve profits for Vietnamese commercial banks

1.3 Research questions

This thesis is aimed to solve some issues:

What factors affect the profitability of Vietnamese commercial banks?

How do these factors affect the profitability of Vietnamese commercial banks? What solutions to improve profits for Vietnamese commercial banks?

1.4 Subject and scope of the study

1.4.1 Subject of the study

The subject of this study is system of profit evaluation criteria, factors affecting profit in business activities of the bank

1.4.2 Scope of the study

Time scope: from 2012 to 2020

Space scope: 22 commercial banks in Vietnam

1.5 Research methodology

The thesis combines both qualitative research methods and quantitative methods Qualitative research methods: The thesis is based on the collected data and information, conducts comparison, from which to make comments, evaluate research

content At the same time, the thesis uses the deductive method to argue and explain the characteristics of each detail in the data analysis process

Quantitative research method: Regression analysis of panel data to determine factors affecting profitability of Vietnamese commercial banks, combined with analysis including: ordinary least squares method (Pooled OLS), random effects model (REM), fixed effects model (FEM) The thesis proceeds to build research model, present independent variables and Dependent variables in the model, data sources are taken from financial statements and annual reports of banks and macro variables are taken from the General Statistics Office In addition, the thesis also uses methods such

as synthesis, comparison, analysis, inference, description, etc in order to compare with reality, consider and evaluate factors affecting profitability of Vietnamese commercial banks

1.6 Contribution of the topic

The research results of the thesis bring positive meaning not only to the managers

of commercial banks but also to investors

For commercial banks, the research is the scientific basis for the managers and the bank's executive board to identify the factors and the level of impact of each factor

on profitability in banking business, detect inadequacies in business operations as well

as policies for using existing resources of joint stock commercial banks From there, it

is possible to make rational and effective decisions to help joint stock commercial banks improve operational efficiency, enhance competitiveness, and expand their brands

For investors, the research results help investors have an overview of the bank's operations On that basis, it is possible to evaluate and forecast operational efficiency, which helps investors make informed decisions while investing

1.7 Structure of the thesis

The research thesis will be presented in five chapters, including:

Chapter 1: Introduction to the topic

An overview of the research problem, the reason for choosing the topic, the research problem, the research objective, the object, the research scope and the meaning of the research

Chapter 2: An overview of the theory of profit and previous studies on factors affecting the profitability of Vietnamese commercial banks

This chapter presents the theories related to the thesis such as: profits, profit evaluation criteria in commercial banks' business activities and factors affecting profitability in commercial banks' business activities, a brief overview of related studies

Chapter 3: Research Methods

Make initial assumptions about the impact of factors on profitability of commercial banks, introduce how to choose data sources, choose appropriate research methods and set up regression models

Chapter 4: Research results and discussion Research conclusions

The study will conduct descriptive statistical analysis, analyze the relationship between the variables and analyze the regression results to determine the impact of the independent variables on the dependent variable

Chapter 5: Conclusion and some recommendations Conclusion and suggested solutions

Summarize the results of the study, outline the limitations of the research topic and suggest future research directions

CHAPTER 2 THEORETICAL BASIS AND LITERATURE REVIEW 2.1 Theoretical basis about commercial bank

Commercial banks are credit institutions that perform all banking activities and other related business activities for profit purposes (Consolidated documents No 20/2018/VBHN-NHNN, the State Bank of Vietnam)

Commercial bank is a financial institution which is operating under two business scopes: one is to federally insure deposits and to pay interests to the depositors and the second is to use its charter to issue loans, to check cash balance and clearing services, and to underwrite securities (Getter, 2016) Commercial bank plays prominent role in modern economy in circulating financial resources (Tariq et al., 2014) Other definition of commercial bank is a financial intermediary which effectively channel idle funds in the market to those who need credit to invest into valuable production and business opportunities and personal purposes (Tuyishime et al., 2015) Commercial bank is further divided into public sector bank (the bank with major of stake is hold by the government), private sector bank (the bank with major of stake is hold by private individuals) and foreign bank (the bank with head office located in other countries outside of a nation) (Kalpana & Rao, 2017) Commercial banks establish maladjustment and impediment and contribute to the development of the economy (Mongid et al., 2012) The operation of commercial banks is aligned with monetary policies of a nation and they play the main role of controlling cashflow given

to expected rate of returns and emissions (Erina & Lace, 2013)

In summary, the term of commercial bank used in the study is defined as a financial institution which operates in the way of holding deposit, paying interests to the depositors, opening credit to different economic sectors and facilitates economic development of a country

