The effect of credit risk management on the financial performance of commercial banks in vietnam

That is the reason why the topic "The effect of credit risk management on the financial performance of commercial banks in Vietnam" was chosen for research in this study.. Research objec

BANKING ACADEMY ADVANCED PROGRAM

=================

GRADUATION THESIS

THE EFFECT OF CREDIT RISK MANAGEMENT ON THE FINANCIAL

PERFORMANCE OF COMMERCIAL BANKS IN VIETNAM

STUDENT NAME: Z NGUYEN VIET THANH CLASS: K21CLCA

COURSE: 2018-2022 STUDENT ID: 21A4010948 INSTRUCTOR: z MS PHAM HONG LINH (MSc)

Hanoi, May, 2022

GUARANTEE STATEMENT

The author certifies that the research findings in the thesis are the result of my

efforts and have not previously been published in any other research program

The research findings and other documents (citations, tables, formulas, graphs,

and other papers) utilized in this work have been agreed upon and fully cited by the

authors

If this is a crime, I would wish to undertake complete responsibility for the

foregoing commitments in front of the Thesis Defense Council, the Faculty of Banking,

and the law

Hanoi, May 𝟐𝟏𝒕𝒉 2022

Author Nguyen Viet Thanh

ACKNOWLEDGEMENTS

It gives me great pride to be able to study a high-quality bachelor's program at Banking Academy since it encourages young students to widen their thought and advanced abilities in a variety of highly practical disciplines, allowing for future self-development After months of hard work, my research is complete, and it is now time for me to express my gratitude to everyone who has eagerly supported me

I'd like to express my appreciation and sincere thanks to Ms Pham Hong Linh, Master in Banking and Finance, who has committed all of her time and passion to provide students with important knowledge and constructive ideas Because of her unconditional support, I've learned new approaches, broadened my critical and logical thinking, and developed advanced abilities that will be highly valuable in my future profession and life Furthermore, I'd want to thank all of the Banking Academy's teachers and lecturers who actively aided me in finishing this thesis

Sincere Thanks

TABLE OF CONTENT

GUARANTEE STATEMENT i

ACKNOWLEDGEMENTS ii

LIST OF TABLES vii

LIST OF CHARTS viii

INTRODUCTION 1

1 The urgency of the research 1

2 Research objectives 2

3 Research questions 2

4 Objects, Scope and Limitation of Research 2

5 Research method 2

6 Research structure 3

CHAPTER 1: GENERAL THEORY AND BACKGROUND ON CREDIT RISK MANAGEMENT AND BANK FINANCIAL PERFORMANCE 4

1.1 Introduction on the bank financial performance 4

1.1.1 Bank financial performance 4

1.1.2 Measures of bank financial performance 5

1.2 Credit risk management in commercial Banks 6

1.2.1 Credit risk in commercial Banks 6

1.2.2 Concept of credit risk management in commercial banks 8

1.2.3 Measures of Credit Risk Management 9

1.3 Literature review of credit risk management on banks financial performance 11 1.4 Other factors affect the bank financial performance 12

1.4.1 Bank Specific Factors 12

1.4.2 Macroeconomic Factors 14

CHAPTER 2 RESEARCH METHOD 16

2.1 Variables Definition and Measurement 16

2.1.1 Dependent Variable 16

2.1.2 Independent Variables 16

2.2 Model Specification Error! Bookmark not defined 2.3 Sample Study 22

2.4 Data Processing and Analysis 23

CHAPTER 3: THE OVERVIEW OF THE FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN VIETNAM AND CREDIT RISK MANAGEMENT 24

3.1 The current state of commercial banks' business activity in Vietnam from 2011 to 2021 24

3.1.1 Overview of Vietnamese commercial banking system in the research period 24

3.1.2 Commercial Banking System Size 26

3.1.3 Loan Outstanding Balance 28

3.1.4 Deposit Mobilization 30

3.2 The current state of the financial performance of commercial banks in Vietnam 32

3.3 The current state of credit risk management in Vietnamese commercial banks 33

3.3.1 Non-performing Loan Ratio 33

3.3.2 Capital Adequacy Ratio (CAR) 35

CHAPTER 4: RESULTS OF THE EXPERIMENTAL MODEL ON EFFECTS OF CREDIT RISK MANAGEMENT ON THE THE FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN VIETNAM 36

