Factors affecting capital adequacy ratio of joint stock commercial banks in Vietnam 2022

THE STATE BANK OF VIETNAM MINISTRY OF EDUCATION AND TRAINING HO CHI MINH UNIVERSITY OF BANKING BUI THI NGOC KHUYEN FACTORS AFFECTING CAPITAL ADEQUACY RATIO OF JOINT STOCK COMMERCIAL BA

THE STATE BANK OF VIETNAM MINISTRY OF EDUCATION AND TRAINING

HO CHI MINH UNIVERSITY OF BANKING

BUI THI NGOC KHUYEN

FACTORS AFFECTING CAPITAL ADEQUACY RATIO OF JOINT STOCK COMMERCIAL BANKS IN VIETNAM

GRADUATION THESIS MAJOR: FINANCE – BANKING

CODE: 7340201

HO CHI MINH CITY - 2022

THE STATE BANK OF VIETNAM MINISTRY OF EDUCATION AND

BUI THI NGOC KHUYEN

FACTORS AFFECTING CAPITAL ADEQUACY RATIO OF JOINT STOCK COMMERCIAL BANKS IN VIETNAM

GRADUATION THESIS MAJOR: FINANCE – BANKING

CODE: 7340201

INSTRUCTOR PHD LE THANH NGOC

HO CHI MINH CITY - 2022

ABSTRACT

The capital adequacy ratio is one of the important criteria to assess the operational safety of banks Banks' compliance with the minimum capital adequacy ratio has become more and more stringent in recent years Therefore, this thesis aims to study the factors affecting the capital adequacy ratio of Vietnamese joint-stock commercial banks The thesis is made based on panel data collected from financial statements and regular reports of 25 Vietnamese commercial banks in the period 2010-2020 The study studies 10 factors affecting the dependent variable and uses Pooled OLS, FEM, REM models, and finally chooses the REM model

The research results show that leverage ratio, loan loss reserves ratio, and economic growth, have a positive impact on the capital adequacy ratio of Vietnamese joint-stock commercial banks In contrast, bank size, return on assets ratio, and liquidity ratio negatively affect the capital adequacy ratio of Vietnamese joint-stock commercial banks While the deposits ratio, loans ratio, inflation rate, and net interest margin are not statistically significant On that basis, the author has proposed solutions to improve the capital adequacy ratio at Vietnamese joint-stock commercial banks

Key word: Capital adequacy ratio, Basel, Joint Stock Commercial Banks, Vietnam

Ho Chi Minh City, December 26th, 2022

ACKNOWLEGEMENTS

Firstly, I would like to express my gratitude towards Ph.D Le Thanh Ngoc for his dedication, patience, and support with me with good advice and guidance in the process of this study

Secondly, I would like to thank all Ho Chi Minh University of Banking's lecturers who have provided me with valuable knowledge as well as experience to help me obtain a solid academic foundation for future research, career practice, and workflow

Finally, I would like to thank my friends and my family for their sharing and support throughout my Bachelor's program

However, due to the limitation of experience and time, the study cannot avoid certain drawbacks All the comments and advice contributed by the examiners are gratefully welcomed and appreciated