2.2 Theoretical basis about commercial bank profitability

2.2.1 Definition of bank profitability

Profitability is determined as one of that reflect efficient banking system, along with high service quality and sufficient funding indicators (Wang & Wang, 2015) When the banks earn high profitability, their operations are safe and sound (Bikker & Vervliet, 2017) It is also the indicator to reflect whether the banks are in threating

from its assets and the expenses incurred in its liabilities (Yuksel et al., 2018) Profitability reflects the efficiency of the management in making benefits from all the business operations of an organization, firm or company (Muya & Gathogo, 2016) Profitability refers to amount of money that a company can produce with the resources

it has The goal of most organization is to maximize profitability (Niresh & Velnampy, 2014) One precondition for any long-term survival and success of a business is profitable Profitability is generally measured using accounting ratios with the commonly used profitable ratio being ROA ROA determines the amount of the profit earned per shilling of assets This reflects the efficiency with which the bank's managers use bank's investment resources or assets in generation of income (Sehrish, Irshad & Khalid, 2010) It is also determined as the banks' ability in compensation of credit losses, capital retention, and the support for future development (Pastory & Marobhe, 2015) Behind of profitable generated from interest income, banks also earn substantial profit from non-interest income which is collected from the charge to the customers to use financial services (DeYoung & Rice, 2004) Some discussions related

to non-interest income of the banks were discussed by other researchers and this income sources implied for less reliance of the banks to interest income while relating

to the banks' business and operational stabilization, leveraging risk diversification and the increase of fixed cost to invest into facilities to deliver banking services to the customers (Kohler, 2013)

Given to the difference understandings of bank profitability, the term of bank profitability used in the thesisis defined as a relative number (a percentage), which expresses the ratio between profit and revenue Commercial bank profitability made during the year represents the capability of making profit, in which profit is expressed through the results of business activities of the bank, such as: mobilizing capital, lending, discounting, guaranteeing, providing financial services and other related activities The time for determining annual profit is made at the end of December 31 when the annual settlement, preparing annual financial statements For the determination of profits to be accurate, the total revenue and expenses of the entire system must be accurately determined during the year

2.2.2 Factors affecting commercial bank profitability

& Lace, 2013) Empirical evidence from different researchers explored more internal indicators affecting bank profitability such as management decision and policy objectives set by the banks (Staikouras & Wood, 2004)

 External factors

Beside internal factors, bank profitability is also under the influence of external factors or macro-economic factors According to Blerta, B (2014), external factors refer to those which are not under the banks' control such as inflation rate, market share, industry growth and interest rate The contribution of overall banking sector to national gross domestic product (GDP) is also considered as important external factor

to the bank profitable (Bezawada & Ranajee, 2018) Economic growth is determined

as external factor and its effect on bank profitability is confirmed (Gul et al., 2011; Rehmandet al., 2018)

2.3 Theoretical framework

2.3.1 Agency theory

According to Jensen and Meckling (1976) define an agency relationship (or fiduciary relationship) as a contractual relationship whereby shareholders (principals) appoint, appoint another, company managers (representatives-agents) to perform the management of the company for them, which includes giving authority to make decisions about the disposal of the company's assets Agency theory holds that, if both parties to this relationship (shareholders and company managers) want to maximize their own interests, then there is reason to believe that corporate managers will not always act in their own interests, i.e the shareholders This implies that there is always

a potential risk of a conflict of interest between a shareholder and an agent due to the

Agency Theory suggests that companies should establish an appropriate board structure to monitor the behavior of managers in order to prevent the abuse of power

by managers over company resources to pursue personal interests (Jensen and Meckling, 1976)

The theory is applied to explain that the existence of foreign shareholders in the relationship with the company's executive management may affect the company's profits

2.3.2 Relative market power

Relative Market Power argues that companies with large market shares and differentiated products can rely on market power for uncompetitive profits For example, a large, long-established bank with many advantages in terms of brand name and product quality can position the product at a higher level in the market and earn more profits (Nguyen Cong Tam and Nguyen Minh Ha, 2012) Arguing according to the theory of market power, a bank with advantages in market share and product differentiation or advantages from large capital can use its market power to reap more profits through increasing prices of products and services, increasing constantly market share and scale This increase to a certain extent can create great pressure on competitors, reduce market competition and commercial banks gain more profits thanks to monopoly prices (if any) Therefore, this theory states that commercial banks with larger capital scale have higher profitability

2.3.3 Balance portfolio theory

Balanced Portfolio Theory, also known as Modern Portfolio Theory, suggests that it is possible to minimize market risk in order to achieve expected return through building a portfolio Investments have been diversified, simply say: "Don't put all your eggs in one basket" According to modern portfolio theory, an efficient portfolio is one that has the lowest expected return for risk or one that has the expected risk but offers the maximum return Therefore, commercial banks can increase profitability through diversification of the bank's investment portfolio, which depends on the decisions and effectiveness of the bank's governance (Nguyen Cong Tam and Nguyen Minh Ha, 2012)

This theory is used to explain portfolio diversification, which generates more non-interest income, which increases bank profits

2.3.4 Trade-off theory

Trade-off Theory proposed by Kraus and Litzenberger (1973), firms can choose

an optimal capital structure to maximize firm value based on the trade-off between the benefits and costs of the debt use This theory aims to explain why banks are often financed partly by debt and partly by equity A big reason why banks cannot finance completely with debt is because besides the existence of tax shield benefits from debt, debt financing incurs many interest costs, affecting bank profits Thus, a bank with a low equity-to-asset ratio due to heavy use of debt has a high expected interest expense, which increases the bank's risks and costs, leading to a decline in the bank's profit This theory is applied to explain the equity structure in the relationship to profitability

