Assessing the profitability and risk management of listed banks in vietnam Assessing the profitability and risk management of listed banks in vietnam
INTRODUCTION
The banking sector plays a crucial role in economic development, significantly shaped by external factors and internal strategies This analysis explores the complexities of Vietnam's banking industry, focusing on the comparative environment, risk appetite, and profitability of publicly listed banks within this dynamic developing economy.
Banks play a crucial role in economic growth by mobilizing savings and directing them toward productive investments, which stimulates economic activity Additionally, a robust and efficient banking system is essential for ensuring financial stability and reducing systemic risks.
Vietnam's rapidly evolving economy and reformed financial landscape make it a compelling case study for the dynamics of the banking sector Recent years have seen significant transformations in the Vietnamese banking industry, driven by regulatory reforms, technological advancements, and heightened competition.
This research aims to conduct a comprehensive analysis of the Vietnamese banking sector, focusing on listed banks It will examine the interplay between environmental factors and internal drivers that influence banks' risk appetite and profitability in Vietnam Additionally, the study will investigate how internal characteristics, including bank size, ownership structure, and management practices, correlate with risk appetite and profitability (Berger & Mester, 1997).
In the mid-2010s, Vietnam's banking system faced significant challenges due to a high volume of Nonperforming Loans (NPLs), primarily stemming from lax lending practices and inadequate risk management in prior years This accumulation of bad debts put smaller banks at risk of insolvency, posing a serious threat to the stability of the entire financial system in the country.
To put an end to this crisis, the State Bank of Vietnam (SBV) used a consolidation approach Rather than let these sick banks down, which could have triggered a cascading
To stabilize the financial system, the State Bank of Vietnam (SBV) facilitated the acquisition of struggling banks by Saigon Commercial Bank (SCB), a larger and more stable institution The symbolic price of 0 VND indicated that SCB did not pay cash for these banks but rather assumed their liabilities and non-performing loans (NPLs) Subsequently, the government provided financial support to SCB to help manage the acquired assets and ensure adequate recapitalization.
The unconventional 0 VND bank acquisitions, while stabilizing Vietnam's banking sector and preventing broader economic spillover during the crisis, have raised concerns about moral hazard and the use of public resources The long-term impact of these acquisitions on the competitiveness and efficiency of the banking sector remains a topic of ongoing debate.
The Vietnamese banking sector is crucial for the country's economic development, significantly influencing the well-being of businesses and individuals From 2015 to 2022, the ratio of outstanding credit debt to GDP in Vietnam increased from 89.7% to over 125%, highlighting substantial credit expansion that drives economic activity However, this growth also raises concerns regarding debt sustainability and potential financial vulnerabilities, according to the World Bank (2024).
Banks are essential partners in driving economic growth in Vietnam, playing a crucial role in providing credit, mobilizing savings, and managing financial risks This research offers a detailed analysis of financial data and case studies to highlight the current state of the Vietnamese banking sector The findings will provide valuable insights for policymakers, regulators, and bank managers regarding the challenges and opportunities that arise in a rapidly evolving financial landscape.
LITERATURE REVIEW
Banks and their roles in an emerging market
Banks serve as vital financial intermediaries, connecting borrowers with beneficial investment opportunities, which is essential for the stability of both the financial system and the economy Despite Vietnam's commitment to an independent and cooperative foreign policy, emerging economies remain vulnerable to financial instability due to their heightened exposure to external factors, particularly foreign capital inflows As the cornerstone of the economy, the banking sector is crucial for promoting sustainable growth.
According to the United Nations, the country is among the fastest-growing economies, joining Indonesia, Malaysia, the Philippines, and Thailand (United Nations, 2014) As a developing nation, it is characterized by a moderate to low Human Development Index, an underdeveloped industrial base, and a relatively low standard of living The Human Development Index serves as a comparative measure, evaluating factors such as life expectancy, literacy, education, and poverty.
Over the past decade, numerous developing countries have witnessed significant economic growth, leading to a substantial reduction in poverty levels As a result, analysts frequently categorize these nations as emerging markets.
2017) These days, many of what was regarded as developing markets are emerging economies.
Emerging market economies are in the early stages of market development and have recently opened up to global capital, products, and services These countries promote transparent multilateral foreign policies that enhance international cooperation across various sectors, actively integrating into the global economy while fostering diverse international relations.
Since joining the World Trade Organization (WTO), Vietnam's economy has undergone significant transformation, achieving an impressive annual growth rate of 6.2% from 2007 to 2019 This remarkable progress has earned Vietnam the title of the next Asian dragon, reflecting its emergence as a developing market.