Ho Chi Minh City, December 26th, 2022

CONTENTS

ABSTRACT i

DECLARATION OF AUTHENTICITY ii

ACKNOWLEGEMENTS iii

LIST OF ABBREVIATIONS viii

LIST OF TABLES AND CHARTS ix

CHAPTER 1 INTRODUCTION 1

1.1 Reason for choosing the topic 1

1.2 Research objectives 1

1.2.1 Overall objectives 1

1.2.2 Detailed objectives 1

1.3 Research questions 2

1.4 Objects and research scope 2

1.4.1 Research object 2

1.4.2 Research scope 2

1.5 Research methods 3

1.6 Scientific and practical significance 3

1.6.1 Scientific significance 3

1.6.2 Practical significance 3

1.7 Structure of the thesis 3

1.8 Research gap 4

CONCLUSION OF CHAPTER 1 5

CHAPTER 2 THEORETICAL BASIS AND OVERVIEW OF PRIOR

2.1 theoretical basis of the capital adequacy ratio 6

2.1.1 The concept of the capital adequacy ratio 6

2.1.2 Basel Accord 7

2.1.3 Measure the capital adequacy ratio 8

2.1.4 Legal documents of the State Bank of Vietnam on CAR 8

2.1.5 Meaning of the capital adequacy ratio 10

2.2 Previous studies 11

2.2.1 Studies in the world 11

2.2.2 Domestic studies 13

CONSCLUSION OF CHAPTER 2 18

CHAPTER 3 RESEARCH METHODS 19

3.1 Research process 19

3.2 Research model 20

3.3 Variable measurement and research hypothesis 22

3.3.1 Bank size (SIZE) 22

3.3.2 Return on assets (ROA) 22

3.3.3 Liquidity ratio (LIQ) 23

3.3.4 Loan loss reserves (LLR) 23

3.3.5 Deposits (DEP) 24

3.3.6 Loans (LOA) 24

3.3.7 Leverage (LEV) 25

3.3.8 Net interest margin (NIM) 25

3.3.9 GDP growth (GDP) 25

3.3.10 Inflation (INF) 26

3.4 Research data 28

3.5 Regression methods and tests 29

3.5.1 Ordinary least s quare method (OLS) 29

3.5.2 Fixed Effect Model (FEM) 30

3.5.3 Random Effect Model (REM) 30

3.6 Model selection test 30

3.6.1 Testing the appropriateness between the Pooled OLS and FEM 30

3.6.2 Testing the appropriateness between the FEM and REM 30

3.6.3 Testing the appropriateness between the Pooled OLS and REM 31

CONCLUSION OF CHAPTER 3 32

CHAPTER 4 RESEARCH RESULTS AND DISCUSSION 33

4.1 Descriptive statistics 33

4.2 Correlation analysis 35

4.3 Check for multicollinearity 36

4.4 Regression results 36

4.4.1 Pooled OLS regression model 36

4.4.2 Fixed effects model 37

4.4.3 Random effects model 38

4.5 Choose the suitable model 38

4.5.1 Testing the appropriateness between the Pooled OLS and FEM 38

4.5.2 Testing the appropriateness between the FEM and REM 39

4.5.3 Testing the appropriateness between the Pooled OLS and REM 39

4.6 Discussion 40

4.6.1 Bank size (SIZE) 41

4.6.2 Return on Assets (ROA) 42

4.6.3 Liquidity ratio (LIQ) 43

4.6.4 Leverage (LEV) 44

4.6.5 Loan loss reserves (LLR) 45

4.6.6 GDP growth (GDP) 46

CONCLUSION OF CHAPTER 4 48

CHAPTER 5 CONCLUSIONS AND RECOMMENDATIONS 49

5.1 Conclusion 49

5.2 Recommendations 50

5.3 Limitations of the research and further research directions 52

5.3.1 Limitations of the research 52

5.3.2 Further research directions 52

CONCLUSION OF CHAPTER 5 54

REFERENCES 55

APPENDIX 57

LIST OF ABBREVIATIONS

LIST OF TABLES AND CHARTS

Table 2.1 Legal documents of the State Bank of Vietnam on CAR 8 Table 2.2 Summary of the results of previous studies

15

Diagram 3.1 Research process

20

Table 3.2 Variable names – measures and expectations among the

variables in the model

26

Table 3.3 List of 25 joint-stock commercial banks in Vietnam 28

Table 4.7 Summary of regression results and model selection 39

CHAPTER 1 INTRODUCTION 1.1 Reason for choosing the topic

In the context of the country's growing development and integration, the banking system becomes the lifeblood of the economy, which is one of the factors contributing to the development of the economy Along with the country's high international integration, there has been an explosion in both the size and diversity

of the banking system in the current period However, that has hidden risks and great risks that directly affect the safety and soundness of the commercial banking system Therefore, the bank administrators must maintain and emphasize the importance of the capital adequacy ratio in banking activities according to Basel standards to prevent bank failure and protect the interests of the depositor

Currently, the researchers around the world are very interested in studying the risks and safety in the operation of the banking system No exception with Vietnam, when commercial banks are racing to meet the capital adequacy ratio standards as prescribed by the State Bank of Vietnam as well as to meet the standards under the Basel accords, the study of the capital adequacy ratio becomes even more essentials For those reasons, the author chooses " Factors affecting capital adequacy ratio of joint-stock commercial banks in Vietnam " as the research topic

1.2 Research objectives

1.2.1 Overall objectives

The study was conducted to test the impact of the factors on the capital adequacy ratio of the joint-stock commercial banks in Vietnam From there, give the suggestions to improve the capital adequacy ratio of the joint-stock commercial

banks in Vietnam in the coming time

1.2.2 Detailed objectives

Determining factors affecting capital adequacy ratio of joint-stock commercial banks in Vietnam