2.4 The meaning of profit assessment

For banks: Evaluating profits as well as identifying factors affecting profitability

in business activities of commercial banks helps bank managers and executives see operational efficiency and financial advantages of their own banks, as well as points that have been achieved and have not been achieved, and inadequacies, etc to make timely and appropriate adjustments, aiming at financial goals such as minimizing costs, maximizing profits and growth income in a sustainable way Thus, the evaluation of profits in business activities of banks has always been of primary importance and concern in order to improve the position and competitiveness of commercial banks in the financial market The evaluation of profits in a certain period can help managers see operating trends and predicting operating results in general and profitability in particular in the next periods Besides, with positive profits, healthy financial indicators can increase employees' trust and dedication to the bank and avoid situations human bleeding in the banking industry

For investors: Through the evaluation of profits in the business activities of commercial banks, investors will see profits and development prospects, this is the basis for investors to make investment decisions Besides, evaluating profits also shows investors the level of dividend payment, ranking Stock market class and stability of share price so that they can evaluate the effectiveness of the investment in order to set a threshold for risk tolerance as well as minimize the opportunity cost of

For state agencies: the assessment of business profits of commercial banks helps state management agencies carry out inspection and control to ensure that commercial banks comply with policies, regimes and laws regulations in banking activities

On the other hand, the evaluation of profits of commercial banks will be a source

of information to help authorities and state banks rate the credit of banks There are timely corrections to avoid inefficient banking operations leading to losses losses, bankruptcy had a knock-on effect, causing stagnation and crisis to the entire economy Therefore, analysis and evaluation is an indispensable job for each bank This is

an important step in banking governance to enhance competitiveness, creating a premise for the overall development of the banking system and towards integration with regional and international banking systems

The existence and development of commercial banks as well as business performance of commercial banks are mainly based on the bank's profits Currently, domestic and foreign analysts have used many different indicators to reflect the profitability of commercial banks

2.5 The indicators reflect the profitability of commercial banks

Most of the studies on profitability are measured through return on assets (ROA), return on equity (ROE) as the studies so far by Abreu and Mendes (2002), Athanasoglou, Delis and Staikouras (2006), Wahdan and Leithy (2017)

2.5.1 Return on assets – ROA

ROA is an indicator reflecting the management effectiveness, measuring the ability of the bank's board of management to convert a bank's assets into net income

value of ROA shows that the bank is functioning well in making profits by utilizing the assets and performance of the bank is good However, it is necessary to review the bank's activities if ROA is above the stable level ROA is calculated from financial report of the firms through an equation of which it is equivalent to net profit after taxes divided by average total assets (Samiloglu et al., 2017) The firms expected that their ROA value to be increased and higher ROA value means higher performance and increasing value of ROA is attractive to the investors (Saragih, 2018)

2.5.2 Return on equity – ROE

ROE is an indicator to measure the percentage of income that a shareholder of a bank receives from an investment in a bank In other words, return on equity is an indicator of the efficiency of the equity investment

Source: Principals of finance, Scott, B & Eugene, F B (2015)

ROE is defined as the ability of a firm to generate profit upon every share of its capital (Rosikah et al., 2018) ROE is calculated through an equation in which net profit after taxes divided by average total shareholder equity (Kabajeh et al., 2012) Like ROA, the firms always expect higher ROE to attract investors in the market, and ROE valued between 15-20% is generally considered good (Faisal et al., 2018) ROE

is a measure of profitability that calculates how many dollars of profit a business generates with each dollar of shareholders' equity (Rose, 2002), so it always receives great attention from investors If this ratio is positive, the bank is profitable In contrast, if the ratio is negative, the bank is trading at a loss At the same time, higher ROE proves that the bank is balanced in the use of shareholder capital compared to its borrowed capital effectively to generate profits during its operation Therefore, a high value of ROE shows that the bank is functioning well in managing the shareholder's equity and generating revenues to shareholders

2.6 Literature review

2.6.1 Foreign studies

The effect of internal and external factors on commercial bank profitable was explored in foreign studies In this section, foreign studies are collected in order to explore how previous research studies about this topic Key results, data collection and data methodology and the limitation of foreign researchers will be highlighted

Li (2006) studies the determinants of bank profitability and the application of research results in risk management To test the research hypotheses, the study uses data from 123 British banks for the period 1999-2006 to generate an asymmetric panel with 378 observations that form the basis for economic analysis The study uses the regression model method with ROA as the dependent variable, the independent variables include: liquidity, credit risk, capital, inflation, GDP growth and interest rates The test results on the impact of bank profitability in the UK show that the impact of liquidity on bank profitability is not well defined and needs further research, credit risk provisions have a negative impact on ROA This shows that higher credit risk results in lower returns The test results also show that there is a positive relationship between capital and profitability showing that an increase in capital strength will increase profits, a bank with a high amount of capital can pursue business opportunities more effectively, have more time and more flexibility to deal with unexpected loss problems, thus achieving profitable growth

Finally, macroeconomic factors including inflation, GDP growth and interest rates also have a significant impact on the profitability of banks in this model

Syafri (2012) studied the factors affecting the profitability of commercial banks

in Indonesia, Faculty of Economics, University of Triakti The data is collected from commercial banks listed on the Indonesian stock market from 2002 to 2011 Bank profitability is measured by return on assets (ROA) and independent variables: bank size, lending capacity to total assets, capital to total assets ratio assets, provision for credit losses to total loans, non-interest income to total assets, operating expenses to income ratio, inflation rate and economic growth rate The model uses the regression method to aggregate data The experimental results show that: ratio of loans to total assets, ratio of capital to total assets, provision for credit risks to total loans have a positive impact on profitability Meanwhile, the inflation rate, the size of the bank and

the ratio of operating expenses to income have a negative effect on profitability Economic growth and non-interest income on total assets have no impact on bank profitability In general, the profitability of Indonesian commercial banks is influenced

by loans, equity, inflation rate and efficiency in managing operating costs Other variables, such as bank size and credit risk, also have an effect on bank profitability but are not significant Economic growth and non-interest income on total assets have negligible effect on profitability