4.1 Summary Descriptive Statistics of Study Variables 36

4.2 Correlation Analysis and Multicollinearity Check 36

4.2.1 Correlation Analysis 36

4.2.2 Multicollinearity Check 37

4.3 Model Selection 38

4.3.1 Breush – Pagan Test 38

4.3.2 Likelihood Test 38

4.3.3 Hausman Test 39

4.3.4 Heteroskedasticity Test 39

4.3.5 Autocorrelation Test 39

4.4 Model Fix 40

4.5 Result of The Model 40

4.6 Result Analysis 41

4.6.1 The effect of credit risk management on the financial performance of commercial banks 41

4.6.2 Other Variables 43

CHAPTER 5: SOLUTIONS AND RECOMMENDATIONS 45

5.1 Development orientation of the banking industry from the Government and The State Bank of Vietnam 45

5.2 Solutions for Vietnam commercial banks 46

5.2.1 Controlling bad debt and non-performing loan ratio 46

5.2.2 Increasing owner’s equity proportion 47

5.2.3 Managing operating costs and expenses 47

5.3 Recommendations for the government and The State Bank of Vietnam 48

5.3.1 Effective monetary and fiscal policy implementation 48

5.3.2 Improving the capacity of forecasting indicatore 49

5.3.3 Continuing to closely monitor bad debt and other safety indicators 49

CONCLUSION 51

REFERENCES 52

APPENDIX 55

LIST OF TABLES

Table 3.1: Structure of Vietnam's commercial banking system 2011-2021 25

Table 4.2: Correlation matrix between independent variables 37

Table 4.10: Comparison between initial expectations and results 41

Chart 3.2: The proportion comparison of total assets of state-owned

commercial banks and joint-stock commercial banks in the period

2011-2021

27

Chart 3.3: Loan outstanding balance of 24 Vietnamese commercial banks

during the research period

28

Chart 3.5: Deposit mobilization of 24 Vietnamese commercial banks in the

period 2011-2021

30

Chart 3.7: ROA of Vietnamese commercial bank groups from 2011 to 2021 32 Chart 3.8: Average NPL ratio of Vietnamese commercial banks from 2011-

2021

33

Chart 3.9: Non-performing loans proportion distribution between 2 group 34

INTRODUCTION

1 The urgency of the research

The spectacular economic improvement of recent years is a significant milestone in Vietnam's development in the globalization trend In which the banking industry plays an undeniable role in the local financial system, although facing numerous obstacles since many countries' previous financial crises Banks provide financial services to all members

of society and maintain the cash flow, facilitating payment, manufacturing, and trading between countries in the area and globally

Bank managers are always concerned about efficiency in banking operations because efficient banks contribute to long-term earnings, bank stability, and increased competitive advantages, boosting the development of Vietnamese banks in an international integration environment Because competition is fierce not only between banks, but also between financial intermediaries, financial institutions, and foreign banks with significant financial capacity and international experience, the competitive environment in Vietnam's financial market is becoming extremely competitive As a result, it is critical to assess the factors affecting these banks' financial performance, especially their profits, since recommendations will be provided based on statistical analysis to assist managers in orienting and reorganizing their operations

Credit extension is the primary source of revenue for commercial banks, but it also results in financial losses if the consumers fail to meet their debt payback obligations The bank's income will improve if it promotes credit activities, which may lead to an increase

in profitable assets, but the risks associated with this activity will also rise As a result, administrators, researchers, and policymakers are always interested in the relationship between profit and credit risk, as well as credit risk management in the banking sector

Credit risk management not only directly affects the financial performance and reputation of the bank but also determines the sustainable development of the bank in the future When credit risk management is not good, it will increase credit risk, customers will not be able to repay, and banks will suffer enormous losses, especially banks that are still poor in business and financial services Credit is the main profitable business When bank

managers are well aware of the impact of credit risk management on financial performance, they will tend to make credit decisions more cautiously and have the best credit risk prevention mechanism for banks to maintain stable financial performance That is the reason why the topic "The effect of credit risk management on the financial performance

of commercial banks in Vietnam" was chosen for research in this study

2 Research objectives

Through quantitative and qualitative analysis, the study aims to identify and clarify the impact of credit risk management and other factors on the financial performance of Vietnamese commercial banks The thesis focuses on how credit risk management as well

as micro and macro factors influence commercial bank financial performance Furthermore, the report discusses the operational status of commercial banks from 2011 to

2021 On this foundation, the thesis offers additional recommendations and options for improving financial performance and advancing the banking industry as a whole

3 Research questions

The study was conducted with the hope of answering the following questions:

- Whether factors related to credit risk management affects the bank's financial performance?

- How credit risk management affects the bank's financial performance, positive

or negative?

4 Objects, Scope and Limitation of Research

Objects: The effect of credit risk management on the financial performance of commercial banks in Vietnam

The research timeframe: 2011-2021

Sample scope: 24 Vietnamese commercial banks operating in the period 2011-2021 and periodically publishing financial statements

5 Research method

The study uses the following research methods:

- Method of analyzing and synthesizing documents to systematize theoretical issues related to the collection of available data, statistics, analysis, and synthesis

to assess the current status of credit risk management as well as financial performance in the Vietnamese commercial banking system

- Quantitative method: The thesis uses a regression model based on panel data to assess the impact of credit risk management on bank financial performance in the period from 2011-to 2021

The source of data used is collected from reliable data sources such as the State Bank, financial statements published by banks

6 Research structure

The study is divided into 5 main chapters:

Chapter 1: General theory and background on credit risk management and commercial banks financial performance

