The impact of capital structure on the performance of vietnamese commercial banks

MINISTRY OF EDUCATION STATE BANK OF VIETNAM AND TRAINING HOCHIMINH UNIVERSITY OF BANKING NGUYEN THI MINH NGUYET THE IMPACT OF CAPITAL STRUCTURE ON THE PERFORMANCE OF VIETNAMESE COMMERCIAL BANKS BACHEL[.]

MINISTRY OF EDUCATION STATE BANK OF VIETNAM

AND TRAINING

HOCHIMINH UNIVERSITY OF BANKING

NGUYEN THI MINH NGUYET

THE IMPACT OF CAPITAL STRUCTURE ON THE PERFORMANCE OF VIETNAMESE COMMERCIAL

BANKS

BACHELOR’S DISSERTATION SPECIALIZATION: FINANCE – BANKING

CODE: 7340201

HO CHI MINH CITY, 2022

MINISTRY OF EDUCATION STATE BANK OF VIETNAM

AND TRAINING

HOCHIMINH UNIVERSITY OF BANKING

NGUYEN THI MINH NGUYET

THE IMPACT OF CAPITAL STRUCTURE ON THE

PERFORMANCE OF VIETNAMESE COMMERCIAL

BANKS

BACHELOR’S DISSERTATION SPECIALIZATION: FINANCE – BANKING

CODE: 7340201

INSTRUCTOR PhD VUONG THI HUONG GIANG

HO CHI MINH CITY, 2022

ABSTRACT

Summary:

Recognizing the importance of capital structure to the business success of banks

in general, and commercial banks in particular As a result, the author decided to

research "The Impact of Capital Structure on the Performance of Vietnamese

Commercial Banks." The study investigates the degree and direction of influence of

internal and external factors on commercial bank performance, typically, Capitalization, Size, Loan, Deposit, bank growth, Liquidity, Tangibility, Gross

Domestic Product, and Inflation on the performance of Vietnamese Commercial banks

(ROE, ROA) The topic's research sample covers 31 commercial banks operating in the Vietnamese market from 2012 to 2021 Using secondary data gathered from audited

financial statements of banks available on each bank's official website

Following the essay, the researchers applied the following regression methods: Pooled OLS (Pooled Ordinary Least Squares), REM (Random Effect Model), FEM (Fixed Effects Model), and GLS (Generalized Least Squares) The findings indicate that capital structure has a beneficial effect on bank performance Furthermore, the study discovered a significant positive association between the bank’s capitalization, the bank's size, loan ratio, and growth rate on its performance via two metrics, including the ratio of return on equity and return on total assets, while the deposit rate, gross domestic product, and inflation have negative effects According to the study, banks should consider raising equity capital to improve operational efficiency and

boost financial capability

Keywords: Capital Structure, Performance, Vietnamese commercial banks

ASSURANCE LETTER

The author of the essay has an honorary assurance of his college graduation course, specifically:

My name is: Nguyen Thi Minh Nguyet

Major: Finance - Banking

As an HQ6 – GE05 class student, I am a member of Ho Chi Minh City Banking University's K34 high-quality training program

Number of students: 050606180266

“The impact of capital structure on the performance of Vietnamese Commercial banks" is the research that I conducted under the guidance of Dr Vuong

Thi Huong Giang

This dissertation is my own, the content is independent, does not copy any documents, and has not been published in any previous form The figures in the tables for analysis, comments, and assessments collected from different sources are clearly and transparently stated in the reference section

In addition, the dissertation also uses some comments, reviews, and figures from other authors, and other organizations have quotes and annotations of origin If I find out that there is any fraud, I take full responsibility for the content of my essay

Ho Chi Minh City, 2022

Author

Nguyen Thi Minh Nguyet

THANK-YOU LETTER

There is no success used to the support and assistance of others, whether more

or less, directly or indirectly Since I began exploring the subject, I have received a great deal of attending great e from teachers, family, and friends I would like to express my heartfelt gratitude to the Board of Directors, departments, and faculties in general, and the teachers of the Faculty of Finance and Banking in particular, of Banking University of Ho Chi Minh City, who guided, taught, and created all favorable conditions to assist me throughout the process of studying, researching, and completing this thesis topic

I would especially like to thank Ph.D Vuong Thi Huong Giang – the Lecturer, personally directed and dedicatedly advised me to carry out the first steps of studying the topic to complete the entire graduation essay

Due to the limited conditions of my competence, the research topic is not immune to weaknesses during the study, therefore I look forward to getting comments from teachers and friends so that I can gain more experience and the research paper will be better developed

Sincerely thank you!