Obamuyi (2013) studies the determinants of bank profitability in developing economies taken from the reports of 20 banks in Nigeria for the period 2006 -2012, collecting secondary data with the dependent variable ROA, the independent variable including: capital, bank size, management costs, interest rates and GDP growth Research results show that banks with larger capital can diversify their businesses by increasing risk tolerance and attracting capital at a low cost, thereby improving liquidity Administrative procedures, management costs have a negative effect on the bank's operations, profits of banks tend to increase with interest rates, big banks can earn less profit than other banks small bank GDP has a positive effect on bank profitability, higher GDP indicates improved business opportunities, which ultimately leads to higher bank profits

Francis (2013) used REM regression for 216 commercial banks from 42 African countries, period 1999-2006 He uses ROA and NIM as profitability measures The research model includes independent variables including logarithm of total assets, ratio

of equity to assets, deposit growth rate, expense/income ratio, loan balance/total assets ratio, GDP growth rate, and inflation The results show that the equity-to-asset ratio and deposit growth rate have a positive impact on bank profitability Bank's asset size, operating costs, loan-to-total assets ratio, and macro factors such as economic growth and inflation have a negative impact on bank profitability

Wahdan and Leithy (2017) aimed to determine the internal and external factors affecting the profitability of commercial banks in Egypt between 2011 and 2015 on a sample of the top 5 Egyptian banks Data is obtained from each of the central banks of Egypt, as well as the published financial statements of selected banks This research model has 8 variables including capital adequacy ratio, asset growth rate, credit risk

provision, operating expense ratio, economic growth rate, net interest income ratio, non-interest income ratio and inflation rate

The results of the research model have 4 variables that have an impact on profitability, including: capital adequacy ratio, net interest income ratio, non-interest income ratio and inflation rate For ROA, capital adequacy ratio and non-interest income ratio have a positive effect while the inflation rate has the opposite effect For ROE, capital adequacy ratio and inflation rate have a negative effect, while non-interest income ratio and net interest income ratio have a positive effect In addition, the study shows that 77% of ROA variation is explained by capital adequacy ratio, inflation rate and non-interest income ratio, while 61% of ROE volatility is explained

by capital adequacy ratio, credit risk provision, net interest margin, non-interest income ratio and inflation rate

Factors affecting the profitability of commercial banks such as studies by Nguyen Cong Tam and Nguyen Minh Ha (2012), with data collected from the consolidated financial statements of 28 banks in 6 countries in the Southeast region Along with market and macro indicators, the author's team conducted a study on profitability and factors affecting profitability of banks in Southeast Asian countries in the period 2007-2011 With panel regression analysis technique and fixed effects approach (Fix Effects), the study found the impact of capital adequacy, quality of outstanding loans, quality of cost management, liquidity and market interest rates on bank profits In which, the two factors of capital adequacy and market interest rate have opposite effects and the remaining factors have a positive impact on bank profitability In addition, an effect of size on efficiency was not found in the study Nguyen Hong Son (2014) studied the impact of ownership structure on the profitability of 40 Vietnamese commercial banks in the context of restructuring in the period 2010-2012 The research results show that the concentration of equity capital

and the rate of private ownership have a positive impact on the profitability of commercial banks Meanwhile, bad interest rates have a negative impact on bank profits In addition, the research results are also consistent with previous studies (Nguyen, Tran and Pham, 2014) on the positive impact of corporate governance on the profitability of commercial banks The findings on the impact of ownership structure and corporate governance on the profitability of commercial banks in Vietnam in this study have many similarities with the research results of foreign authors on the impact

of ownership structure and corporate governance on the profitability of open-ended commercial banks in Kenya, China, Malaysia (Rokwaro, 2013, Wen, 2010, Kim, Rasinh and Tasnim, 2012)

Tran Viet Dung (2014) used the General Moment method (GMM) and studied within the scope of 22 Vietnamese commercial banks in the period 2006-2012 ROA, ROE and NIM are the dependent variables described as a measure of profitability The independent variables studied include state ownership structure, equity-to-asset ratio, logarithm of total assets, provision for risks/total outstanding loans, lending capacity, liquid assets/total deposits and short-term deposits, GDP growth rate, inflation The results show that the equity-to-asset ratio, GDP growth rate have a positive impact while state ownership, bad debt and inflation have negative effects on bank profitability

Ho Thi Hong Minh and Nguyen Thi Canh (2015), this study focuses on examining the relationship between income diversification and other factors affecting profitability of Vietnamese commercial banks The data used for the study were collected from the financial reports of 22 commercial banks in Vietnam for the period 2007-2013 Applying the method to GMM estimation table data, the results show that income diversification index, loan balance ratio / total assets, customer deposit ratio, inflation are all positively correlated with profitability of commercial banks Meanwhile, the bad ratio, the ratio of equity to assets, the ratio of operating expenses

to income are negatively related to profitability The study found no evidence on the impact of total asset size and economic growth on profitability of Vietnamese commercial banks

