The factors affecting ldr of commercial vietnam banks during the 11 year period from 2010 to 2021 when strongly influenced by the domestic economy and international economy

1 MINISTRY OF EDUCATION & TRAINING VIETNAM NATIONAL UNIVERSITY HO CHI MINH CITY UNIVERSITY OF ECONOMICS AND LAW FINANCE AND BANKING ~~~~~~ * ~~~~~~ COMMERCIAL BANK The factors affecting LDR of commerc[.]

MINISTRY OF EDUCATION & TRAINING VIETNAM NATIONAL UNIVERSITY HO CHI MINH CITY

UNIVERSITY OF ECONOMICS AND LAW

FINANCE AND BANKING

Ho Chi Minh City - 2023

COMMENTS OF THE SUPERVISOR

LIST OF GRAPH, DIAGRAMS AND TABLE

Figure 1 Correspondence matrix 13

Figure 2 Accreditation Hausman 14

Figure 3 Accreditation Heteroskedasticity 14

Figure 4 Accreditation Autocorrelation 15

Figure 5 Accreditation Multicollinearity 15

Figure 6 Fix the model using the xtgls function 16

Figure 7 Model fix when removing ROE variable using xtgls function 16

Figure 8 Changes in LDR of commercial banks in the period 2010 – 2020 18

Figure 9 Changes in NPL of commercial banks in the period 2010 – 2020 19

Figure 10 Changes LOANS of commercial banks in the period 2010 – 2020 20

Figure 11 Changes in INF of commercial banks in the period 2010 – 2020 21

Table 1 Descriptive statistics of the variables used in the model 17

STATISTICS OF VARIABLES IN RESEARCH MODEL

Dependent variable

Independent variable

The factors affecting LDR of commercial Vietnam banks during the 11 - year period from 2010 to 2021 when strongly influenced by the domestic economy and the

international economy

Summary: Because of the decline in credit quality, liquidity unstable system accounts, the

risk of system crash, the Bank restructuring project (2016 - 2020) was approved by the Government in Decision No 1058/QD-TTg The main reason is that commercial banks have not met the requirements on ensuring liquidity safety set by the State Bank That is the reason why this study was conducted The purpose of this study is to ascertain how the liquidity of commercial banks is impacted by the economy's micro-macro dynamics 14 Vietnamese commercial banks contributed data that was gathered between 2010 and 2021 for the study The study's analysis of panel data and fixed effects model (FEM) produced the following results: Non Performing Loan (NPL), loan ratio (LOANS), and inflation rate (INF) are positively related to liquidity risk (LDR) Besides, two factors capital adequacy (CAR) and Net interest margin (NIM) are not correlated with Loan to Deposit (LDR) Factors such as bank size (SIZE) and return on equity (ROE) were not statistically significant The study also offered suggestions for policy on liquidity management for both state banks and commercial banks based on the findings

Keywords: LDR, ROE, CAR, INF, NPL, LOANS, SIZE, NIM

1 INTRODUCTION

1.1 The reason of choosing the research topic

Since 2010, due to the influence of the world market as well as the consequences of the previous rapid expansion, the banking system has revealed a number of inadequacies Credit quality declines, liquidity of the system is unstable, the risk of system breakdown Therefore, at the beginning of 2012, the commercial banking system started the restructuring process under the Project on restructuring the credit institution system for the period 2011-2015 However, the system still has concerns about cross-ownership, high level of bad debt as well as poor financial capacity of commercial banks

Therefore, the Bank Restructuring Project phase 2 (2016 - 2020) was approved by the Government in Decision No 1058/QD-TTg Currently, the commercial banking system is

in the process of continuing to restructure to ensure operational safety and towards management and administration in accordance with international practices In particular, specific issues are detailed in separate legal documents In Particular, liquidity management of commercial banks is concerned and regulations are constantly updated The cause of the liquidity risk situation of commercial banks during this time is due to many factors, from objective conditions to subjective factors of commercial banks Objective conditions can be mentioned are the effects of the world economic crisis and domestic macroeconomic conditions But the main cause is still the subjective factors of the system when commercial banks do not meet the requirements on ensuring liquidity safety set forth by the State Bank as well as the problem of handling information crises related to the banking system prestige and influence of the Bank's Board of Directors Besides, In the context of the first 9 months of 2022, the negative credit and deposit gap plus the capital need to meet business activities and payment at the end of the year caused the interest rate increase to show no sign of stopping The race in deposit interest rates in the past time has also shown the level of tension when banks had to increase capital to compensate for the loan out portion in the first 9 months of the year