Evaluating the influence of these factors on the capital adequacy ratio of joint-stock commercial banks in Vietnam

Providing the recommendations to improve the capital adequacy ratio for bank managers and policymakers

Research time: The research data was collected from 2010 to the end of

2020 11 years is a long enough time to reflect changes in the economy and is close

to the present time

1.6 Scientific and practical significance

1.6.1 Scientific significance

Systematize the theoretical basis related to the capital adequacy ratio of the commercial banks and serve as a reference for researchers and banks interested in capital adequacy ratio

1.6.2 Practical significance

Research results provide empirical evidence on the positive and negative impacts of factors on the capital adequacy ratio of joint-stock commercial banks Thereby, giving some recommendations to bank managers to improve the capital adequacy ratio in the future at Vietnamese joint-stock commercial banks

1.7 Structure of the thesis

Chapter 1 Introduction

In chapter 1, the research provides an overview of the research topic, including the reason for choosing the topic, the research objectives and questions, the research object and scope, the research method, the scientific and practical significance At the end of this chapter, an overview of the structure of the thesis will be presented

Chapter 2 Theoretical basis and overview of prior studies

In this chapter, the author presents an overview of the theoretical basis of the capital adequacy ratio, which includes concept, measurement, and meaning Besides that, the author also reviews the previous empirical domestic and international studies

Chapter 3: Research Methods

Chapter 3 will focus on clearing the research method of the topic, proposing the research hypotheses through the previous research, presenting collected data, research model, and research process

Chapter 4: Research results and discussion

Chapter 4 will present the research results through analyzing and processing the collected data using Stata software, including: descriptive statistics, correlation analysis, regression analysis and model selection test From there, the author explains the impact of the independent variable on the dependent variable

Chapter 5: Conclusions and recommendations

In the last chapter of the thesis, the author will conclude on the factors as well as their impact on the capital adequacy ratio, thereby making recommendations

to improve the capital adequacy ratio In addition, present the limitations of the thesis and directions for the future researches

1.8 Research gap

Up to now, most of the studies were mainly conducted in foreign countries, there were relatively few domestic studies on this topic In addition, the research papers in Vietnam almost use the data series of commercial banks from 2000-to

2016 Therefore, there is still a lack of empirical evidence from the results of multivariate regression analysis to provide more solid evidence for the relationship between the factors that can affect the capital adequacy ratio and the capital adequacy ratio of the joint-stock commercial banks in Vietnam

CONCLUSION OF CHAPTER 1

In chapter 1, the author introduced the reason for choosing the topic, the overall objectives, the detailed objectives, the object and scope of the research, the research approaches, the structure of the research Chapter 1 also shows the scientific and practical significance of the thesis Chapter 1 is the premise for further clarification and detail in the following chapters

CHAPTER 2 THEORETICAL BASIS AND OVERVIEW OF PRIOR

STUDIES 2.1 theoretical basis of the capital adequacy ratio

2.1.1 The concept of the capital adequacy ratio

Parvesh Kumar Aspal and Afroze Nazneen (2014) highlighted that the capital adequacy ratio (CAR) is the ratio propounded by the regulatory authority in the banking major to judge the health of the banking system and to ensure that banks can take up a reasonable level of losses arising from operational losses The capital adequacy ratio reveals the internal strength of the bank to bear up losses during a period of crisis The higher the CAR ratio, indicates the bank is stronger and the more will be the protection of investors This ratio ensures that banks are capable to fulfill the liabilities and other risks such as operational risk, credit risk, and market risk

According to Nguyen Dang Don (2012), the capital adequacy ratio is the ratio between the core capital and total risk assets This is an important indicator to reflect the financial capabilities of commercial banks, as well as assess the ability to pay term debts and assess the safety level in credit activities of commercial banks According to Bateni et al (2014), the capital adequacy ratio is one of the most critical indicators in banking that provides an overview of bank performance and stability, the use of the minimum capital adequacy ratio leads to increased strength and efficiency of the financial system by reducing the possibility of bank insolvency

In Vietnam, the capital adequacy ratio is often mentioned in the annual reports

of commercial banks Accordingly, the capital adequacy ratio (CAR) of banks is guaranteed according to the regulations of the State Bank: reflecting the bank's sufficient capital on the basis of its core capital value and risk level in banking operations