Table 2-1 Summary previous studies

Liquidity Undefined Credit risk Positive Capital Positive Syafri (2012) Factors affecting

profitability of commercial banks in Indonesia

Bank size Negative Lending

No effect

Operating expenses/income ratio

is obtained from reports

of 20 banks in Nigeria for the period 2006 -

Bank size Positive Management costs Negative Interest rate Positive GDP growth Positive

2012 Francis (2013) Using REM regression

method for 216 commercial banks from

2 African countries, period 1999-2006

Logarithm of total assets

Negative

GDP growth rate Negative Inflationary Negative Wahdan and

Leithy (2007)

Identifying internal and external factors affecting profitability

of commercial banks in

Egypt

Capital adequacy ratio

Tam và Nguyen

Minh Ha (2012)

profitability of banks in Southeast Asian countries

Outstanding quality Positive Quality of cost

management

Positive

Liquidity Positive Market interest rate Negative Nguyen Hong

Son

Impact of ownership structure on profitability of 40 Vietnamese commercial banks in the period 2010-2012

Concentration of equity

Positive

Bad rate Negative Company manager Positive Ownership structure Positive Tran Viet Dung

(2014)

Research within the scope of 22 Vietnamese commercial banks in the period 2006-2012

Equity/assets ratio Positive Logarithm of total

assets

No clear

Provisions/total outstanding loans

Income Diversification Index

Positive

Ratio of outstanding Positive

affecting profitability

of Vietnamese commercial banks

loans/total assets Customer deposit rate

Positive

Inflationary Positive Bad rate Negative Equity/assets ratio Negative Operating

expenses/income ratio

Negative

Source: Author’s synthesis

The above studies help the author to have a basis for selecting the variables to be included in the research However, this topic has differences at the research stage Thereby, the topic contributes to give a more specific view for bank administrators as well as policy makers to timely orient the activities of Vietnamese commercial banks

in order to increase profits In this thesis, the author has used return on total assets (ROA) and net return on equity (ROE) as a common measure, the use of many representative measures of profitability to consider more fully aspect of commercial banks' profits

CONCLUSION OF CHAPTER 2

In chapter 2, the author has focused on studying the concepts of commercial banks and commercial banks' profits Since then, the author has also researched and learned more about empirical models of previous studies and domestic and foreign research subjects on the factors affecting the profitability of commercial banks, including macro and micro factors that affect the profitability of commercial banks The theoretical basis for the author to consider and select a research model suitable to the topic and the collected data

CHAPTER 3 RESEARCH METHODS

Inherited from the theoretical framework of factors affecting profitability in Chapter 2 This chapter analyzes the research hypotheses and empirical models of the thesis, using Pooled OLS, FEM, REM data manners, and a similar method The fit tests of the model such as limited F-tests, Hausman tests, etc The purpose of this chapter is to introduce research methods and models and establish hypotheses to analyze the effects of factors affecting the profitability of commercial banks The highlight of this chapter is the detailed presentation of the steps and opinion methods

to collect evidence for the research objectives of the thesis Besides, the measurement

of variables and data mining sources are also detailed in this Chapter

3.1 Research model

3.1.1 Research model

According to analyses that have been done in many countries around the world as well as studies in Vietnam In this thesis, profit will be measured by ROA, and ROE along with the effects of other variables Similar to the study of Ho Thi Hong Minh and Nguyen Thi Canh (2015) The estimated model represents as follows:

Yit = α + β1X1it + β2X2it + β3X3it + β4X4it + β5X5it + β6X6it + β7X7it + β8X8t + β9X9t + ei,t, where:

Yit: measures the profit of the “i” commercial bank in year t

β1X1it: variable measures variable Bank size of the “i” commercial bank in

β7X7it: variable measure Income diversification of the “i” commercial bank in

year t

β8X8it: variable measure Inflation rate in year t

β9X9it: variable measure Economic growth in year t

ei,t: model error term

Based on this construction model, the author uses the OLS method to regress the model in 3 approaches Pooled OLS, FEM, REM; after that, the study uses Hausman test and Likelihood ratio to choose the most suitable approach to test the research hypotheses

3.1.2 Method of determining variable

In this thesis, the author limits the test to some of the main factors that clearly affect the profitability of commercial banks In the specific regression model of this study, profit is represented by Profit after tax on average total assets and Profit after tax on average total equity The factors affecting profitability are included in the model: (1) Bank size, (2) Liquidity ratio, (3) Equity ratio, (4) Loan balance, (5) Non-performing loans, (6) Operating Efficiency, (7) Income diversification, (8) Economic growth, (9) Inflation

Bank size (SIZE) is an independent variable that is calculated as the logarithm of total assets Total assets data is taken from the bank's balance sheet

Calculation formula: SIZE = Log (total assets)

Liquidity ratio (LIQ): is calculated by taking cash and cash equivalents divided

by total assets showing the ability of banks to fulfill their obligations to customers, especially depositors The higher the liquidity ratio, the higher the ability to fulfill obligations to customers, creating a reputation with customers who can develop more profitable services for the bank, collected from the bank's balance sheet

Calculation formula: LIQ = Cash and cash equivalents/Total assets

Equity ratio (CAP): is measured by the ratio of equity to total assets of the bank Bank equity and total assets value data is collected from the bank's balance sheet