According to the State Bank of Vietnam (SBV), by the end of October, credit growth reached 11.5%, capital mobilization growth reached 4.8% compared to the beginning of the year The difference between deposit and credit has been negative since July, the credit growth rate is higher than the deposit growth rate, causing the credit to deposit ratio (LDR)

at banks to be negative goods increased

While the net LDR ratio has exceeded 99%, the LDR ratio under Circular 22 (including interbank deposits) remains at less than 85%, SSI Research's November industry report said Net LDR ratio at many banks has exceeded 100% such as MSB, Techcombank, VIB

or VPBank

Therefore, it can be seen that the ratio of outstanding loans to deposits plays an extremely important role This ratio is used to assess the creditworthiness or safety of banks If the LDR is high, it will reflect that the profitability of banks is high At the same time, the quick level of capital mobilization means that the bank has money to pay at any time when customers withdraw money or lend to businesses immediately without having to wait for

a long time In addition, when the LDR increases, it also reflects that the bank's trust level

is large Thereby reducing the risk of customers withdrawing suddenly, limiting the phenomenon of collapse The study was conducted with the aim of proving that the ratio

of outstanding loans to deposits has an influence on the safety and efficiency of the banking system

1.2 Research scope

1.2.1 Research content

The topic focuses on researching, evaluating the factors affecting Loan to Deposit (LDR)

of 14 commercial banks in Vietnam

1.2.2 Space

Research on the correlation between Loan to Deposit (LDR) and independent variables (Inflation, Capital Adequacy, Size, Loans, Net interest margin, Return on equity, Nonperforming Loan) of 14 commercial banks in Vietnam The data is taken from a variety

of state-owned commercial banks to domestic private joint stock commercial banks

Time: The period from 2010 to 2021

1.3 Research objectives

1.3.1 Overall objectives

The study studied the factors affecting LDR of commercial banks during the 11-year period from 2010 to 2021 when strongly influenced by the domestic economy and the international economy

1.3.2 Detail objectives

Determining the current status of Loan to Deposit of Vietnamese commercial banks; Determine the impact of liquidity and other variables (Inflation, Capital Adequacy, Size, Loans, Net interest margin, Return on equity, Nonperforming Loan) of the Vietnam commercial banks;

Make recommendations and propose solutions to appropriate Loan to Deposit (LDR) for Vietnamese commercial banks

2 LITERATURE REVIEW

2.1 Theoretical review

2.1.1 Profitability of Commercial Bank

The concept of profitability of commercial banks

According to the dictionary Nguyen Van Ngoc (2012), in Economics "Profitability is a number that evaluates the ability of an enterprise to generate profits in the long run, assuming all current operating conditions are generally unchanged.” Nguyen Van Ngoc (2006)

According to Definition.USLegal.com “Profitability is the ability of an enterprise to earn

a return on its invested capital after paying its owners and employees, fulfilling its obligations, and fully recognizing its expenses business while following good accounting practices.”

Thus, profitability is an important factor to evaluate the Bank's operations, showing the rate of return from the owner's investment amount through to individuals or businesses or opening a book savings and many other activities

Understanding the concept of profitability will help us better visualize the impact of capital adequacy on profitability of commercial banks later in this essay

2.1.2 Liquidity

The concept of Liquidity

Liquidity is a term that describes the degree of flexibility of any asset in that trading in the market does not change the market value of that asset More simply, liquidity represents the ability of an asset or product to be converted into cash Liquidity is an important criterion for credit institutions to assess a business's ability to pay its debts

The Basel Committee on Banking Supervision said that: "Liquidity is a specialized term that refers to the ability to meet the needs of using available capital for business activities

at all times, such as payment of money deposit, loan, payment, capital transaction, "

At different times, Basel has different concepts and emphasis on liquidity, but in general, liquidity is defined as the ability to increase asset funds and meet due obligations with the cost of acceptance

In 2010, in the textbook of Commercial Administration, Truong Quang Thong (2010) said:

"Liquidity is the ability to convert an asset into cash quickly, with the lowest possible cost Rather, based on both asset and capital approaches, liquidity is the ability to access assets and capital at a reasonable cost to serve the various operational needs of a bank”

needs to re-evaluate its asset holdings because highly liquid assets are often not very profitable

𝐿2 = 𝐿𝑖𝑞𝑢𝑖𝑑𝑖𝑡𝑦 𝑎𝑠𝑠𝑒𝑡𝑠 𝐷𝑒𝑝𝑜𝑠𝑖𝑡𝑠 + 𝑆ℎ𝑜𝑟𝑡 − 𝑡𝑒𝑟𝑚 𝑏𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔 ∗ 100%

Liquidity ratio 𝐿2 shows how liquid assets are compared to deposits and mobilized capital,

if this ratio is greater than or equal to 100%, the bank can meet the withdrawal needs of customers individuals, households, businesses or any organization at the same time when

an extraordinary event occurs This ratio is similar to the 𝐿1 ratio, that is, the higher it is, the better the bank's liquidity

𝐿4 here can also be understood as the loan-to-deposit ratio (DLR)

The concept of Loan to Deposit (LDR)

The loan-to-deposit ratio (LDR), which compares a bank's total loans to its total deposits for the same time period, is used to determine how liquid a bank is A percentage is used

to represent the LDR The bank may not have adequate liquidity to meet any unforeseen funding needs if the ratio is too high If the ratio is too low, on the other hand, the bank could not be making as much money as it could

● LDR: The ratio of outstanding loans to total deposits

● L: Total loans (summarizing loans, financial leases, guarantees and cash flows in other banking operations such as factoring, discounting valuable papers, etc.)