In recent years, Vietnam has experienced significant economic growth fueled by industrialization, export-oriented manufacturing, and foreign direct investment The government's implementation of structural reforms aimed at enhancing economic development and attracting investment has positioned Vietnam as an increasingly appealing destination for businesses and investors.
Vietnam's financial markets are evolving due to enhancements in infrastructure, regulatory frameworks, and increased investor engagement, signaling the country's transition to a more developed financial system typical of emerging markets (Phan, 2021) This transformation is further evidenced by Vietnam's inclusion in various emerging market indexes (Morgan et al.).
2.1.2 The Thread of Financial Crises
Financial crises often originate when a country liberalizes its financial systems by lifting restrictions on institutions and markets, allowing for increased capital flows and foreign financial firms This trend, known as financial globalization, is particularly evident in emerging market economies (Sufi & Taylor, 2022).
A financial crisis occurs when significant disruptions in information flows lead to the cessation of financial market operations, resulting in increased financial frictions Despite experiencing remarkable growth over the past decade, recent data indicates that many emerging markets are facing a slowdown in their growth rates, highlighting their vulnerability during such crises (Parboteeah & Cullen, 2017).
In the 1990s, 11 nations liberalized their markets with the aim of alleviating poverty and accelerating economic growth However, many of these countries faced severe financial crises that paralleled the American Great Depression (Mishkin & Eakins, 2006).
Globalization presents both advantages and disadvantages On the positive side, it facilitates the exchange of talent among workers, diminishes monopolistic profits, and enables businesses to operate internationally Conversely, increased globalization leads to heightened competition, leaving companies susceptible in areas that demand enhanced managerial and technological skills Thus, the globalization of the economy encompasses a range of pros and cons that impact businesses and workers alike.
Severe economic downturns often coincide with financial crises, prompting extensive research into their causes (United Nations, 2014) Despite predictions of financial market crises occurring every three to five years, understanding the immediate triggers remains crucial Notably, before the crisis, the budget deficit was only 0.7% of GDP, a figure many developed nations aspire to achieve Furthermore, East Asian countries experienced budget surpluses prior to their crises (Mishkin & Eakins, 2016).
Developing nations are particularly vulnerable to financial crises due to their exposure to external shocks and often fragile economic institutions This susceptibility is influenced by various factors that highlight potential risks During a financial crisis, investors typically move their investments from riskier assets in developing markets to safer options, resulting in sudden capital flight Consequently, this can cause a rapid depreciation of the local currency, which in turn raises import costs and heightens inflationary pressures.
Emerging economies often depend on external financing to support development projects and maintain economic growth However, excessive borrowing can lead to a high debt-to-GDP ratio, making it difficult to manage debt during crises, especially when revenues decline due to currency devaluation or economic downturns These nations typically rely on exports for economic growth, and during global financial crises, reduced worldwide demand can significantly impact their economies, particularly those reliant on commodity or manufactured goods exports.
Emerging market financial institutions often lack the robust regulatory and risk management frameworks found in advanced economies, making them vulnerable to bank runs and systemic failures during crises, as noted by Claessens and Kodres (2014) This vulnerability is exacerbated by the volatility of their currencies compared to major reserve currencies like the US dollar and euro, as highlighted by Dell’Ariccia et al (2012) Such currency fluctuations can intensify during financial crises, disrupting investment and trade flows.
The External Forces on Banks
Banks face numerous external factors that significantly impact their operations, including economic influences like GDP growth and inflation, which affect loan demand and default rates Regulatory requirements, particularly regarding capital adequacy, shape how banks conduct business and generate profits Additionally, technological advancements, geopolitical dynamics, and market volatility contribute to risk perception and present both challenges and opportunities Public health emergencies and natural disasters further complicate operations and elevate credit risk To maintain stability and profitability, banks must continuously monitor these external influences and adapt to the evolving landscape.
Emerging economic conditions can significantly impact banks by influencing credit quality and default risks Economic downturns may lead to an increase in borrower defaults, which can adversely affect banks' asset quality and profitability.
Emerging economic conditions significantly influence lending demand and interest rates As economic growth in emerging markets rises, the demand for loans typically increases, prompting banks to lend more Conversely, weak economic conditions can diminish loan demand and tighten lending criteria Additionally, while bank profitability in these markets benefits from economic growth, challenges arise from economic instability and unpredictability, impacting overall bank performance.
The evolving regulatory landscape significantly impacts bank operations and risk management, often prompted by new economic challenges While these regulatory changes aim to bolster the stability of the financial sector and enhance banking systems in emerging economies, they also lead to increased compliance costs for banks (Demirgỹỗ-Kunt et al., 2018).