Calculation formula: CAP = Total equity/Total assets

Loan balance ratio (TLA): using the ratio of outstanding loans/total assets as a research variable because lending is the main profit-making activity for banks and

which in turn will affect the profit of the banks The data is based on the bank's balance sheet

Calculation formula: TLA = Total loans/Total assets

Non-performing loan (NPL): Ratio of bad debts to outstanding loans This variable reflects the quality of the bank's outstanding loans When the bad profit ratio increases, the bank has to make an increase in provision, increasing costs for the bank and reducing the bank's profit, affecting the bank's profit The data is calculated based

on the bank's balance sheet

Calculation formula: NPL = Non-performing loan value/Total Loan value

Operating Efficiency (CIR): The ratio of operating expenses to income This variable reflects the quality of cost management Banks that manage costs well, that is,

a dollar of expenses brings more income to the bank will increase profits The data is collected from the bank's income statement

Calculation formula: CIR = Operating expenses/Operating income

Income diversification (IDR): income diversification index is calculated based on the proportion of interest income, income from service activities, income from business and investment activities, income from other activities to total income Income diversification increases profitability thanks to high profit margins from non-interest activities, minimizing dependence on certain sources of income

Calculation formula: IDR = Non-interest income/ Interest income

The inflation rate (INF) raises the price level of the economy It shows the level

of inflation of the economy The inflation rate is based on the consumer price index collected from the report of the General Statistics Office

Calculation formula: INF = (CPI t - CPI t-1 )/( CPI t-1 ) * 100%

Economic growth (GDP) is an independent variable collected from the report of the General Statistics Office

Calculation formula: GDP = (GDP t -GDP t-1 )/( GDP t-1 ) * 100%

3.2 Research hypothesis

From the profit theory and empirical evidences done at home and abroad, the research hypothesizes about the influence of 9 independent variables on profit as follows:

 H1: Size has a positive effect on commercial banks' profits

Bank size is frequently used to capture the economies of scale and economies of scale in banks (Ayadi and Boujelbene) The larger the asset size, the higher the profitability of the bank due to the advantage of scale With economies of scale, banks with large assets, the ability to expand market share, will have many favorable opportunities in the process of lending to customers, expanding distribution

non-of products and services, and saving transaction costs, which in turn can increase profits However, economies of scale can arise when the size of the bank is too large The management of this asset block requires eminently qualified human resources and costs a lot The unreasonable expansion of the bank's operation scale will cause many difficulties in management, require highly qualified human resources and incur high costs; at the same time, it can cause managers to make wrong decisions in expanding financial leverage and poor quality lenders, leading to the risk of profitability, reducing the bank's profitability Previous studies have also found rather conflicting results when looking at the relationship between these two variables

Emery (1971) found that larger banks will earn more profits, because large banks will have the advantage of mobilizing capital at a cheaper price, thereby reducing costs

to doing business However, Stiroh and Rumble (2006) argue that the above relationship is negative because the larger the bank, the more difficult it is to manage, especially when the bank has to face difficulties, especially when the scale increases just to follow a horizontal growth strategy will add costs without yielding results In addition, agency costs, administrative costs, and other costs also increased significantly

 H2: Liquidity Ratio has a negative impact on commercial banks' profits

Liquidity ratio is calculated by taking cash and cash equivalents divided by total assets (Doina & Mircea, 2008) This ratio reflects the ability of firms to repay their debt obligations in short-term (Costea & Hostiuc, 2009); Bwacha &Xi (2018) examined the impact of liquidity on profitable in banking sector and they identified that cash and cash equivalents to total assets ratio positively affected ROA of the banks Lipunga (2014) examined the effect of liquidity on profitable commercial banks and this ratio was measured by cash and cash equivalents divided by total assets

Obtained result showed that liquidity ratio affected positively and significantly ROA

of commercial banks Similarly, Karani (2014)also reached the same conclusion

 H3: Equity ratio has a positive impact on commercial banks' profits

The ratio of equity to total assets is an indicator of a bank's capital adequacy ratio, one of the indicators to assess the financial health of commercial banks according to IMF standards (IMF, 2006) Regarding the ratio of equity to profitability, based on the theory of efficient structure of behavior, banks with lower equity ratio have less linkage, and therefore lower profits In addition, according to the theory of the moral hazard, the lower the equity ratio of banks, the higher the loan risk because the increased risk of bad debt reduces the profitability of commercial banks Athanasoglou (2006) argues that equity is the bank's own capital available to support the business, thus the bank's capital acts as a safety net in the worst case Alper and Anbar (2011) argue that equity to total assets is one of the basic coefficients of capital strength With a higher ratio of VSCH, less external capital will be required to increase the bank's profitability One study tested the direct effect of capital on profitability of commercial banks Barth et al (2004) through the study of data at banks around the world, found that high capital holding ratio means less bad rate Berger et al (2013) empirical research on 42 banks in Asia found that equity has a negative impact on profitability through the variable of reserve ratio and profitability Shrieves & Dahl (1992) also adopted US data and found that the results between the two factors are in the same direction According to research by Nguyen Thi Hong Vinh & Le Phan Thi Dieu Thao (2016), bank capital has a negative impact on profitability In short, banks with large equity capital are able to weather financial shocks as well as bring confidence to investors and savers, helping banks to increase access to capital at low cost and risk, thereby increasing profitability