● D: Total deposits (Mobilized capital = Customer deposits – specialized capital deposits – Margin deposits + Valuable papers)

One of the notable regulations in Circular 22/2019/TT-NHNN stipulating the limits and ratios of safety assurance in the operations of banks and foreign bank branches, that is from January 1 In January 2020, the maximum loan-to-deposit ratio (LDR) is 85% According

to the old regulations in Circular 36/2014/TT-NHNN, the maximum LDR of commercial banks is 90%; Joint-stock commercial banks, joint-venture banks, banks with 100% foreign capital are 80%

Reasonable LDR rate

Theoretically, LDR will be in the range of 0 - 100%, but this index can increase to more than 100% because the amount of loan to customers will sometimes exceed the level of capital mobilization

If the LDR is high, it shows that the amount of money that the bank lends to individuals, organizations and businesses is much higher than the level of capital mobilization, leading

to many risks This is not a good sign for commercial banks

Small LDR means that the amount of money the bank mobilizes from other sources is quite large but the amount lent back This shows low liquidity and poor credit service quality According to economic experts, the safety level of LDR stops at 80% or 90% However, this number is not really accurate, it depends on each bank

2.2 Extant literature review

2.2.1 Studies in the world

Anamika Singh, Anil Kumar Sharma (2016) The paper analyzes empirically on specific

macroeconomic and banking factors affecting the liquidity of Indian banks It was performed based on OLS, 59 banks' data from 2000 to 2013 were used for the study The bank's Liquidity research model is measured by independent variables including: Size of bank, profitability, financing costs, capital adequacy and deposits GDP, inflation and unemployment are the macroeconomic factors to be considered The results show that bank ownership affects bank liquidity Additionally, it was discovered that GDP and bank size had a detrimental effect on bank liquidity On the other hand, bank liquidity is positively impacted by deposits, profitability, adequate capital, and inflation Unemployment rates and funding costs have little impact on bank liquidity

Faruque Ahamed (2021) The study looks at both internal and external factors that have an

impact on liquidity risk in Bangladeshi commercial banks 23 banks' data from 2005 to

2018 were used for the study, and panel data were used for the regression analysis The bank's Liquidity research model is measured by independent variables including: Size of bank, CAR (capital adequacy ratio), LAR (Loan to Asset rate), GDP growth and dependent variable: liquidity risks The result, Asset size is one of the bank-specific characteristics that has a bad association with liquidity risk The liquidity position and liquidity risk are better and lower the bigger the bank is The capital adequacy ratio and return on equity have a slight but favorable link with liquidity risks In terms of macroeconomic parameters, GDP and domestic credit have a favorable impact on the liquidity risks whereas inflation has a negative impact

Syed Quaid Ali Shah , Imran Khan , Syed Sadaqat Ali Shah and Muhammad Tahira (2018) The study aimed to determine factors affecting liquidity of banks operating in

Pakistan Through the financial statement and annual report, 23 commercial banks were employed in the studies from 2007 to 2016 The bank's Liquidity research model is measured by independent variables including: capital adequacy ratio (CAR), cost of funds and bank size are statistically significant The study finds that external or macro factors,

such as GDP is statistically significant but affect liquidity of the banks differently Unemployment, another external factor, also impacts liquidity of banks very differently but it is statistically significant in the first measure of liquidity and statistically insignificant

in the second measure of banks’ liquidity Further, the results revealed that profitability is insignificantly related to liquidity while the relationship between deposits and bank liquidity is negative and statistically significant

2.2.2 Domestic studies

Le Quoc Cuong (2019) The study aimed to determine the factors affecting the liquidity of

the Commercial banks in Vietnam and propose solutions to improve liquidity for Vietnamese commercial banks Through the financial statement and annual report, 25 commercial banks were employed in the studies These banks collectively account for a significant amount of the loan market share, mobilization, and related service provision in Vietnam from 2008 to 2017.The bank's Liquidity research model is measured by independent variables including: Size of banks, NPL (Non Performing Loan), GDP (economic growth) and dependent variable: LCR (Liquidity Coverage Ratio) The resulting loan growth and the increase of medium- and long-term loans relative to the total loan have

an adverse connection with liquidity NPL ratio has a negative relationship with liquidity, while other factors including asset size, equity and economic development affect liquidity positively These impacts are not statistically significant, though

Dang Quang Vang (2018) The study aimed to identify the factors affecting the liquidity

of Vietnamese commercial banks, thereby providing solutions and recommendations for the most effective liquidity management of the bank Through the financial statement and annual report, 31 commercial banks were employed in the studies from 2005 to 2015 The bank’s liquidity research model is measured by independent variables including: external fundings (EFD), equity to total assets (ETA), listing variable (LISTED), provision for credit on total outstanding balance (LLPTL), rate of return on equity (ROE), size of banks (SIZE), GDP, INF, money supply M2, and financial crisis (CRISIS) The study has combined GMM and percentile regression methods to analyze the model according to each group of bank sizes The results show that with the GMM regression model, in both cases

of bank size, the variables ETA, LLPTL, and ROE have the same direction as liquidity