In summary, the capital adequacy ratio is an economic indicator that reflects the relationship between equity and risk-adjusted assets of commercial banks With this ratio, it is possible to determine a bank's solvency for due debts and its ability to withstand other risks such as operational risk, credit risk, and security safe operation

of the bank as well as the interests of depositors

2.1.2 Basel Accord

Originating from the crises in the international currency market and banking markets led to the collapse of a series of banks in the late 1980s, most notable was the collapse of the Bank of Herstatt in West Germany Therefore, the central banks and supervisory agencies of G10 countries established the Basel Committee on Banking Supervision (BCBS) in 1974 in Basel, Switzerland The Basel Committee includes Central Bank Governors of the G10 and some countries with the world's leading banking systems, including Great Britain, Belgium, Canada, Germany, the Netherlands, the United States, Luxembourg, Japan, France, Spain, Sweden, Switzerland, and Italy

The Basel Committee does not have any supervisory authority and its conclusions do not have legal and compliance requirements for banking supervision Instead the Basel Committee develops and publishes broad standards and supervisory guidelines Besides that, introducing best practice reports in the hope that individual organizations will adopt them through detailed arrangements best suited for their national systems In this way, the Commission encourages the adoption of the common standards and approaches without attempting to interfere with Member States' surveillance techniques

In 1988, the Commission decided to introduce a capital measurement system which was referred to as the Basel Capital Accord or Basel I This system provides

a framework for measuring credit risk with a minimum capital standard of 8% Basel I is popular not only in the member states but also in most other countries with active internationally banks

By 1996, Basel I was revised with many new points However, the accord still has many limitations, so Basel II was officially published in 2004 and Basel III in

2010

2.1.3 Measure the capital adequacy ratio

The capital adequacy ratio is a measure of a bank's capital adequacy It is calculated by dividing the total of tier I and tier II capital into the bank's total risk-adjusted assets

Tier 1 capital includes the most reliable and most liquid types of financial resources: common stock, non-cumulative preferred stock, retained earnings However, each country's banking system regulator has its specific regulations on what specific financial instruments can be included in tier 1 capital

Tier 2 capital includes: undisclosed retained earnings; provision for revaluation of assets; general provision/provision for general loss of debt collection; Mixed capital instruments; loans on preferential terms, invest in financial subsidiaries and other financial institutions

Risk-adjusted assets: it is the sum of all assets held by a bank that is weighted for credit risk according to a formula given by the state agencies, usually the state Bank Most state banks follow the Bank of International Settlements (BIS)

to set these weights

2.1.4 Legal documents of the State Bank of Vietnam on CAR

Table 2.1 Legal documents of the State Bank of Vietnam on CAR

capital and reserve fund for authorized capital

- Assets include on-balance sheet risk weighted asset and off-balance sheet risk assets

- Core capital is calculated as tier

1 capital plus tier 2 capital and minus deductions

- Risk coefficient from 0%; 20%; 50%, 100%

- CAR is calculated as core capital

to total risk assets

- CAR adds credit risk, operational risk and market risk Circular

- Increase the risk coefficient when lending real estate from 150% to 200% compared to today

Source: State Bank of Vietnam

2.1.5 Meaning of the capital adequacy ratio

The capital adequacy ratio is one of the important criteria in evaluating the operation of commercial banks, is an important measure to measure the level of operational safety of the bank In the increasingly rapid and diverse development of the financial market in particular and the economy in general, commercial banks always face two big problems that are competitiveness and risks in business activities With the CAR coefficient, it is possible to determine a bank's ability to pay its term debts and face other types of risks such as credit risk, operational risk, and market risk In other words, when the bank guaranteed this ratio, it has created a cushion against financial shocks, both protecting itself and protecting depositors Therefore, the correct implementation of the capital adequacy ratio also helps to increase the prestige and competitiveness of commercial banks This has a very special meaning in the deposit business of commercial banks

In addition, CAR is also a tool for the State Bank to supervise the capital of commercial banks, stipulate the minimum capital adequacy ratio from time to time for commercial banks to comply with regulations, ensure real capital compared with the registered capital stated in the license at the time of establishment and compared with the legal capital, check if the risk reserve fund complies with regulations, check the safety and efficiency criteria in using and preserving the capital of commercial banks The fact that banks comply with regulations on capital adequacy ratio helps to avoid insolvency leading to bankruptcy, which endangers the entire financial system of the whole country