Chapter 2 Research method

Chapter 3: The overview of Vietnamese commercial banks financial performance and credit risk management

Chapter 4: Results of the experimental model on effects of credit risk management

on the operation of Vietnamese commercial banks

Chapter 5: Solutions and recommendations

CHAPTER 1: GENERAL THEORY AND BACKGROUND ON CREDIT RISK MANAGEMENT AND BANK FINANCIAL PERFORMANCE

1.1 Introduction on the bank financial performance

1.1.1 Bank financial performance

Chenini Hajer and Jarboui Anis (2015) argued that Bank Financial performance is

an economic category and could be defined as the attainment of the bank's objectives in the agreed-upon time frame and at the lowest possible cost while utilizing available resources of the bank

The business performance of banks directly determines the existence and development of each bank If a bank's business operations are effective, the bank's reputation will improve, resulting in an increase in customers’ trust and credit, which also lead to increased equity mobilization From that commercial banks have the facility and ability to expand operations and generate more profits as well as accumulate and have many conditions to improve service quality to attract customers As a result, banks will gain more and more and the number of customers keeps increasing This circulation brings enormous benefits for both banks and consumers, as long as the bank’s performance is still

in a good condition

The performance of commercial banks is generally measured by the ratio between profit to total assets (ROA) and equity (ROE) The statistics of profit reflect a bank's financial performance, it is determined by interest income from loans and investments, revenue from service activities as well as the size and quality of assets

The analysis of the business performance of banks through ratios must consider many different factors, over different periods to see the development trends and movement rules of banks Besides, the research must also be based on the actual operation of the bank, having an insight view of each component that constitutes the analytical criteria, it will be easier to identify the reasons for the increase and decrease of the indicators and also, easier

to find effective and reasonable solutions as a result of deep research

1.1.2 Measures of bank financial performance

The commercial bank's business performance is assessed through the bank's financial capacity The financial capacity is shown through the analysis of factors affecting the bank's business activities In order to ensure the stability and development of the commercial bank's operations, it is necessary to ensure the safety criteria in the bank's operations

Bank financial performance is usually calculated by those below ratios:

Return on Assets

This ratio points out how much profit a company can create on an assets unit Businesses and analysts use this financial ratio to evaluate the effectiveness with which a company's assets are used to generate profit (M.Hargrave, 2022)

This ratio reflects the business performance per unit of the bank's assets, which is a measure of the bank's investment efficiency because all assets can be invested to generate profit and create interest every day except cash and fixed assets

ROA helps managers see the overall ability of the bank to generate income from assets High ROA affirms good business performance, the bank has a reasonable asset structure, and has flexible movements among assets in response to the movement of the economy Therefore, ROA also reflects the adaptability of the bank's management to the general changes in the economy To increase ROA, banks must find ways to increase their profitable assets Among those items of total assets, loans are the main profit for banks For the purpose of maximizing profits, banks usually increase their credit investments, which are the riskiest ones Therefore, it can be seen that the higher the ROA ratio, the higher the level of risk from total assets

with other enterprises in the same field or business line According to international standards, an efficient business must have an ROE range of about 12 to 15% or more The bank's stockholders have huge attention to the ROE ratio The higher the ROE, the greater the bank's profitability

Net Interest Margin

This ratio determines the gap between interest income and expenses payable to investors of the bank From this figure, clients will know how much the bank gains from the difference in interest rates between deposit activities and credit investment activities Like other businesses, banks must have assets to put into the business and make a profit

To evaluate the efficiency of banking operations, assets are classified into the following types: Earning assets (such as loans, financial investments, etc.), Assets and Liabilities (Deposits from customers, Loans from customers, etc.) from other banks…) and ordinary assets (for example, fixed assets such as offices, machinery, and equipment…) Income generated from earning assets is accounting into this category To measure the financial performance of a bank, the NIM ratio is calculated as above

1.2 Credit risk management in commercial Banks

1.2.1 Credit risk in commercial Banks

Definition

Credit risk is the risk arising from the borrower's failure to comply with the terms

of the credit contract, with specific manifestations being the customer's late payment, incomplete payment or failure to pay the debt when loan principals and interests come due, causing financial losses and difficulties in the commercial bank's business operations (Bank Management & Financial Services; Peter S.Rose, Sylvia C.Hudgins; 2004)

One of the issues for the existence and development of a commercial bank in the current setting of competition and integration is the ability to manage risks, particularly credit risks,

in a comprehensive and systematic manner

Type of credit risk

According to Thai Ha Pham (2017), we can classify credit risk in banks based on the following contents:

Depend on loss:

- Equity loss risk: This is the risk that the borrower will be unable to repay the

loan in full, including principal and interest, according to the terms of the contract Furthermore, the bank is solely reliant on the liquidation value of the company's assets Due to increased bad debts, administration costs, and supervisory costs, the risk of equity loss will increase expenditures; profit would fall due to greater provisions for equity loss

- Equity accumulation risk: this is the risk that the bank will not be able to

recover the loan due to maturity, resulting in frozen equity and harming the bank

in two ways: affecting the bank's equity usage plan; and making it difficult to pay customers