Ho Chi Minh City, 2022

Author

Nguyen Thi Minh Nguyet

TABLE OF CONTENTS

ABSTRACT i

ASSURANCE LETTER ii

THANK-YOU LETTER iii

LIST OF ABBREVIATIONS viii

LIST OF TABLES ix

LIST OF PICTURE x

CHAPTER 1: INTRODUCTION 1

1.1 REASONABLE FOR RESEARCH 1

1.2 RESEARCH OBJECTIVES 3

1.1.1 General objective of the research 3

1.1.2 Specific objectives of the research 3

1.3 RESEARCH QUESTIONS 4

1.4 RESEARCH OBJECTS AND SCOPE 4

1.4.1 Research subjects 4

1.4.2 Research scope 4

1.5 RESEARCH METHODOLOGY 5

1.6 CONTRIBUTION TO THE TOPIC 6

1.6.1 Theoretical aspect 6

1.6.2 Practical aspect 6

1.7 RESEARCH LAYOUT 6

CONCLUSION CHAPTER 1 8

CHAPTER 2 LITERATURE REVIEW 9

2.1 THEORETICAL FOUNDATIONS OF BANK PERFORMANCE 9

2.1.1 Bank activities 9

2.1.2 Bank performance 10

2.2 THEORETICAL BASIS OF THE BANK'S CAPITAL STRUCTURE 12

2.2.1 Capital Structure 12

2.2.2 Theories of Bank capital structure 13

2.2.3 Theories of Corporate capital structure 13

2.2.4 The impact of capital structure on bank performance 16

2.3 EMPIRICAL LITERATURE REVIEW 19

2.3.1 Foreign studies 19

2.3.2 Domestic studies 22

CONCLUSION CHAPTER 2 31

CHAPTER 3: RESEARCH METHODOLOGY 32

3.1 DATABASE AND RESEARCH MODEL 32

3.1.1 Database 32

3.1.2 Research Model 32

3.2 RESEARCH MODEL 34

3.2.1 Dependent variable 34

3.2.2 Independent variables 34

3.3 RESEARCH DATA SOURCE 42

3.4 RESEARCH METHODS 43

3.4.1 Qualitative research methods 43

3.4.2 Quantitative research methods 43

CONCLUSION CHAPTER 3 49

CHAPTER 4: ANALYSIS AND RESEARCH RESULTS 50

4.1 DESCRIPTIVE STATISTICS 50

4.2 CORRELATION ANALYSIS 58

4.3 MODEL SELECTION 59

4.3.1 Data regression model results 59

4.3.2 Accreditation model selection 62

4.4 TESTING DEFECTS FOR THE MODEL 63

4.4.1 Multicollinearity phenomenon test 63

4.4.2 Autocorrelation test for ROA and ROE 64

4.4.3 Heteroscedasticity test for ROA and ROE 65

4.5 CORRECTION OF DEFECTS 65

CONCLUSION CHAPTER 4 74

CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 75

5.1 CONCLUSION 75

5.2 RECOMMENDATIONS 79

5.2.1 For Commercial Banks 79

5.2.2 For state leaders 81

5.3 LIMITATIONS OF STUDY 81

CONCLUSION CHAPTER 5 83

REFERENCES 1 APPENDIX 6

LIST OF ABBREVIATIONS

OLS Ordinary Least Square

GLS Generalized Least Squares

FEM Fixed Effects Model

GMM Generalized Methods of Moments

ROA Return on total Assets

ROE Return on total Equity

CAP The ratio of Equity to total Capital

LIST OF TABLES

Table 2.1 Summary of empirical research results on bank performance 23

Table 3.1: The formula is calculated by the author for each variable 33

Table 3.2: Variable’s measurement and expected effect 41

Table 4.1 Descriptive statistics of variables 50

Table 4.2: Matrix of correlation coefficients between variables 58

Table 4.3: Results of three model regressions (Pooled OLS, FEM, and REM) for ROA and ROE 59

Table 4.4: Model selection test results 62

Table 4.5: Multicollinearity phenomenon test results 63

Table 4.6: Wooldridge test results with dependent variable ROA 64

Table 4.7: Wooldridge test results with dependent variable ROE 64

Table 4.8: Modified Wald test results for ROA 65

Table 4.9: LM Breusch and Pagan Lagrangian multiplier test results for ROE 65

Table 4.10: FEM model regression results according to GLS for ROA variables 66

Table 4.11: REM model regression results according to GLS for ROE variables 67

Table 4.12: Summary of research results 68

Table 5.1: Summary of study results for ROE 76

Table 5.2: Summary of study results for ROA 77

LIST OF PICTURE

Picture 4.1: Average ROE at Commercial banks in the period 2012-2021 51

Picture 4.2: Average ROA at Commercial banks in the period 2012-2021 51

Picture 4.3: Average CAP at Commercial banks in the period 2012-2021 52

Picture 4.4: Average SIZE at Commercial banks in the period 2012-2021 53

Picture 4.5: Average LOAN at Commercial banks in the period 2012-2021 53

Picture 4.6: Average DEPOSIT at Commercial banks in the period 2012-2021 54

Picture 4.7: Average LIQ at Commercial banks in the period 2012-2021 55

Picture 4.8: Average TANG at Commercial banks in the period 2012-2021 55

Picture 4.9: Average GROWTH at Commercial banks in the period 2012-2021 56

Picture 4.10: Average GDP at Commercial banks in the period 2012-2021 56

Picture 4.11: Average INF at Commercial banks in the period 2012-2021 57

CHAPTER 1: INTRODUCTION 1.1 REASONABLE FOR RESEARCH

In recent years, the global economy in general, and Vietnam in particular, have experienced a sharp decline, owing primarily to the severe impact of the Covid-19 pandemic The banking system, in particular, was severely impacted, resulting in significant economic losses Banking is one of the decisive factors, the lifeblood of the financial market, contributing to economic development As a result, it is critical to establish and create a reasonable capital structure that is in line with the bank's operating resources to maximize profits while minimizing financial crisis risks

Many researchers have expressed an interest in capital management The development of capital structure is critical for financial managers because it directly contributes to the creation of business value and can increase income for owners As a result, the use of capital and increasing the operating efficiency of the business is always a problem that managers must solve For the reasons stated above, the study of factors affecting the capital structure of commercial banks is an important and useful job that can assist managers in organizing and reallocating business capital sources Through the selection and implementation of their financing decisions, banks can achieve the appropriate capital structure for each stage of development