2.2 Previous studies

2.2.1 Studies in the world

Nadja Dreca (2014) analyzed a data set of observations for 10 banks over a

period of 6 years in B&H shows how Capital Adequacy Ratio (CAR) The author analyzes a data set of observations for 10 banks over a period of 6 years in B&H shows how Capital Adequacy Ratio (CAR) Selected variables are chosen from the previous research and analysis is done through several methods and some

diagnostics tests are performed in order to determine the most appropriate model that explains the determinants of CAR Results indicate based on data that SIZE, DEP, LOA, ROA, ROE, and LEV have a significant effect on CAR On the other hand, LLR and NIM do not appear to have a significant effect on CAR Variables SIZE, DEP, LOA, and ROA have a negative effect on CAR, while variables LLR, ROE, NIM, and LEV are positively related to CAR All variables except LOA and ROA have expected signs It is hard to distinguish which CAR is better higher or lower, from the stability aspect it is better to have a higher CAR, but from the

profitability side lower CAR is preferable, so the banks should decide based on this study which variable to use in order to reach targeted CAR level

Bahtiar Usman, Henny Setyo Lestari, Tiara Puspa (2019) determined the

factors affecting the CAR with the sample used in this study is the banking industry listed on the Indonesia Stock Exchange (IDX) in the period from 2007 until 2018

Independent variables are bank size, leverage, loan loss reserves, net interest margin, loan assets ratio, and liquidity The number of samples is 27 conventional banks by using purposive sampling Based on the description in the previous analysis and discussion, it can be concluded as follows that bank size, loan loss reserve, and credit asset ratio have a significant negative effect on the capital adequacy ratio Leverage and net interest margin have a significant positive effect

on the capital adequacy ratio Liquidity does not affect the capital adequacy ratio

Ahmet and Hasan (2011) conducted the study to investigate the

determinants of Turkish banks' capital adequacy ratio and its effects on the financial positions of banks covered by the study Data are obtained from banks' annual reports for the period 2006 - 2010 Panel data methodology is used in this study and analyzes relationships between independent variables; bank size (SIZE), deposits (DEP), loans (LOA), loan loss reserve (LLR), liquidity (LIQ), profitability (ROA and ROE), net interest margin (NIM) and leverage (LEV) and a dependent variable which is capital adequacy ratio (CAR) The results of the paper indicate that LOA, ROE, and LEV have a negative effect on CAR, while LLR and ROA positively influence CAR On the other hand, SIZE, DEP, LIQ, and NIM do not appear to have any significant effect on CAR

Serhat Yüksel and Mustafa Özsarı (2017) determined the factors that affect

the capital adequacy ratio of the deposit banks with 24 deposit banks of Turkey are taken into the consideration While analyzing similar studies in the literature, 13 different variables are selected that may affect on capital adequacy ratio Additionally, annual data

of these variables for the periods between 2005 and 2016 is evaluated by using panel regression analysis It is concluded that the CAR ratio is negatively related to the economic growth rate and positively related to the inflation rate Furthermore, the results also show that there is a negative relationship between the net balanced sheet position of the banks and the capital adequacy ratio

Yakup and Serkan (2007) analyze the determinants of capital structure in the Turkish banking sector Using a panel data set that employs bank-level data

from the Turkish banking sector covering the period 2002–2006 and estimated the model with a generalized method of moments (GMM) The findings of this study suggest that lagged capital, portfolio risk, economic growth, average capital level of the sector and return on equity are positively correlated with capital adequacy ratio and share of deposits are negatively correlated with capital adequacy ratio

2.2.2 Domestic studies

Nguyen Kim Chi (2018) studies the factors affecting the capital

adequacy ratio at 10 Vietnamese commercial banks designated by the State Bank of Vietnam (SBV) to pilot implementation according to Basel II standards starting from February 2016 The article uses a sample of 10 Vietnamese commercial banks including Vietcombank, BIDV, VietinBank, Techcombank, ACB, VPBank, MBB, MaritimeBank, Sacombank, and VIB, studied in the period from 2007 to 2016 through the FGLS method The results show that bank size, ROA, LIQ, and DEP have a negative impact on the bank's capital adequacy ratio On the other hand, LEV has a positive effect on the capital adequacy ratio of the bank LLR has no significant impact on the capital adequacy ratio of the banK