Depend on Customer:

- Individual customer risk

- Companies, economic organizations, financial institutions risk

- Country or geographic risk

Depend on Range:

- Individual credit risk: A credit risk that arises on a loan from a specific consumer

in a specific industry Specific credit risk arises for a variety of factors, including industry characteristics and customer economic types, customer financial status, management abilities, customer ethics, among others…

- Systemic credit risk: is a credit risk that occurs not only for one bank but has a systemic nature, spreading to the whole banking sector The causes of systemic risk are usually macroeconomic-causes, such as policy changes reflected in monetary and financial policies, tax policies, import and export policies, etc

1.2.2 Concept of credit risk management in commercial banks

Credit risk management could be understood as the process of identifying,

analyzing risk factors, measuring risk levels, on that basis, selecting and implementing measures and managing credit activities in order to limit credit risk and eliminate risks in the credit granting process

The meaning of credit risk management in commercial banks

- Credit risk is always related to credit activities, but it is also exceedingly diversified, complex, and difficult to control, resulting in harm to the bank's equity and revenue

- Effective credit risk management allows the bank to cut costs, improve income, maintain equity, build customer and investor trust, create market expansion circumstances, and increase market share and position

- Because the bank's equity to total asset value ratio is so low, only a few loan portfolios (with significant value) that cannot be recovered could result in significant losses for the bank, possibly even bankruptcy

The content of credit risk management in commercial banks

- Planning a credit strategy, as well as developing credit processes and policies: Credit strategy refers to a bank's long-term development plans The bank's propensity to take risks is reflected in its operational approach Credit process policies are put in place as part of the credit strategy to ensure that credit activities produce the desired results

- Credit analysis: This is the most basic content of credit risk management It is the collecting and processing of information, as well as the consideration and assessment of factors that affect a borrower's ability to repay loans, as the foundation for making suitable lending decisions

- Spreading credit risks: Implement well the process of classifying and setting up credit risk provisions as well as regulations on prudential ratios in credit activities, establishing an internal system for scoring and customer ratings on the

basis of regular monitoring of customers' activities with early warning indicators such as financial analysis indicators and information about borrowers at banks

1.2.3 Measures of Credit Risk Management

Non-performing loan ratio or Non - Performing Loan to Total Gross Loans

According to the IMF, This index is used to consider and evaluate the quality of assets and is often used as a proxy for the quality of the assets of the depository institution, and at the same time, this index is used to determine the risk of assets in the loan portfolio The State Bank of Vietnam issued Circular 11/2021/TT - NHNN dated July 30, 2021 on outstanding credit from customers classified from group 1 to group 5, equivalent to other types of debt

a debt cancellation policy, which will change the debt classification Musyoki and Kadubo’s (2012) found out the non-performing loan ratio had a significant negative relationship with commercial bank’s financial performance

Capital Adequacy Ratio

CAR is the ratio of a bank's equity to its risk-weighted assets and short-term liabilities It is decided by central banks and banking regulators to prevent commercial banks from using excessive leverage and becoming insolvent in the process It gauges a bank's equity as a percentage of its overall credit This ratio is enforced by banking

authorities to ensure credit discipline, safeguard depositors, and improve financial system stability and efficiency Capital adequacy ratio is a factor that determines a bank's ability

to meet its term liabilities and other risks such as credit risk, market risk, operational risk and other risks It is a measure of the amount of equity used to support a bank's risky assets Wahyudi (2019) considered that CAR does not have a positive effect on bank financial performance, while according to Aubiola and Olausi (2014), growth in CAR leading to better profits

According to Circular 41/2016/TT-NHNN, which regulates the capital adequacy ratio for banks and foreign bank branches, banks must comply with Basel II standard by January 1, 2020 Banks must attain a CAR of at least 8% under Basel II standard, which is

a numerical drop of 1% over Basel I, although the computation is more difficult For those who have not yet met Basel, according to Circular 11/2021, the minimum capital adequacy ratio allowed is 9%

Alshatti (2015) revealed that Leverage ratio has an adverse negative effect on the financial performance of banks

Cost per Loan Assets

The average cost per loan advanced to a customer in monetary terms is known as the cost per loan asset (CLA) Purpose of this is to indicate efficiency in distributing loans to customers (Appa, 1996) Bhattarai (2016) explained that there was a significant positive

relationship between CLA and bank financial performance, while Musyoki and Kadubo’s (2012) result was opposite, the relationship between two objects was inverse

1.3 Literature review of credit risk management on banks financial performance

There have been various studies on the impact of credit risk management on commercial bank financial performance, as well as how effective credit risk management may lower the risk of failure and the uncertainty of reaching the requisite financial performance The majority of these studies back up the concept that effective credit risk management and bank financial performance have a positive relationship