Typically, theories of capital structure such as the capital structure theory of Modigliani and Miller (M&M theory), Pecking Order Theory (Myers, 1984), and many other related theories play an important role in this study premise for future studies In the world, there have been many experimental studies before research on this topic, however, in Viet Nam, the author found only studied the impact of capital structure on the performance of Vietnamese banks as Nguyen Thu Thuy et al (2021) conducted a similar study on Vietnamese commercial banks Notwithstanding, this study only analyzes the relationship between capital structure and operating efficiency using some bank-specific determinants such as bank size, non-performing loan ratio, liquidity ratio,

and cost to income ratio; thus, the study has not reflected the impact of capital structure

on bank performance accurately and comprehensively As a result, the author realizes that it is necessary to continue analyzing this topic; however, in this study, the author has included factors that can strongly affect the operation of banks such as capital finance, bank loans, and bank deposits to obtain a more comprehensive view, and a more reliable relationship between capital structure and performance is obtained Besides, depending on the different time locations, different studies will lead to different studies such as Shubita and Alsawalhah (2012), and Trujillo-Ponce (2013) which argue that the debt ratio increases, the profits of the firms will be decreased, which shows in contrast to the research of Doan Vinh Thang (2016) and Vo Minh Long (2017) that manufacturing firms use more debt will increase operational efficiency As can be seen, empirical studies conducted both at home and abroad produce contradictory findings regarding the direction of the influence of capital structure on performance

Given the inconsistencies in the above studies' findings, the author recognizes the need for additional research on the impact of capital structure on the performance

of Vietnamese commercial banks for two main reasons To begin, the study sought to determine the extent and direction of the impact of capital structure on the performance

of commercial banks, specifically commercial banks in Vietnam Simultaneously, compare the impact of internal and external capital structure factors on return on total assets and return on equity representing the performance of commercial banks in the Vietnam market to previous domestic studies Furthermore, the author discovers that studies on this topic have recently become more common in Vietnam, but research papers using representative factors for capital structure for analysis are still limited, and the data collected for analysis has not been updated to the most recent, resulting in low reliability of the results obtained

Based on the foregoing, the author believes that it is feasible to investigate the impact of capital structure on bank performance, so the author focuses on the topic

"The impact of capital structure on the performance of Vietnamese Commercial

banks" The study's goal is to determine the level and trend of capital structure's impact

on the performance of manufacturing enterprises in Vietnam from 2012 to 2021 As a result, the study collects secondary data for quantitative analysis to demonstrate the relationship between capital structure and enterprise performance, thereby proposing some recommendations and valuable contributions in terms of theory and practice for this field of study in Vietnam

1.2 RESEARCH OBJECTIVES

1.1.1 General objective of the research

The objective of the study is to examine the factors of capital structure that affect the performance of the Commercial banking system in Vietnam, and at the same time to study the degree of influence and control of the banking system Modeling the influence of capital structure on performance, empirical evidence in Vietnamese commercial banks in the period 2012-2021

From there, propose solutions to improve operational efficiency for Commercial Banks based on capital structure management to be listed on Vietnam's market in the coming time

1.1.2 Specific objectives of the research

To achieve the general objective, the study needs to focus on several specific objectives as follows:

Objective 1: Assess the effects of the bank’s capital structure on the

performance of Vietnamese commercial banks during the period 2012 - 2021

Objective 2: Identify the degree of influence of capital structure on the

performance of Vietnamese commercial banks during the period 2012 - 2021

Objective 3: Provide suggestions and recommendations related to restructuring

to improve the performance of Commercial banks in Vietnam in the coming time

1.3 RESEARCH QUESTIONS

With the above research objective, the thesis will find out the influence of capital structure on the performance of Commercial banks, and propose recommendations to improve the performance of Commercial banks in the financial market in Vietnam by answering the following research questions:

Firstly, what factors effects the bank’s capital strucutre on the performance of

Vietnamese commercial banks during the period 2012 - 2021?

Secondly, the degree of influence of capital structure on the performance of the

Vietnamese commercial banks market during the period 2012 - 2021?

Thirdly, what are the recommendations for Commercial banks in Vietnam to

improve business performance through the capital structure to see the importance of capital structure?

1.4 RESEARCH OBJECTS AND SCOPE

1.4.1 Research subjects

The object of the study is the impact of capital structure on the performance of Commercial banks in the Vietnam market

1.4.2 Research scope

Research space: The study is expected to use secondary data from 31

Vietnamese Commercial banks in the period 2012-2021 Banks are selected and included in the research sample when fully satisfying the following criteria:

+ The bank's shares remain listed on the market as of the end of the fiscal year

2021

+ The bank has full financial statements from 2012 to 2021

+ All audited financial statements and the auditor's report give an acceptable opinion of reasonableness and truthfulness by materiality

+ The data source is collected by the author from the official website VietstockFinance

Research time: The research is carried out for 10 years from 2012 to 2021 after

there were significant changes in the economy when restructuring the banking system

in 2011

The thesis on secondary data collection and uses descriptive statistical methods, gathers, and processes data of banks to describe the research sample, and analyze the current situation of a capital structure affecting the performance of Vietnamese Commercial banks South in the period from 2012 to 2021 Then, using a quantitative research method, we propose an econometric model of the factors of capital structure that affect the performance of Vietnamese commercial banks in the period 2012-2021 The author uses Stata 16.0 software to run panel data regression according to the fixed-effects model (FEM) and random-effects model (REM) to select the most optimal model

The author will use tests to consider the existence of variable variance phenomena (estimate according to FEM, use Modified Wald test, estimate according to REM, use Breusch and Pagan Lagrangian test) series correlation using Wooldridge's test

However, panel data with a large number of observations in a short time series will have the disadvantage of variable variance and generate endogeneity problems in the model Therefore, the author uses the GLS model to test the defects of the endogenous phenomenon and the variance, thereby analyzing the impact direction of the influencing factors