Pham Xuan Thoa, Nguyen Ngoc Anh & Nguyen Khac Minh (2020)

conducted the research to determine the internal banking factors that influence the capital adequacy ratio (CAR) of Vietnamese banks The secondary data is collected from banks’ annual reports from the period 2009–to 2015 FGLS method and panel data are used to examine a regression model with CAR as the dependent variable and five independent variables: bank size (SIZE), loans (LOA), loan loss reserve (LLR), liquidity (LIQ), profitability (ROE) The results show that SIZE and LIQ impact negatively on CAR with significant meanings On the other hand, LLR and LOA also affect CAR negatively but they are insignificant

Vo Hong Duc, Nguyen Minh Vuong, Do Thanh Trung (2014) conducted

the study to determine and quantify the influence of typical factors on the capital adequacy ratio of commercial banks in Vietnam The study uses the panel

regression technique to analyze the factors affecting the capital adequacy ratio (CAR) of 28 Vietnamese commercial banks in the period 2007- 2012 Research results show that the increased liquidity (LIQ) and loan loss reserve (LLR),) have a positive impact on the capital adequacy ratio Meanwhile, Bank size (SIZE), Deposit ratio (DEP), return on equity (ROE) have a negative impact on the capital adequacy ratio This study has not found quantitative evidence of the impact of leverage ratio (LEV) and loan ratio (LOA) on the capital adequacy ratio

Le Hong Thai (2020) conducted the research to identify how internal factors

of banks and macroeconomic factors affect a bank’s capital adequacy ratio (CAR) This study uses data sets of 28 Vietnamese commercial banks collected from 2008

to 2019 This study’s results show that internal factors of the bank such as the capital adequacy ratio of the previous studied period (L.CAR), the loans to assets ratio (LAR), the net profit margin (NIM), the liquidity (FDR) have positive impacts

on the CAR Meanwhile, the return on assets (ROA), the bank size (SIZE), and the leverage ratio (LEV) have negative impacts on the CAR For macroeconomic factors, the average lending interest rate (LIR) has a positive impact on the CAR while the factors of economic growth (GDP) and exchange rate (EXC) do not have statistical impacts on the CAR

Hung Phuong Vu and Ngoc Duc Dang (2020) used a panel data analysis to identify the factors that significantly affect the capital adequacy ratio (CAR) of Vietnamese commercial banks for the period from 2011 to 2018 During this period, the number of banks had decreased from 41 to 31 due to mergers and acquisitions The variables that are hypothesized to affect the capital adequacy ratio of commercial banks in Vietnam include bank size (SIZE), deposit (DEP), loan (LOA), loan loss reserves (LLR), liquidity (LIQ), return on assets (ROA), return on capital (ROE), net interest margin (NIM), non-performing loans (NPL) and leverage (LEV) The results indicate that LEV, LLR, ROE had a negative impact, ROA had a positive impact, and SIZE, DEP, LOA, LIQ, NIM, NPL did not significantly influence the CAR of Vietnamese commercial banks

Table 2.2 Summary of the results of previous studies Variables Notation Expected

sign

Sources

Bank size SIZE - Vo Hong Duc, Nguyen Minh

Vuong& Do Thanh Trung (2014) Nguyen Kim Chi (2018)

Triyuwono, Munawar Ismail

và Aulia F Rahman (2013) Hung Phuong Vu and Ngoc Duc Dang (2016), Ahmet and Hasan (2011)

Anh & Nguyen Khac Minh (2020) Ahmet và Hasan (2011)

Nadja Dreca (2014)

Liquidity LIQ + Vo Hong Duc, Nguyen Minh

Vuong& Do Thanh Trung (2014)

- Nguyen Kim Chi (2018)

Pham Xuan Thoa, Nguyen Ngoc Anh & Nguyen Khac Minh (2020)

Loan

Loss

Reserves

Vo Hong Duc, Nguyen Minh Vuong& Do Thanh Trung (2014)

Usman, & Ansari (2016)

- Bahtiar Usman, Henny Setyo

Lestari, Tiara Puspa (2019)

Hung Phuong Vu and Ngoc Duc Dang (2020)

Deposits DEP - Nguyen Kim Chi (2018)

Vo Hong Duc, Nguyen Minh Vuong& Do Thanh Trung (2014) Nadja Dreca (2014)

Yakup and Serkan (2007)

+ Mohammed T.Abusharba, Iwan

Triyuwono, Munawar Ismail

và Aulia F Rahman (2013)

Leverage LEV - Ahmet và Hasan (2011)

Le Hong Thai (2020) Hung Phuong Vu and Ngoc Duc Dang

+ Nadja Dreca (2014)

Nguyen Kim Chi (2018)