Allshatti (2015) has tried to investigate thoroughly the effect of credit risk management on a bank’s performance and the result showed that non-performing loan ratio has a positive effect on a bank’s financial performance, which surprisingly goes against the vast majority of research Also, this research points out that not only credit risk/credit facilities but also CAR and LR have no impact on a bank’s profits measured by ROE Taiwo; Ucheaga; Achugamonu; Adetiloye; Okoye; Agwu, (2017) found that LTD ( Loans

to Deposits Ratio) and Money Supply have a positive effect and increase bank profits Poudel (2012) investigates several credit risk management characteristics that have an impact on a bank's financial performance, the result shows that the non-performing loan ratio not only has a negative relationship with a bank’s financial performance, but it also has the largest effect on bank’s financial performance Musyoki and Kadubo’s (2012) research had the same result, and although all of those variables harmed banks, Bad Debt Cost and CLA (Cost per Loan Assets) seem to play insignificant roles Abiola and Alausi (2014) revealed that commercial banks with a greater capital adequacy ratio can extend more loans and absorb credit losses more effectively, resulting in increased financial performance Ogboi and Unafe (2013) found evidence that sound credit management and capital adequacy can increase bank profits Hamza (2017) used the pool regression to determine the impact of credit risk management on ROA and ROE, the result revealed that credit risk management has an inverse relationship with a bank’s financial performance Kargi (2011) had the same result Kodithuwakku (2015) pointed out the fact that improved

credit risk management led to the improvement of Bank Financial performance and suggested that banks should make sure they have a well-established credit risk management strategy in place Ekinci and Poyraz (2019) use the REM to represent the data structure, and their findings revealed there is a negative relationship between Non-performing Loans / Total Loans to ROA and ROE Gakure, Ngugi, Ndwiga, and Waithaka (2012) tried to look into the effect of credit risk management techniques on unsecured loan performance

by banks The result was a financial risk in which a banking organization could impose limits on the bank's capacity to accomplish its commercial goals

Only a few studies have looked into the impact of credit risk management on a bank's financial performance in Vietnam On the one hand, the few relevant qualitative studies (Dam Dan Luy; 2010) lack in-depth and scholarly research on the subject Some quantitative research (Le Tam Thanh; Doan Ngoc Minh;Bui Giang Thu, 2021 focused solely on revenue diversification and credit risk On the other hand, the relationship between credit risk management and bank financial performance in Vietnam has not been clarified in studies yet

This research will add to several previous studies by looking at the total and overall influence of credit risk management and its indicators on the financial performance of Vietnamese commercial banks, with the measurement by several credit risk management indicators

1.4 Other factors affect the bank financial performance

1.4.1 Bank Specific Factors

Bank Size

Size is understood as the total assets of commercial banks Most prior studies identified bank size as a factor that has a direct impact on financial performance Under normal circumstances, major banks will have a greater variety of business activities and services, as well as better facilities and technology The larger bank group is frequently claimed to offer a broader range of service lines through which economies of scale can be achieved This is because the portfolio strategy might benefit from the diversification

benefit of numerous income streams that are perfectly uncorrelated from one another As

a result, major banks will outperform small banks in terms of profit growth According to some studies, the natural logarithm of the bank's total assets was usually employed to explain the influence of bank size on bank’s financial performance

Anggari and Dana (2020) studied the effect of determinants on the financial performance

of banking companies in IDX and they concluded that the bigger the bank's total assets are, the more profitable it is

Loans / Total Assets

Bank loans are likely to demand both equity and principal payments, but they can

be tailored to match your specific business needs Businesses wishing to purchase commercial property can opt for commercial loans with more flexible conditions There are many types of loans, they are classified based on many criteria, such as the objective

of the loan, bank loans might be short-term or long-term, etc

The ratio of loans to total assets is often used as a variable in many types of research related

to factors' effect on bank financial performance Menicucci and Paolucci (2016) revealed that when loans increase, it is not certain that the financial performance increases too while

in the other research, Gul, Irshad, and Zaman (2011) revealed that loans have a positive and significant relationship with bank financial performance

Deposits / Total Assets

According to Thanh Hang (2018), bank deposits are money deposited in bank accounts In fact, it is a metric of a bank's debt to depositors This type of money arose from the financial intermediary role of banks Deposits are held in different accounts in terms of use or withdrawal Deposits in a current account are often considered to be a part

of the total amount of money, and they make up a significant portion of it Deposits in bank accounts are not included in the M1 monetary volume, but are included in other monetary volume definitions, such as M2, M3, and M4

Scholars often use the ratio of deposits to total assets as a variable in their research related

to bank financial performance In those two studies I have mentioned in the Loans section, two scholar groups Menicucci and Paolucci (2016) and Gul, Irshad, and Zaman (2011)

also studied the effect of deposits on bank financial performance, and they had the same conclusions : deposits on bank’s financial performance measured by ROA and ROE is significant and positive

1.4.2 Macroeconomic Factors

Gross Domestic Product Growth

GDP growth rate is a measure of economic growth in terms of gross domestic product (GDP) over time, adjusted for inflation and reported in real terms rather than nominal terms The GDP growth rate is a percentage that represents the rate of change in a country's GDP from one year to the next