1.6 CONTRIBUTION TO THE TOPIC

1.6.1 Theoretical aspect

The study is a useful document, contributing to strengthening and supplementing the theoretical basis of capital structure, and empirical studies on the relationship between capital structure and the performance of Commercial banks In addition, analyzing and measuring the capital structure indexes as well as the influence

of capital structure on the business performance of Commercial banks listed on the Vietnam stock market

1.6.2 Practical aspect

The author hopes to apply these results to build a theoretical model of the impact of capital structure on the performance of Commercial in the Vietnam market This study will be one of the practical contributions to help the Commercial banks listed on the Vietnamese market to see more fully the relationship between capital structure and the performance of Commercial banks On that basis, practical capital structure solutions have been proposed to help Vietnamese Commercial banks improve operational efficiency in the coming time

Finally, this thesis can help businesses or investors, further researchers have more reference sources and serve as a basis for similar studies in Commercial banks

1.7 RESEARCH LAYOUT

In addition to the conclusion, appendix, table of contents, list of figures and tables, and references are presented and cited using APA style, the present study consists of 5 chapters with the following layout:

Chapter 1: Introduction

The content of Chapter 1 defines the research problem as the impact of capital structure on the performance of banks Accordingly, in chapter 1, the author presents contents including (1) the reason for the research, (2) the research objective, (3) the

research object, (4) the research scope, (5) the research method, (6) contribution of the topic, (7) research layout

Chapter 2: Theoretical Basis

In this section, the author presents the theoretical basis of the capital structure of banks and the factors affecting the capital structure of Commercial banks At the same time, summarize and compare previous studies related to the factors affecting the capital structure

Chapter 3: Research Methodology

The author will establish a research model, establish research hypotheses, and present methods of data collection and data analysis to test hypotheses in this chapter

Chapter 4: Research Results and Analysis

In this chapter, the topic will make descriptive statistics of the variables in the model, test the research model, analyze the correlation between the variables in the model and analyze the impact of factors on capital structure From that research result, the author proposes a suitable regression model showing the relationship between internal and external factors of the bank

Chapter 5: Recommendations and Conclusions

In the last chapter, the author outlines the conclusions drawn from the analysis and reasoning process At the same time, making some recommendations for Vietnamese commercial banks to improve the capital structure to improve the efficiency of business activities in the Vietnam market Finally, the study presents the limitations that the study has not implemented

CONCLUSION CHAPTER 1

Chapter 1 of the dissertation course presents the reasons for choosing the topic

of study of the effect of capital structure on the performance of commercial banks From there, summarize the general research objectives, the corresponding specific research objectives, and three research questions to address the above-mentioned objectives In addition, this chapter presented the subjects and scope of research of 31 commercial banks in 10 years from 2012 to 2021 Next is the contribution of the topic

at present and the expectation to become a reference for further studies in the future

At the end of chapter 1, the topic presents the structure of the dissertation course consisting of 5 chapters and the main content of each chapter The content presented in chapter 1 will serve as the basis for the author to deploy and analyze in-depth the internal and external factors of the bank about the capital structure to the performance

of commercial banks in detail in the next chapters

CHAPTER 2 LITERATURE REVIEW

In this chapter, the author will present the theoretical basis and empirical evidence from previous domestic and foreign experimental studies on the capital structure impact on the operational efficiency of commercial banks In addition, this chapter also discusses identifying research gaps and design models for the subject study

2.1 THEORETICAL FOUNDATIONS OF BANK PERFORMANCE

2.1.1 Bank activities

The formation and development of commercial banks are linked to the country's economic progress Simultaneously, the rapid development of the market economy in the era of realization and globalization has established the premise and motivation for commercial banks to rapidly transform from traditional banks with simple business organizations into modern commercial banks, with digital technology diversifying and expanding the area of operations to multinationals There are many different perspectives on the concept of commercial banking, but in general, a commercial bank

is an organization that directly trades currencies, raises capital from individuals and organizations in the economy, then makes loans or invests in other potentially lucrative assets Additionally, the bank provides many business-related finance services, such as granting payment credit to organizations and individuals in the economy

According to the criteria given above, commercial banking is a financial institution that is critical to the development of the economy The role of commercial banking is examined in detail using the following criteria:

Commercial banks play a significant role in implementing policies issued by the state, ensuring that monetary policy and other state macro policies are tightly and reasonably integrated to promote economic growth and the implementation of community objectives

As a financial intermediary, the Commercial Bank transfers customer deposits

to settle credit payments to people and commercial entities conducting business and investing Concurrently, commercial banking is a source of investment for public projects because it is one of the bond market's essential members

Commercial banks issued and paid checks as a payment role, enabling electronic payment networks based on the payment of money to parties purchasing and selling commercial products and services

As an agent, commercial banks oversee and guarantee the issuance or acquisition of securities by partner parties At the same time, issue a letter of commitment to meet financial commitments and pay the business contract's parties

2.1.2 Bank performance

2.1.2.1 Definition

According to European Central Bank, efficiency is "the ability to generate sustainable profits, the profits obtained are first used to back up unexpected losses and strengthen capital positions, improving future gains through investments and retained profits However, Vu Thu Giang (2000), the economist Adam Smith said that

"Efficiency is the result of economic activity, the revenue of goods consumption" As such, it can be understood that the effect is similar to the indicator that reflects the results of business activities

Another argues that business performance is the conversion of scarce inputs into higher profits or cost reductions than competitors (Draft, 2008) It can also be understood in another way: "Business performance is the equivalent ratio of comparison between the result and the cost of achieving that result”