While the growth of banking industries in developing countries is often seen as a positive development, research by Claessens et al (2010) indicates that such rapid expansion can lead to heightened systemic risk during economic booms Conversely, recessions are linked to increased systemic risk and financial instability To evaluate these economic conditions, various assessment measures are available.
The table below displays the two of common Macroeconomic indicators:
G = Government expenditure on goods and services
X = Exports of goods and services
M = Imports of goods and services
- A fundamental measure of economic activity within a country.
- Represents the total value of all goods and services produced within the country’s borders.
2 Inflation rate Inflation Rate ((Current CPI – Previous CPI) / Previous CPI) *
- Measuring the rate at which the general level of prices for goods and services is rising.
- Being able to erode purchasing power and impact consumer spending patterns when at a high level When low or negative,it may signal economic stagnation or deflationary pressures.
2.2.2 Political stability and Regulatory environment
The performance and operations of banks are significantly influenced by political stability, particularly in emerging countries, where political unpredictability can greatly affect investor confidence, economic conditions, and regulatory frameworks.
Political stability enhances investor confidence and encourages capital inflows into emerging markets According to Gelb et al (2014), there is a strong correlation between political stability and increased foreign direct investment (FDI), portfolio investment, and overall economic growth Additionally, political stability affects a country's creditworthiness and sovereign risk, impacting banks' borrowing rates and their exposure to risk.
Political unrest within the banking sector significantly elevates systemic risk and undermines customer trust Research by Laeven & Valencia (2013) and Cihak et al (2013) indicates that such unrest correlates with increased volatility in the banking sector and a heightened likelihood of financial crises.
Political stability decreases uncertainty and thus bolsters firm confidence, which aids in adequate loan disbursement and increased economic growth.
Under the leadership of the Communist Party of Vietnam (CPV), the nation has achieved a degree of political stability that fosters economic growth The CPV's dominance ensures consistent governance, which is crucial for defining political stability in Vietnam (World Bank, 2021) Additionally, a centralized decision-making process and the CPV's control over key institutions contribute to a stable and predictable political environment (Tran, 2018).
Political stability in Vietnam has significantly bolstered the banking sector by enhancing investor confidence and fostering economic growth This stability encourages increased Foreign Direct Investment (FDI), which in turn stimulates bank lending operations and drives credit growth.
Vietnam's stable political environment has facilitated the implementation of effective macroeconomic policies and regulatory reforms that strengthen the banking sector and drive financial innovations Government efforts to improve financial stability, enhance governance, and tackle the issue of non-performing loans are well-documented in multiple studies by the Asian Development Bank (ADB).
Financial stability and depositor confidence rely on political stability, which in turn sustains public trust in banking systems Research done by Pham and Nguyen
(2020) emphasizes how political stability is critical to the development of financial resilience and the mitigation of systemic risks in developing nations like Vietnam.
Banks in emerging economies are much affected by the regulatory environment, determining their operations, risk management strategies, and their general performance.
Compliance costs might disproportionately be more significant for banks in developing nations due to less established regulatory frameworks and more
Due to the significant administrative burden, banks face increased regulatory compliance, which is crucial for their stability (Allen & Carletti, 2013) Capital adequacy standards serve as the primary safeguard for maintaining this stability In emerging economies, higher capital requirements enhance financial stability by minimizing the risk of bank failures (Demirgỹỗ-Kunt & Huizinga, 2010).
Regulatory restrictions significantly influence banks' lending practices, particularly in developing countries where limited access to credit information hinders SMEs' ability to secure loans for business expansion Effective consumer protection frameworks are crucial for fostering public confidence in the banking sector, as they reduce information asymmetries and promote equitable treatment of customers Such regulations not only enhance consumer protection in emerging markets but also bolster financial inclusion and stability (Claessens & Van Horen, 2014).
Regulatory programs promoting financial inclusion significantly boost bank adoption, particularly in emerging nations where mobile and agent banking are encouraged, facilitating access for marginalized groups Effective oversight and governance systems are crucial for maintaining stability in the banking sector, as robust regulatory frameworks help mitigate bank fragility and systemic risk, ultimately enhancing financial stability in developing countries.
The State Bank of Vietnam (SBV) implements prudential rules and capital adequacy standards to ensure the stability and resilience of banks These regulations encompass minimum capital ratios, risk-weighted asset assessments, and liquidity restrictions Additionally, the SBV governs lending practices and credit distribution to manage credit growth and systemic risk while supporting essential economic sectors Key rules include loan-to-deposit ratios, sectoral lending limits, and credit risk management guidelines that significantly impact banks' lending decisions and portfolio compositions.