Samhan and Al-khatib (2015) concluded that there is no relationship between gross domestic product growth rate and bank’s financial performance measured by ROA while Ameur and Mhiri (2013) explained in their study that GDPGr exerts a negative impact on both ROE and NIM

Inflation

Inflation is the persistent increase in the general price level of goods and services over time and the loss of value of a currency When the general price level rises, a unit of money buys fewer products and services than before, resulting in a loss of purchasing power per unit of currency Scholars often use inflation rate as a proxy of inflation in their studies

Samhan and Al-khatib (2015) also concluded that there is a significant and positive relationship between inflation and bank’s financial performance measured by ROA While the study of Vong and Chan (2009) about determinants of bank financial performance in Macao showed the conclusion: Inflationary situations tend to be more profitable for commercial banks

Real Interest Rate

The price of the right to use a unit of borrowed money for a unit of time is known

as interest rate This is a highly unique type of price that is determined by the use value rather than the value Interest rates also influence company decisions such as whether to use money to invest in new factory equipment or to deposit savings in banks

Vong and Chan (2009) believed that as interest rates rise, the disparity between saving and borrowing rates will widen, resulting in higher banking sector profits and their result had the same conclusion Altavilla, Boucinha and Peydró (2018) also concluded that bank financial performance is boosted by increased interest rates

CHAPTER 2 RESEARCH METHOD

2.1 Variables Definition and Measurement

2.1.1 Dependent Variable

The author will utilize ROA as the independent variable in this study to quantify the financial performance of commercial banks

Return on Total Assets

= Earning after taxes / total assets

This ratio indicates the business performance per unit of the bank's assets, which is

a measure of the bank's investment efficiency because all assets, save cash and fixed assets, can be invested to earn profit and income annually This ratio indicates how much profit a corporation may make on a given asset unit This financial ratio is used by businesses and analysts to assess the efficiency with which a company's assets are employed to create profit (M.Hargrave, 2022)

2.1.2 Independent Variables

2.1.2.1 Variables that related to Credit risk management

Non-performing Loan Ratio (NPL)

= Non - Performing Loans / Total Loans

When bad debts expand, banks must spend a lot of money on these debts, such as provisioning, and management expenditures rise as a result of the protracted debt The risk becomes higher when interest rates rise on overdue debts Musyoki and Kadubo (2012) ‘s study about the effect of credit risk management on the financial performance of commercial banks in Kenya discovered that the non-performing loan ratio had a substantial negative link with the financial performance of commercial banks According to those aforementioned studies, Hypothesis 1 (H1) is given with the assumption that when non-performing loan ratio increases, the bank's financial performance will decrease

Capital Adequacy Ratio (CAR)

= (Tier I equity + Tier II equity)/( Risk-weighted assets) CAR is the equity-to-risk-weighted-assets-and-short-term-liabilities ratio of a bank

utilizing excessive leverage and going bankrupt through this ratio It assesses a bank's equity as a percentage of its total credit According to Wahyudi (2020), CAR has no positive influence on bank financial performance, however Kusumastuti and Alam (2019) found no association between the two objects Therefore, the author predicts that Capital Adequacy Ratio is inherently negatively related to bank’s financial performance (Hypothesis H2)

Leverage Ratio (LR)

= Total Debt / Total Equity This financial indicator depicts the relationship between mobilized equity and equity (investor equity) This ratio displays an organization's debt management capacity as well as its current financial size when used Calculate this ratio to determine how much debt banks are using to run its operations and how much financial leverage it has Alshatti (2015) discovered that the leverage ratio has a detrimental impact on the financial performance of banks Along with the conclusions of many previous articles, it is hypothesized that the LR ratio negatively affects a bank’s financial performance (Hypothesis H3)

Cost per Loan Assets (CLA)

= Total Operating Cost / Total amount of Loan

The cost per loan asset is the average monetary cost per loan issued to a customer (CLA) The goal of this is to demonstrate efficiency in loan distribution to customers (Appa, 1996) Bhattarai (2016) noted that there was a substantial positive association between CLA and bank financial performance, however Musyoki and Kadubo's (2012) finding was the converse, indicating that the relationship between two items was inverse

It is believed, in accordance with the findings of numerous prior papers, that the CLA has

a positive impact on bank’s financial performance (Hypothesis H4)

2.1.2.2 Bank specific variables

Bank Size (SIZE)

= Ln (Total Assets)

Prior research has highlighted bank size as a factor that has a direct impact on financial performance Major banks, under normal conditions, will have a broader range of commercial activities and services, as well as better facilities and technology Previous research on the determinants of bank financial performance used the natural logarithm of the bank's total assets to explain the impact of bank size on financial performance Anggari and Dana (2020) investigated the effect of determinants on the financial performance of banking firms in IDX and came to the conclusion that the larger the bank's total assets, the more profitable it is So, the Hypothesis H5 will be the natural logarithm of bank’s total assets and exert a positive impact on bank financial performance