There are many varied perspectives on operational efficiency, but in general, company performance is the level of success that investors have in employing inputs to export output variables while satisfying previously established goals As a result, from

an economic standpoint, commercial banks' business efficiency is defined as a profit equal to the investment capital spent

2.1.2.2 Measuring the bank's financial performance

As there are different approaches to operational efficiency, there are also many methodologies to analyze this problem that are gradually emerging There are currently two main approaches in use around the world to evaluate the business performance of commercial banks The first way of evaluating performance is based on financial metrics, and the second is model-based assessment Based on the study model, this issue focuses on the approach of analyzing commercial banks' business performance using financial indicators

 These indicators assess profitability in the relatively static group

These metrics assess the effectiveness of using a unit of business capital, which reflects the bank's management efficiency based on revenue and profit earned The bulk of past research employed metrics such as return on total assets (ROA), return on equity (ROE), net interest income ratio (NIM), non-interest income ratio to total assets, and earnings per share (P/E) Each measuring indicator has its own set of outcomes and interpretations that may be used to study and evaluate the bank's performance in a variety of ways However, in the scope of this topic, the author solely refers to commercial banks' profitability performance in terms of return on total assets (ROA)

ROE= Net profit/Equity

ROA= Net profit/Total Assets

NIM= Net interest Income/ Profitable assets

P/E= Price/Earning

and return on equity (ROE) ROA and ROE were chosen because they evaluate profit made per dollar of assets and show the extent to which bank management leverages the bank's real investment resources to generate a profit (Bennaceur & Goaied, 2008) In another research investigation, Zeitun and Tian (2014) and Al-Kayed (2014) employed return on assets (ROA) and return on equity (ROE) as proxies for bank performance

Accordingly, the author will detail several indicators of business performance assessment that are relatively expressed in a static form and are mostly used to evaluate the business performance of commercial banks Besides, these indicators are also a measure of business performance that will be used in this essay

2.2 THEORETICAL BASIS OF THE BANK'S CAPITAL STRUCTURE

2.2.1 Capital Structure

Capital structure is understood as a combination of liabilities including term regular debt, long-term debt, and equity including preferred shares, and common equity used to finance the operation of the business (Macguigan et al., 2006)

short-Furthermore, capital contains both obligations and equity Short-term and term debt exist, and the owner's capital may include capital raised in common stock, preferred shares, and non-divided profits Capital structure is the ratio of sources to total resources (Luu Thi Huong 2012, page 129) However, another opinion believes that the definition of capital structure is the relationship according to the proportion of debt and equity in total capital to finance production and business activities (Nguyen Minh Kieu, 2014) Similarly, Ngo Kim Phuong et al (2013) analyzed the capital structure according to the data approach from the balance sheet of the enterprise, from which the results show that the capital structure of the enterprise is sorted by increasing stability, including debt payable and equity Several related studies also measure capital structure in different ways: long-term debt to total assets, short-term debt to total assets, and total debt to total assets (Kayo and Kimura, 2011), (Phan Thi Bich Nguyet, 2013) and (Vo Minh Long, 2017) Thus, in general, capital structure is defined

long-as a combination of debt and equity to finance the production and business activities of

a certain organization

2.2.2 Theories of Bank capital structure

There are significant variations between banks and conventional firms in terms

of business models and capital structure features, therefore applying the theory of the capital structure of traditional enterprises to banks requires careful examination

2.2.3 Theories of Corporate capital structure

 Modigliani and Miller's theory

The origins of capital structure theory may be traced back to the original writings of Modigliani and Miller (1958), who argued that capital structure is irrelevant

to company performance when we have ideal capital markets with no transaction costs

or taxes According to their argument, leverage does not affect profitability because the use of debt or equity financing just identifies the sources of funds accessible to a corporation and has no effect on the organization's value Their irrelevance argument was attacked throughout time for disregarding taxation and for making the unrealistic premise of flawless capital markets

Many studies on capital structure theory were born to test and explain the relationship between capital structure and business performance, including Static trade-off theory and Pecking order theory, after inheriting and developing the study results of Modigliani and Miller

 Static trade-off theory

The trade-off theory of capital structure is regarded as one of the central capital structure theories since it is a solid proof that explains capital structure decisions significantly better than other capital structure theories According to Frank et al (2003), this theory is also regarded as a competing hypothesis in the capital structure with the pecking order theory

This theory assumes that enterprises will strike a balance between marginal costs and marginal gains when deciding on capital structure According to M&M’s (1963) tax model, the value of the firm increases with the usage of debit and reaches a maximum when the enterprise is fully financed by debt According to Myers (1984), if a company adopts the trade-off theory, it will set a target debt ratio and adapt its capital structure to that level The target debt ratio is calculated by weighing the benefits of the tax shield against the expenses of bankruptcy

Graham (2000) discovered evidence indicating a large change in long-term loans as a result of the firm's effective tax rate Once again, taxes have an impact on financial decisions

Accordingly, researchers divide trade-off theory into two forms:

 The Static Trade-Off Theory

According to Myers (1984), enterprises operating under this model will build a target capital structure and gradually adjust to that goal This theory also shows that:

having high profits will have a high target debt ratio

 The Dynamic Trade-Off Theory

According to this theory, each firm will have a target capital structure, and firms will adapt their target capital structure over time if the original capital structure changes

One of the theory's drawbacks is the assumption that the firm is always at its optimal capital structure However, in practice, capital structure decisions are

"dynamic," and the ideal capital structure adjustment is determined by the capital structure adjustment expectations and costs The decision to finance with debt or equity, according to this theory, is determined by the firm's future expectations Furthermore, the business's capital structure will not be optimal at one point in time, but the business will modify the capital structure to the target capital structure