 H4: The ratio of outstanding loans has a positive impact on commercial banks' profits

The ratio of outstanding loans reflects the business strategy of the bank, when this variable is high, it shows that the bank focuses more on credit activities Most literature suggests that bank profits are expected to increase as the loan portfolio increases relative to other items Although the cost of holding loans increased, profits increased as the loan-to-asset ratio increased

In an empirical study, the results show that an increase in the loan ratio creates risk for the loan portfolio leading to a decrease in profitability, whereas a reasonable increase in the loan portfolio will increase interest income, making profits increased (Angela Roman, 2013) The results of (Sufian, 2009) loan balance has a positive effect

on return on average assets (ROA) Most of the previous studies suggested that focusing more on credit activities contributes to higher profits

 H5: The quality of outstanding loans has a negative impact on commercial banks' profits

According to the IMF (2006), the ratio of bad debt to total outstanding loans is one of the core indicators to assess the financial health of a bank This variable reflects the quality of the bank's outstanding loans Profitability is directly related to the quality

of outstanding balance on the balance sheet When a customer incurs overdue debt, it means an increase in doubtful assets, requiring the bank to make provision When there is a cost of provision for loans to customers, it will reduce the bank's operational efficiency, thus reducing profits In many empirical studies, it has been shown that a high NPL ratio to total outstanding loans represents inadequate credit management and low credit quality (Halil Emre, 2012) A change in credit risk may reflect a change in the loan portfolio, which affects the bank's profitability (Sufian, 2009) Research results of Ayanda et al (2013), Osuagwu (2014) show that the quality of bank loans has a negative impact on profitability In the reverse causal relationship, Achou and Tenguch (2008) use data from the Central Bank of Qatar for the period 2001-2005, the research results show that banks with high profitability have low NPLs due to good management strategies Reasonable credit risk management Pham Huu Hong Thai (2013) evaluated the impact of bad debt on the profitability of 34 Vietnamese commercial banks in the period 2005-2012, the results showed that bad debt has a negative impact on profitability of banks

 H6: Effective cost management has a negative impact on commercial banks' profits

The expense-to-income ratio is an important financial indicator, especially in evaluating banking performance It shows the correlation between expenses and income of that bank Cost effectiveness reflects the ability to adjust the relationship

get a more general view of the profitability of the bank's business The smaller the ratio, the better because then it takes less costs to generate the same level of income or

in other words, the bank gets more profit, hence the higher profit margin Banks with good cost management, i.e a dollar of expenses bring more income to the bank, will help the bank achieve a high level of profitability

Based on this inference, Berger & De Young (1997) conducted an audit To investigate the effect of cost effectiveness on credit risk The study found cost-effectiveness to be an important indicator of a bank's future NPLs and risk Therefore, inefficient banks will be under great pressure from credit risks, reducing the bank's profitability Similarly, Hess et al (2008) also chose the quality of cost management as one of the factors affecting profitability for research Previous studies by Alexiou and Sofoklis (2009), Dietrich and Wanzenried (2011) also found a significant effect of efficiency on profitability

 H7: Income diversification has a positive impact on commercial banks' profits

Income diversification in the banking sector is the non-interest income in a bank's operating income structure This independent variable represents the business strategy of the bank, when the high ratio shows that managers pay more attention to non-credit activities These activities are considered to be more effective for banks than credit activities, partly because they do not require a large amount of capital and

do not bear credit risks Banks that offer a wider range of products and services will generate more demand and will earn more income As a result, income diversification changes the bank's performance in terms of profitability

Theories of financial intermediation imply that an increase in returns to scale is related to income diversification Many studies have provided evidence of positive effects when banks implement income diversification strategies, such as: According to Saunders & Walter (1994), banks can take advantage of the information collected in the process of lending to use and finance other financial services, including underwriting securities Likewise, by providing underwriting services for securities or insurance, banks can gain more information, reduce information asymmetry with customers, and thereby promote lending efficiency

As a result, banks with diversified operations can support and increase economies

of scale Smith et al (2003) found evidence on the stability of non-interest income, thereby contributing to the stabilizing effect of bank profitability Supporting the view that income diversification is beneficial for bank profitability is also the study of Chiorazzo et al (2008) The authors explain that small-sized banks will have an advantage when it comes to income diversification Since non-interest income accounts for a small proportion of total income, the increase in non-interest income increases financial efficiency Thus, income diversification will increase the opportunity to generate higher income, thereby having higher profits

On the other hand, previous researchers such as Maksimovic and Philips (2002), DeYoung and Roland (2001) and Stiroh (2006) have argued that income diversification is not a guarantee for low levels of bad debt in banks Because too much business will make banks unable to focus on their area of expertise and thereby reduce the effectiveness of loan supervision, as a result, it will increase the possibility

of loans turning into bad debt Therefore, banks should focus on one business segment that will be able to take advantage of managers' experience in reducing the probability

of bad debt

With the view that the impact of income diversification can limit the risks of banks, Smith et al (2003) show that, not relying too much on interest income will contribute to stabilizing profits for banks Non-interest income from service fees is usually more stable than interest income from lending, so banks can reduce the risk of income diversification (DeYoung and Roland, 2001)