Loans / Total Assets (LOAN)

= Loans / Total Assets

Bank loans are one of the most prevalent types of financial assistance available to small and medium-sized enterprises This is the quickest and easiest way to receive the money that clients require, and it is usually completed within a certain length of time The loan-to-total-asset ratio is frequently used as a variable in various studies on factors influencing bank financial performance Menicucci and Paolucci (2016) discovered that as loans increase, financial performance does not always follow suit, but Gul, Irshad, and Zaman (2011) discovered that loans have a positive and substantial link with bank financial performance As a result, the Hypothesis H6 is proposed that LOAN has a positive effect

on bank financial performance

Deposits / Total Assets (DEPOSITS)

= Deposits / Total Assets

Authors frequently utilize the deposit-to-total-asset ratio as a variable in research on bank financial performance Two researcher groups: Menicucci and Paolucci (2016); Gul, Irshad, and Zaman (2011) evaluated the influence of deposits on bank financial performance in the two same studies described by the author in the Loans section, and they came to the same conclusion: deposits have a positive and favorable impact on bank financial performance as assessed by ROA The Hypothesis H7; therefore there is a

positive relationship between Deposits / Total Assets ratio and bank’s profitabily measured

by ROA

2.1.2.3 Dependent Variables that are related to Macroeconomics

Gross Domestic Product Growth (GDP)

When the economy is growing, it is a good environment for businesses in various industries to develop, encourage factors of production, and exhibit positive trends, including the banking industry's prospects Many previous studies have also demonstrated the positive of this relationship Ameur and Mhiri (2013) explained surprisingly in their study that GDPGr exerts a negative impact on both bank financial performance Therefore, the hypothesis H8 is about a negative relationship of GDP growth rate to ROA indicators

Inflation (INF)

Commercial banks always focus on forecasting changes in inflation to alter the interest rate level of terms, assisting the bank to improve its revenue Samhan and Al-khatib (2015) also found a substantial and positive association between inflation and bank financial performance as assessed by ROA While Vong and Chan (2009) study on the factors of bank financial performance in Macao revealed the following conclusion: Inflationary environments tend to be more profitable for commercial banks The Hypothesis H9 proposes that inflation has a positive relationship with financial performance

Real Interest Rate (IR)

The interest rate determined a bank's earnings from deposits and loans Interest rates also have an impact on business decisions such as whether to utilize money to invest in new factory equipment or to save in banks Vong and Chan (2009) believed that if interest rates rose, the spread between saving and borrowing rates would expand, resulting in higher banking sector profits, and their findings supported this belief Increased interest rates, according to Altavilla, Boucinha, and Peydró (2018), raise bank financial performance The Hypothesis H10 also supports an assumption related to the positive relationship between real interest rate and bank financial performance

Variables Measures

Predict the relationship between dependent and independent variables

References

1 Return on Total

Assets (ROA)

Earning after taxes / total assets

(M.Hargrave, 2022)

2

performing loan ratio (NPL)

Non-Non - Performing Loans / Total Loans

Kadubo (2012)

3

Capital Adequacy Ratio (CAR)

(Tier I equity + Tier II equity)/(

Risk-weighted assets)

Assets (CLA)

Total Operating Cost / Total amount

of Loan

(+)

Bhattarai (2016), Wahyudi (2020)

8

Deposits / Total Assets (DEPOSITS)

Deposits /

Menicucci and Paolucci (2016), Gul, Irshad, and Zaman (2011)

9

Gross Domestic Product Growth (GDP)

Gross Domestic Product Growth Rate

Mhiri (2013)

10 Inflation (INF) Inflation rate (+)

Samhan and Al-khatib (2015), Vong and Chan's (2009)

2.2 Model Specification

Panel data is used to aggregate all data from banks chosen in the research period The models used are Pooled OLS, FEM model, REM model and FGLS model which are also used numerously in panel data-based studies from Vietnam to World to accurately evaluate the relationship between the dependent variable and the independent variable in those research

The following models illustrate the effect of credit risk management on Vietnamese commercial banks’ financial performance:

𝑌 = 𝛽1 × 𝑁𝑃𝐿 + 𝛽2 × 𝐶𝐴𝑅 + 𝛽3 × 𝐿𝑅 + 𝛽4 × 𝐶𝐿𝐴 + 𝛽5 × 𝑆𝐼𝑍𝐸

+ 𝛽6 × 𝐿𝑂𝐴𝑁 + 𝛽7 × 𝐷𝐸𝑃𝑂𝑆𝐼𝑇𝑆 + 𝛽8 × 𝐼𝑁𝐹 + 𝛽9 × 𝐺𝐷𝑃+ 𝛽10 × 𝐼𝑅 + 𝑒

In the model, 𝑦 is the dependent variable of the model representing the bank's financial performance and is measured by ROA ratio The independent variables related to credit risk management in the group of 11 variables selected in the model include: bad debt

or non-performing loan ratio (NPL), leverage ratio (LR), capital adequacy ratio (CAR), and cost per loan assets (CLA) The independent variables are classified into 2 groups, the group of internal variables related to factors inside the bank and the group of external factors related to macroeconomics The variables in the group of internal bank factors are bank size (SIZE), , ratio of deposits as well as loans to total assets (DEPOSITS) and (LOAN) Gross domestic product growth (GDP), inflation rate (INF) and real interest rate (IR) are counted as dependent variables related to macroeconomics