Bahtiar Usman, Henny Setyo Lestari, Tiara Puspa (2019)

CONSCLUSION OF CHAPTER 2

Chapter 2 has shown the concept of capital adequacy ratio, the method of its calculation according to the Basel committee and legal documents of the State Bank

of Vietnam on CAR In addition, the author has also systematized previous studies

on factors affecting the capital adequacy ratio of both domestic and foreign studies This is a premise to be able to study deeply into the detailed model of factors affecting the coefficient of safety, which is presented in chapter 3

CHAPTER 3 RESEARCH METHODS 3.1 Research process

Step 1: The author will conduct a review of the background theory related to the capital adequacy ratio At the same time, the author explores empirical studies in the world and Vietnam on the factors affecting the capital adequacy ratio

Step 2: Based on theory and related studies, the author builds a research model and collects data for the research

Step 3: Descriptive statistics: The author uses STATA 16 software to summarize the characteristics of the data about the dependent variable and the independent variables, including mean, maximum, minimum, and standard deviation

Step 4: Analyze the correlation relationship between the variables in the model to know the degree of correlation and the correlation sign between the pairs

of variables Besides, the author uses the VIF variance exaggeration factor to check the degree of multicollinearity

Step 5: Estimating the model by Pooled OLS, FEM, REM methods The author runs the regression model according to the least-squares method (Pooled OLS), the regression model according to the fixed effects method (FEM), and the regression model according to the random effects method (REM) respectively Step 6: After performing the estimation with 3 methods Pooled OLS, FEM, REM, the author conducts some tests including F-Test, Breusch –Pagan, and Hausman to choose the most suitable model

Step 7: Correct the model's defects such as variable variance or autocorrelation if the model has arisen

Step 8: Concluding the research results, assessing the impact of each factor

on the capital adequacy ratio, and making recommendations from the research results

Diagram 3.1: Research process

Source: Compiled by the author

3.2 Research model

On the basis of theory and previous empirical studies on the factors affecting the capital adequacy ratio of commercial banks, the author decided to inherit the research model of Nadja Dreca (2014) and the research model of Vo Hong Duc, Nguyen Minh Vuong, Do Thanh Trung (2014) as the main model for this research

The research of Nadja Dreca (2014) studies the factors affecting the capital adequacy ratio of banks in 10 selected banks in Bosnia and Herzegovina in the period of 6 years, this is a country with many similarities with Vietnam The research of Vo Hong Duc, Nguyen Minh Vuong, Do Thanh Trung (2014) analyzes

Step 8: Make conclusions and recommendations from the research results

Step 7: Correct the model's defects if the model has arisen

Step 6: Choose the most suitable model

Step 5: Estimating the model by Pooled OLS, FEM, REM methods

Step 4: Analyze the correlation relationship and check the degree of

multicollinearity

Step 3: Descriptive statistics Step 2:Build research models and collect research data Step 1:Review of background theory and previous studies

the factors affecting the capital adequacy ratio (CAR) of 28 Vietnamese commercial banks in the period 2007-2012 Moreover, these two models use variables that have been studied and proven by many authors to have an impact on the capital adequacy ratio of commercial banks

In addition, the author also synthesizes two macro-independent variables taken from other studies Specifically, the inflation variable is taken from the study

of Shaddady & Moore (2015) and the economic growth variable (GDP) is referenced from the study of Serhat Yüksel and Mustafa Özsar (2017) to further complete the research model

The research model is as follows:

CAR = β 0 + β 1 SIZE it + β 2 ROA it + β 3 LIQ it + β 4 LLR it + β 5 DEP it + β 6 LOA it +

β 7 NIM it + β 8 LEV it + β 9 INF it + β 10 GDP it +e it

In which:

β 0: The intercept coefficient

β1 , , β8:The individual regression coefficients of the independent variables

i: stands for banks, t stands for years and e represents the error of the model

CAR: Capital adequacy ratio

SIZE: Bank size

ROA: Return on Assets

LIQ: Liquidity Ratio

LLR: Loan loss reserves ratio

DEP: Customer deposit to total assets ratio

LOA: Loans ratio

NIM: Net interest margin

LEV: Leverage ration

INF:Inflation rate

GDP: GDP growth

3.3 Variable measurement and research hypothesis

3.3.1 Bank size (SIZE)

Bank size is measured by the natural logarithm of a bank's total assets which are taken from banks' balance sheets