 H8: Economic growth has a positive impact on commercial banks' profits

Due to the nature of the financial intermediary in the economy, the profitability

of banks is said to be sensitive to macroeconomic conditions despite the banks' tendency to diversify geographically, as well as to use more financial instruments to manage risks before fluctuations in the economic cycle The global financial crisis stemming from the 2008 banking crisis has shown the sensitivity of bank profits to the business cycle Understanding the relationship between economic cycle fluctuations and bank profitability plays an important role in assessing the stability and soundness

2000, Yu et al, Liver, 2010) One of the first studies on the relationship between bank profitability and macro variables was done by Molyneux and Thomson (1992) The authors assume that economic growth is the most important factor affecting the profitability of banks Many subsequent studies have also shown that bank performance is influenced by the business cycle (Lowe et al., 1993, Calomiris et al.,

1997, Kaufman, 1998)

 H9: Inflation has a negative impact on commercial banks' profits

Many studies have been conducted on the impact of inflation on financial performance However, the relationship between inflation and business activities of the banking system in particular has received little attention One study suggests that a high inflation rate can hinder the efficient allocation of resources in the financial sector, thereby causing negative consequences for the economy In particular, studies emphasize the importance of information asymmetry in the credit market, and show that increasing inflation negatively affects market efficiency leading to a decline in financial market performance (banks, and stock market) Increasing inflation not only reduces the real rate of return of money, but also of assets Increased inflation leads to tighter credit allocation of commercial banks Boyd et al (2000) studied the impact of inflation on financial market performance across 100 countries over the period from

1960 to 1995, finding that for low inflation, there exists a negative correlation between inflation and inflation and (i) credit to the private sector, (ii) the size of the bank's assets However, Kunt and Huizinga (1999) in their study found a positive relationship between inflation and bank profitability, when bank income increased faster than its costs High rates of inflation are also associated with higher interest rates on loans, and consequently higher incomes The bank also benefits from the slow disbursement to customers in the high inflation environment

3.3 Research data

The study uses secondary data including financial and accounting data of commercial banks, macroeconomic data for the period 2012–2020 Financial and accounting data representing factors inside the bank, including the items in the balance sheet and income statement, are collected from the bank's annual audited financial statements Annual GDP and inflation data are collected from the report of the State Bank of Vietnam and the General Statistics Office The research period was selected

based on the fact that this is a period of many fluctuations for banks such as mergers and acquisitions deals due to the impact of the economic crisis, leading to a great change in the Vietnamese commercial banking system The study was carried out with the type of joint stock commercial bank, however, one bank did not publish the financial statements or explain the attached financial statements, so the remaining research results were 22 banks with data for the period from 2012 to 2020, forming panel data with 198 observations Panel data are suitable for research because by combining time series of cross-observations, panel data gives us data with more useful information, more bias, less multicollinearity between variables more, more degrees of freedom and more efficient

3.4 Selection of regression model and tests

With the aim of studying the factors affecting the profitability of Vietnamese commercial banks, the study was carried out with the following process: Using descriptive statistics, correlation analysis, and regression analysis methods of panel data with the help of Stata 14 software to determine study results

Quantitative research model

Pooled OLS –Pooled Ordinary Least Squares

Pooled OLS –Pooled Ordinary Least Squares is a regression model in which all coefficients are constant over time and on individuals This is the simplest approach and the simplest model as it does not consider the space and time of the combined data but only estimates by conventional OLS regression Therefore, this model may give incomplete results and distort reality about the relationship between independent and dependent variables

Pooled OLS model basic table data has the form:

Yit = α + β1X1it + β2X2it + + βnXnit + unit, where:

Yit: The dependent variable of the observation i in the period t

α: Intercept coefficient

β1, β2, , βn: Individual regression coefficients

X1it, X2it, , Xnit: Independent variables of observation I in the period t

Unit: the error term

Fixed Effects Model –FEM

With the assumption that each unit has distinct characteristics that can affect the explanatory variables, FEM analyzes this correlation between the residuals of each unit and the explanatory variables, thereby controlling and separating the influence of these separate characteristics (time-constant) from the explanatory variables so that we can estimate the net effects of the regressor on the dependent variable

The simple FEM model has the form:

Yit = αi + β1X1it+ β2X2it + + βnXnit + unit

The above model has added the index “i” for the intercept coefficient “α” to distinguish the interception coefficient of each different bank that may be different, this difference may be due to the different characteristics of each bank or the difference between management policies and operations of banks

Random Effects Model –REM

This model assumes that variation between units is assumed to be random and uncorrelated with the explanatory variables The simple REM model takes the form:

Yit= α + β1X1it + β2X2it + + βnXnit + εi + unit

With εi: Error of composition of different objects (different characteristics of each enterprise)

Unit: Error of other combined components of both individual characteristics by object and over time

Model fit tests

After running the model, perform a model fit test to select a suitable model

Assessment of suitability

Based on the model's adjusted coefficient of determination R2, this coefficient shows how much of the independent variables in the model explain the variation of the dependent variable From there, conclude the appropriateness of the model

Check the fit of the model

Consider a pair of hypotheses:

H0: R2=0 (All independent variables have no effect on the dependent variable) H1: R2≠0 (There is at least one independent variable that affects the dependent variable)

Based on the regression results, if:

Prob value of F statistic < 0.05: Reject hypothesis H0