 Pecking order theory

According to the Pecking order theory, hypotheses include: (i) an existing problem of information asymmetry between corporate managers and outside investors; (ii) the management of the company will operate in the best interests of the current owners This theory does not seek the optimal capital structure but instead determines

an order of priority in the selection of capital sources in the financing decision

According to this hypothesis, the corporation chooses to finance internally rather than externally When forced to choose external sources of capital, the corporation will proceed in a specific order to fulfill the goal of limiting cost increases owing to asymmetric information According to the pecking order idea, corporate executives will have a competitive edge over outside investors in terms of ownership of available information, risk, and firm value

The following capital sources are prioritized: (i) internal capital ; (ii) loans (iii) owner-contributed capital

In this case, equity capital is the last choice because the cost of equity is expensive, and this type of funding frequently sends out negative signals Potential shareholders, on the other hand, will provide a challenge to the genuine worth of the stock because they rely on information provided by management, which implies that shareholders frequently demand a cheap price for the stock Because the genuine value

of newly issued shares may be overestimated

The research variable in this study is the bank's performance in the year, as represented by the return on equity (ROE) and return on assets (ROA) of the bank i The author employs a variable that represents the capital structure as determined

by equity-to-capital ratio (CAP) bank i in year t The selected control variables that have the potential to affect bank performance include Bank size (SIZE), Bank loan ratio (LOAN), Bank deposit ratio (DEPOSIT), growth rate (GROWTH), the ratio of tangible assets (TANG), Liquidity (LIQ) and external variables: gross domestic product (GDP), inflation (INF)

2.2.4 The impact of capital structure on bank performance

 Capital structure has a positive impact on bank performance

Hawaldar et al (2017) assessed the performance of commercial retail banks (conventional and Islamic) in Bahrain using financial ratios from 2001 to 2015 The findings revealed that conventional retail banks, except Bahrain Development Bank, consistently outperform in terms of return on assets and return on equity, whereas Kuwait Finance House outperforms Islamic retail banks in terms of profitability According to the data, all banks have a reasonable risk assets ratio The profitability and capital adequacy of commercial banks, as well as their profitability and efficiency, are statistically associated Among the listed commercial retail banks, there is considerable variance in capital adequacy but no major difference in profitability or liquidity

Similarly, Saeed et al (2013) examined the impact of capital structure on bank profitability in 25 Pakistani banks from 2007 to 2011 The study's findings examined profitability through return on assets, return on equity, earnings per share, and capital structure through long-term debt to capital ratio, short-term debt to capital ratio, and total debt to capital ratio According to the findings, there is a positive association between capital structure and profitability in Pakistani banks As a result, empirical data on the effect of capital structure on company profitability remain ambiguous

Vitor, D.A and J Badu, J (2012) investigated the capital structure and performance of Ghanaian listed banks The findings suggest an inverse association between capital structure and financial success High gearing among listed banks resulted in an over-reliance on short-term loans, resulting in high lending rates and little bond market activity The regression study found that capital structure has an unfavorable association with bank performance in terms of return on equity and

Tobin's Q

 Capital structure has a negative impact on bank performance

Pratheepkanth (2011) studied the capital structure (CS) and its impact on the financial performance of commercial organizations in Sri Lanka from 2005 to 2009 The study's findings confirmed a negative association between capital structure (CS) and the financial performance of Sri Lankan firms Prior experts' arguments had well-balanced perspectives on the determination of capital structure and business performance This study seeks to determine the extent to which capital structure has influenced corporate performance, notably in Jordan's banking sector

In the example of Ghana, Abor (2007) discovered a highly negative association between all capital structure metrics and business performance (ROA) The association between short-term debt and return on assets is statistically significant in the South African sample As a consequence, it appears that short-term debt is substantially less expensive As a result of the low-interest rate, rising short-term debt may result in high-profit levels The results for long-term debt and total debt demonstrate a strongly negative relationship with ROA Hence, long-term debt has a greater cost, which might

result in a negative return on assets

 Capital structure has no impact on bank performance

Anarfo Bugri (2015) investigated the capital structure and performance of banks

in Sub-Saharan Africa by utilizing the total debt ratio as a proxy for capital structure because it covers both short-term and long-term debt ratios The findings indicate that the capital structure of African banks is statistically unimportant This means that capital structure has no impact on bank performance, i.e., bank performance is not dependent on capital structure, but rather capital structure is dependent on bank performance

Berger and Bonaccorsi di Patti (2006) use two reasons to illustrate the probable reverse causation from performance to capital structure To begin, they support this issue under the efficiency-risk hypothesis, which holds that more efficient firms choose relatively low equity ratios because higher expected returns from greater profit

efficiency substitute equity capital to some extent in terms of protecting the firms against financial distress, and bankruptcy, or liquidation Second, they allude to the franchise-value concept, which states that more efficient firms choose relatively high equity ratios to secure future income generated by high-profit efficiency As a result, a non-monotonic linear relationship between profitability and capital ratio is likely, consistent with the preceding reasoning