As banks increase in asset size, they will hold more risk assets than smaller banks This has a negative impact on the capital adequacy ratio of the bank Many previous studies have shown a negative correlation between asset size and the capital adequacy ratio like Nguyen Kim Chi (2018), Nadja Dreca (2014), Bahtiar Usman, Henny Setyo Lestari, Tiara Puspa (2019)

H1: Bank size has a negative effect on capital adequacy ratio

3.3.2 Return on assets (ROA)

A return on assets ratio is determined by dividing profit after tax into total assets ROA measures the profit earned per dollar of assets ROA is one of the indicators to evaluate the effectiveness of asset management

Return on assets (ROA) is high, indicating that the company is well managed with assets This will help the bank reduce risks and increase profits, the bank will increase retained earnings and thereby increase capital Therefore, the return on assets helps the bank to increase the CAR Empirical studies show that return on assets has a positive impact on the capital adequacy ratio as studied by Hung Phuong Vu and Ngoc Duc Dang (2016), Ahmet and Hasan (2011) However, research by Nadja Dreca (2014) and Nguyen Kim Chi (2018) shows that the rate of return on total assets has a negative impact on the capital adequacy ratio In this

study, the author expects the rate of return on total assets to positively affect the capital adequacy ratio

H2: Return on assets has a positive effect on the capital adequacy ratio

3.3.3 Liquidity ratio (LIQ)

Liquidity ratio is calculated by taking cash and cash equivalents divided by total assets High liquidity means banks can convert assets to cash quickly to meet other financial needs

As cash and cash equivalents increase, the exposure to liquidity risk improves On the other hand, a decrease in cash and cash equivalents means an increase in liquidity risk Therefore, an increase in a bank's liquidity can have a positive impact on the capital adequacy ratio According to research Vo Hong Duc

et al (2014) also said that when the liquidity ratio and the capital adequacy ratio of commercial banks have a positive relationship For that reason, the author expects a positive relationship between liquidity ratio and the capital adequacy ratio

H3: Liquidity ratio has a positive effect on the capital adequacy ratio

3.3.4 Loan loss reserves (LLR)

Loan loss reserve ratio can be measured by using the formula of loan loss reserves divided by total loans.This ratio is defined as the reserve value for possible losses in the total loan amount of the bank

When loan loss reserves increase, banks tend to lend more or accept loans with higher risk, therefore leading to a lower capital adequacy ratio Research by Bahtiar Usman, Henny Setyo Lestari, Tiara Puspa (2019), and Hung Phuong Vu and Ngoc Duc Dang has shown a negative correlation between LLR and CAR The author expects in this research that the loan loss reserves ratio will also have a negative impact on the capital adequacy ratio

H4: Loan loss reserve ratio has a negative effect on the capital adequacy ratio

to a decrease in the capital adequacy ratio In their study, Nadja Dreca (2014), Yakup and Serkan (2007) showed that the deposit ratio has a negative impact on the capital adequacy ratio Therefore, the author also expects the deposit ratio to have a negative impact on the capital adequacy ratio

H5: Deposit ratio has a negative effect on the capital adequacy ratio

3.3.6 Loans (LOA)

The bank's loan ratio (LOA) is calculated as total loans to total assets

Lending is one of the main activities and contributes significantly to the revenue of most banks, accounting for a fairly large proportion of the total assets structure Therefore, the more banks lend, the more risk-weighted assets are Ahmet and Hasan Studies (2011) Nadja Dreca (2014) also shows that lending has a negative effect on the capital adequacy ratio Therefore, the author expects there will be a negative correlation between the loans ratio and the capital adequacy ratio

of banks

H6: Loans ratio has a negative effect on the capital adequacy ratio

H7: Leverage ratio ratio has a positive effect on the capital adequacy ratio 3.3.8 Net interest margin (NIM)

Net interest margin of banks is defined as the difference between interest income and interest expenses divided by a bank's total profitable assets

NIM is one of the important metrics to measure a bank's performance The higher the bank's NIM ratio, the more efficient the bank's business is, thereby helping to improve the capital adequacy ratio Previous empirical studies of Le Hong Thai (2020) and Nadja Dreca (2014) both show that net interest margin has a positive relationship with the capital adequacy ratio Therefore, the author expects a positive correlation between these two factors

H8: NIM has a positive effect on the capital adequacy ratio

3.3.9 GDP growth (GDP)

The GDP growth rate is determined as the rate of increase (decrease) of GDP

in the year of analysis compared to the previous year