2.3 Sample Study

The research sample includes data taken from the financial statements of the 24 largest commercial banks in Vietnam and carried out the research in the period 2011-2021 with a total of 264 observations Criteria for measuring ability financial performance as well as related to credit risk management are based on the financial statements and on the annual reports of the banks Macroeconomic information such as GDP growth, inflation and real interest rates are collected through data sites such as Worldbank and Statista

2.4 Data Processing and Analysis

After data is collected, all data will be aggregated on Microsoft Excel 2016, calculations are used to calculate the results of some independent variables that are also performed on this site After obtaining the necessary data, the data was aggregated into Stata 16 to examine and analyze

The next step when the data has been entered into Stata 16 software, the author will use commands to analyze the data from steps such as descriptive statistics of the research variables, test the correlation phenomenon of the models, Pooled model regression OLS, multicollinearity test, regression of REM and FEM models, testing of suitable model selection through Breusch-Pagan test and Hausman test, after selecting, the module is continue testing to find out defects of the model and use the FGLS model to correct the defects and give the final result

CHAPTER 3: THE OVERVIEW OF THE FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN VIETNAM AND CREDIT RISK MANAGEMENT 3.1 The current state of commercial banks business activity in Vietnam from 2011 to

2021

3.1.1 Overview of Vietnamese commercial banking system in the research period

According to data given by the State Bank of Vietnam, the system of commercial banks in Vietnam is classified into four types: state-owned commercial banks, joint-stock commercial banks, banks with 100 percent foreign capital, and joint venture banks With

35 banks, 100% state-owned commercial banks and joint-stock commercial banks take the largest proportion Agribank, GP Bank, Oceanbank, and Vietnam Construction Bank (VNCB) represent state-owned commercial banks BIDV, Vietinbank, and Vietcombank are three of the 31 joint-stock commercial banks that have received state capital contributions The remaining 28 commercial banks are wholly privately owned and have

no state capital participation Among those financial institutions, 4 state-owned commercial banks, also the 4 banks with the largest asset size including Vietcombank, Vietinbank, BIDV, and Agribank

Since 2011, Vietnam's economy started to face many difficulties when the economic growth tended to slow down and the risks of the banking system accumulated many years ago began to have a negative impact on the macroeconomic stability Therefore, the urgent issue is to restructure and make the banking system healthy The restructuring of the commercial banking system is carried out through mergers and acquisitions of weak commercial banks As a result, in the period 2011-2016, the number of Joint Stock Commercial Banks changed, namely, decreasing from 37 banks (in 2011) to 31 banks (in 2016) 2012 saw the merger between SCB, Ficombank, Vietnam Tin Nghia, and Habubank merged into SHB, bringing the number of joint-stock commercial banks from 37 to 34 In

2013, continued with the merger between Western Bank and PVFC, DaiABank merged with HDBank

During the implementation of project 254 "Restructuring the system of credit

successful M&A meetings such as MDBank merging with Maritime Bank; MHBank merged with BIDV; Southern Bank merging with Sacombank In 2015, the State Bank successfully acquired 3 banks VNCB, Ocean Bank, and GP Bank for 0 dongs, bringing the total number of state commercial banks from 4 banks to 7 banks

In 2016, with an increase in the number of banks with 100% foreign equity: Public Bank Vietnam was established on March 24, 2016 CIMB Bank Vietnam and Woori Vietnam were established respectively on August 31, 2016, and October 31, 2016, according to the decision of the Governor of the State Bank

Along with the growth of the economy, credit growth at commercial banks also showed signs of a solid recovery compared to the previous period Specifically, the period 2015-2017 recorded an outstanding growth rate of around 17-18% The strong credit growth is seen as a positive impact of the factors affecting economic growth in general and the confidence in the recovery of the industry, production, and business sectors and people's income in particular Although credit growth has decreased in the 2018-2021 period, this can be taken as a matter of course when the scale is increasing In addition, the State and the Government have issued a series of legal documents and regulations to ensure the safety

of the banking business, which has somewhat limited the increase in quantity but ensured the safety in the operation of the bank system

Table 3.1: Structure of Vietnam's commercial banking system 2011-2021

3.1.2 Commercial Banking System Size

In general, the total assets of all 24 commercial banks in the study increased from

2011 to 2021 The total assets of all 24 banks were 3,465,719 Billion VND in 2011 and they had expanded to 12,246,715 Billion VND in 2021

Chart 3.1: The total assets of 24 Vietnamese commercial banks from 2011 to 2021