Based on previous empirical studies, the author concludes that it is necessary to investigate the relationship between capital structure and bank performance, particularly in Vietnamese commercial banks As a result, the author has presented the independent variables representing capital structure in this study, which include CAP, SIZE, LOAN, DEPOSIT, TANG, GROWTH, LIQ, GDP, and INF Furthermore, the author used two dependent variables to represent bank performance in this study: return on equity (ROE) and return on assets (ROA) Based on previous empirical studies' hypotheses, the author has made an expectation of the sign of the impact of the independent variables on the dependent variables; specifically, the author predicts that CAP, SIZE, LOAN, GROWTH, TANG have a positive effect on bank profitability while other variables, such as DEPOSIT, have a negative impact on performance The main reason is that as customer deposits expand, so does the cost of paying interest, resulting in a negative impact on profit Finally, external variables such as GDP and INF are expected to have a positive or negative relationship with commercial bank performance Because if GDP and INF are predictable, the bank can adjust interest rates to ensure a safe profit by increasing revenue faster than it costs On the other hand, if the fluctuations in GDP and INF cannot be predicted in advance, the bank will

be unable to control interest rates properly, and expenses will likely rise faster than revenue, leading to affected revenue In the context of volatile inflation and GDP in recent years, the author decided to include more macroeconomic variables in order to

better understand the impact of these variables on the operating efficiency of Vietnamese commercial banks

2.3 EMPIRICAL LITERATURE REVIEW

2.3.1 Foreign studies

One of the first studies investigating the effect of capital structure on profitability has been carried on by Trujillo-Ponce (2013) He examined the factors that influence the profitability of Spanish banks from 1999 to 2009 To begin, the empirical findings show that commercial and savings banks behave differently Second, the results revealed a significant positive association between asset quality, capitalization, concentration, inflation, economic growth, and real interest rate on ROA, and ROE Finally, when it comes to the effect of bank size on profitability, the data demonstrate that size does not affect the two profitability measures

Abbadi, S.M and Abu-Rub, N (2012) investigated the relationship between Palestinian financial institutions' market efficiency and capital structure The influence

of capital structure on bank efficiency was measured using ROE, ROA, total deposit to assets, and total loan to assets Tobin's q was used to calculate the impact of all these variables on bank market value, which revealed a negative effect on bank market value,

a strong and positive association between market value and ROA, and bank deposits to total deposits

Authors Saeed, Gull, and Rashees (2013) studied the impact of capital structure

on the performance of 25 listed banks in Pakistan in the period 2007–2011 Using OLS regression, the study finds a statistically significant positive (+) relationship between capital structure (total debt/total assets) and the performance of banks (ROA, ROE, EPS)

Furthermore, the author Musah (2018) investigated the impact of capital structure and performance of 23 listed banks in Ghana from 2010 to 2015 The research findings demonstrate that capital structure (total debt/total assets) has a statistically

significant positive effect (+) on the bank performance (ROA), but is not statistically significant with ROE

Their findings were consistent with those of Salim and Yadav (2012), who evaluated the capital structure and its impact on business profitability using data from

1995 to 2011 and 237 firms listed on the Bursa Malaysia Stock Exchange Four profitability indicators (ROE, ROA, Tobin's Q, and EPS) and five capital structure measures were used in their analysis They discovered a negative link between capital structure and profitability across all industries

Mouna et al (2017) conducted a similar study that covered 53 Moroccan enterprises over three years from 2014 to 2016 They employed return on asset (ROA) and return on equity (ROE) as proxies for firm performance as control variables The first model regression used return on asset (ROA) as a proxy for business financial performance, and the results show that the level of leverage has a considerable negative influence on firm profit, as demonstrated by the debt ratio produced by comparing total liabilities to total assets We employed return on equity (ROE) as a proxy for company performance in the second regression model, and the results show a substantial inverse association between return on shareholders' equity and debt to equity ratio As a result, the Trade-off theory, which assumes a positive relationship between capital structure and firm performance, is denied Thus, Moroccan companies should improve their ability to profit by minimizing financial risk and dependence on external financial sources Firms' financial strategies should adopt the Pecking-order theory, which states that profitable firms rely less on external sources to finance their activities

Another research by Liu (2013) identified the determinants of the profitability of the banking sector with data collected from 2007 to 2012 for 8677 US banks derived from the Federal Deposit Insurance Corporation, Nasdaq Stock Market, and Federal Reserve Bank In this thesis, the author uses ROA as dependency variables and independent variables including bank-specific variables, industry-specific variables,

and macroeconomic variables to primarily examine the determinants of profitability for the U.S banking sector during the financial crisis The main conclusion is the non-linear relationship between the bank's profitability and the full ratio of capital

Furthermore, Jaouad et al (2018) conducted empirical research on the influence

of bank-specific features, bank governance, financial market structure, and macroeconomic variables on the performance of Moroccan banks The performance of Moroccan banks is measured by return on assets (ROA) and return on equity (ROE) (ROE) The panel data approach (fixed effects model) is used to analyze data from a sample of six Moroccan banks' financial statements from 2010 to 2016 The data demonstrate that bank size (SIZE) is statistically significant and positively connected to ROA Nevertheless, the other variables' impacts are statistically insignificant

Al-Kayed (2014) also implemented a study to examine the effect of capital structure on Islamic banks’ (IBs) performance to provide guidance to finance managers for raising capital funds Using a sample of 85 IBs covering banking systems in 19 countries, the study uses a two-stage least squares method to examine the performance determinants of IBs to control the reverse causality from performance to capital structure After control of the macroeconomic environment, financial market structure, and taxation, results indicate that IBs’ performance (profitability) responds positively

to an increase in equity (capital ratio) Optimal capital structure results of the IBs found

a non-monotonic U-shaped relationship between the capital-asset ratio and profitability, supporting the efficiency risk and franchise value hypotheses

In Bahrain, Hawaldar et al (2017) examined the performance of commercial retail banks (conventional and Islamic) and financial ratios were used for the period of

15 years 2001-2015 on parameters such as profitability, liquidity, operating efficiency, capital adequacy, and leverage The empirical results revealed that conventional retail banks, except for Bahrain development bank, have consistent performance in return on assets and return on equity while among the Islamic retail banks, the performance of

Kuwait finance house is satisfactory in terms of profitability The data also shows that all banks have satisfactory risk assets ratio The commercial banks’ profitability and capital adequacy as well as their profitability and efficiency are statistically correlated

Finally, Hoffmanm (2011) examined the factors of bank profitability in the United States from 1995 to 2007 The empirical study uses the GMM system estimator

to incorporate bank-specific (endogenous) and macroeconomic (exogenous) variables The empirical findings show a negative relationship between the capital ratio and profitability based on the dependent variable, efficiency in return on equity (EFCROE), supporting the concept that banks are operating too cautiously and neglecting potentially profitable trading opportunities

2.3.2 Domestic studies

For some Vietnamese industry-specific findings on capital structure, Trinh Quoc Trung and Nguyen Van Sang (2013) investigate the factors influencing the performance of Vietnamese Commercial banks The authors find, using the Tobit model, that the higher the capitalization ratio, the higher the return on total assets but the lower the return on equity

Pham Hai Nam et al (2021) researched the elements that influence the profitability of Vietnamese commercial banks The author selects the debt-to-total asset ratio as a proxy for capital structure and employs Bayes regression via the Gibbs sampling algorithm on a dataset containing three state-owned commercial banks and twenty-seven private joint-stock commercial banks from 2007 to 2018 The research findings show that capital structure is related to bank profitability The research findings reveal that parameters such as asset size, asset growth rate, operating time, inflation, and GDP growth have a favorable impact on the capital structure of state-owned joint-stock commercial banks Asset size, asset growth rate, liquid assets, and GDP growth are all good aspects of the group of private joint-stock commercial banks Profitability, uptime, and inflation are examples of factors that have the opposite effect

Similarly, another study finds a concurrent relationship between capital structure and firm performance in Vietnam from 2009 to 2016 The efficiency-risk hypothesis is supported by the fact that the more efficient firms are, the more debt they tend to use to finance the investment process Furthermore, the study demonstrates that the following factors influence enterprise performance: tangible asset ratio, size, and type of business Small enterprises have higher marginal efficiency than medium and large enterprises in the EFF model; on the other hand, in the ROA model, operating large and medium enterprises will have a larger ROA than small enterprises, State-owned enterprises operate more effectively than non-state enterprises, and foreign enterprises operate more effectively than domestic enterprises in the EFF model (Ly Phuong Thuy et al 2020)

Table 2.1 Summary of empirical research results on bank performance

on profitability, the data demonstrate that size does not affect the two profitability measures

Abbadi,

S.M &

The study will cover 8 out

of the 10 banks which are

FEM regression

model

The study found that leverage has a negative effect on bank

Abu-Rub,

N (2012)

listed on the Palestine Securities Exchange Thus, the data used in the study is published by PSE and cover the period of 4 years 2007-

2010

profits, an increase in each ROA and Total Deposit to Assets increase bank efficiency It was also found that Leverage has a negative effect on the market value of the bank based on the above variables on bank market value measured by Tobin's Q, a positive and strong relationship between market value and ROA and bank deposits to total

The study finds a statistically significant positive (+) relationship between capital structure (total debt/total assets) and the performance of banks (ROA, ROE, EPS) Musah

on the bank performance (ROA), but is not statistically significant with ROE

Exchange

FEM regression model

Four profitability indicators (ROE, ROA, Tobin's Q, and EPS) and five capital structure measures were used in their analysis They discovered a negative link between capital structure and profitability across all industries

Mouna et

al (2017)

53 Moroccan enterprises over three years from 2014

of three, debt ratio (DR) has a negative significant effect on return on asset (ROA) debt-equity ratio (DER) has a negative and significant impact

on return on equity (ROE) and size has a positive significant impact on firm performance using return on equity (ROE)

as a proxy

Liu (2013) The data collected from

2007 to 2012 for 8677 US banks is derived from the Federal Deposit Insurance

Fixed effect

panel model

The main conclusion is the non-linear relationship between the bank's profitability and the

full ratio of capital

Corporation, Nasdaq Stock Market, and Federal

Nevertheless, the other variables' impacts are statistically insignificant

Al-Kayed

(2014)

85 IBs covering banking systems in 19 countries from 2003 to 2008

The pooled 2SLS method

After control of the macroeconomic environment, financial market structure, and taxation, results indicate that IBs’ performance (profitability) responds positively to an increase in equity (capital ratio)

The empirical results revealed that conventional retail banks,

development bank, have consistent performance in ROA and ROE while among the Islamic retail banks, the

performance of Kuwait finance house is satisfactory in terms of profitability The data also shows that all banks have satisfactory risk assets ratio The commercial banks’ profitability and capital adequacy as well as their profitability and efficiency are statistically correlated

in return on equity (EFCROE), supporting the concept that banks are operating too cautiously and neglecting potentially profitable trading opportunities

Pham Hai

Nam et al

(2021)

3 state-owned commercial banks and 27 private joint-stock commercial banks

from 2007 to 2018

Applying the Bayes regression method

The research findings reveal that asset size, asset growth rate, operating time, inflation, and GDP growth have a favorable impact on the capital structure of state-owned joint-stock commercial banks Profitability and liquid assets are two factors that have a detrimental impact on capital structure Asset size, asset growth rate, liquid assets, and GDP growth are all good aspects of the group of private joint-stock commercial banks Profitability, time, and inflation are factors that have the

Applying three-step least squares (3SLS) method with fixed effects of business Karma

The study's findings indicate that performance and structures are inherently interconnected When the efficiency of a business is higher, it tends to use debt more On the other hand, the debt ratio affects performance in the form inverted U shape Furthermore,