The internal dynamic of banks
The internal dynamics of banking organizations encompass the structures, procedures, culture, and strategies that shape their operations and performance By analyzing these dynamics, one can evaluate a bank's overall effectiveness, identifying its strengths and weaknesses This article will focus on two key areas: financial performance and risk management.
The financial performance of a bank is the most crucial factor influencing its internal dynamics, encompassing key metrics such as asset quality, efficiency, profitability, liquidity, and capital sufficiency Evaluating these performance indicators is essential for understanding the bank's profitability, risk management, and value creation for shareholders According to Rose and Marquis (2018), a successful bank must assess its financial performance criteria, including capital adequacy, profitability, and liquidity.
To assess a bank's profitability, various metrics and indicators are utilized to evaluate its financial performance and efficiency in generating profits A selection of these well-known indicators is presented in Table 2.3.
No Name of the indicator Measurement Brief description Reference
Average Total Assets The effectiveness of generating profits from assets (Brigham &
The return generated for shareholders' equity, representing the profitability of the bank's equity investment
3 Bank Size SIZE = Log (Total
Assets) The expansion, financial health, and performance over a specified period
The two primary financial ratios for assessing bank profitability are Return on Assets (ROA) and Return on Equity (ROE) ROA indicates how effectively a bank utilizes its assets to generate profits, while ROE measures the returns provided to shareholders based on their equity These metrics are readily available in financial statements, facilitating straightforward comparisons between banks and over different time periods (Bhattarai, 2021).
Recent research highlights the limitations of using Return on Assets (ROA) and Return on Equity (ROE) for analyzing bank profitability Dietrich and Wanzenried (2014) note that these ratios can be significantly affected by accounting decisions and risk-taking behaviors, which are not entirely reflected in the ratios themselves Furthermore, Demirgüç-Kunt et al (2020) emphasize the importance of additional factors such as bank size, capitalization, and macroeconomic conditions in understanding profitability.
While both Return on Assets (ROA) and Return on Equity (ROE) are vital indicators of bank profitability, recent studies emphasize the necessity of utilizing these metrics alongside a range of financial and non-financial measures A comprehensive approach that incorporates multi-dimensional metrics is essential for a deeper understanding of the intricate dynamics of bank profitability in today's financial environment.
Evaluating risks in banking involves several key considerations, particularly through the use of risk ratios These ratios offer a systematic and quantitative method to assess various risks, including operational, interest rate, liquidity, and credit risks Regular monitoring of these ratios enables stakeholders to identify potential risk exposures and implement measures to mitigate them effectively.
Before making investment decisions, shareholders and investors assess banks' risk management practices and financial health through risk ratios Robust risk ratios indicate reliability and stability, enhancing banks' ability to attract capital and foster investor confidence Analyzing these ratios enables banks to optimize capital allocation across various business sectors.
25 activities They can optimize their capital allocation to maximize profitability while keeping an acceptable level of risk, based on the risk-return profiles associated with each activity (Saunders & Cornett, 2017).
Evaluating risk through risk ratios is essential for banks, as it enables effective monitoring and management of risks, ensures regulatory compliance, boosts investor confidence, facilitates prudent capital allocation, and supports strategic planning.
Table 2.4 contains a few frequent ratios.
No Name of the indicator Measurement Brief description Reference
LDR = Total Loan / Total deposit the proportion of a bank's loans to its deposits, indicating the bank's reliance on deposits for funding its lending activities
Ratio DAR = Total Debt/ Total
Assets Company's financial leverage and risk (Brigham &
Ratio DER = Total Debt/ Total
Equity Company's financial leverage and risk in equity holder's perspective (Brigham &
Assets ratio DEAR = Total Deposit to Customer/ Total Assets
Assessing a bank's funding structure, liquidity, and risk profile
Assets ratio EAR = Total Equity/
Total Assets Assessing a company's financial health, leverage, and risk profile (Brigham &
Banks can manage risk exposures effectively by utilizing risk ratios, which enhance their risk profile and financial stability By implementing risk management techniques and analyzing these ratios over time or against industry benchmarks, banks can identify weaknesses (Saunders & Cornett, 2017) Regulatory bodies mandate that banks maintain certain risk ratios to ensure financial stability and safeguard depositors' interests Evaluating these ratios allows banks to showcase their responsible risk management and adherence to regulatory standards (Heffernan, S., 2016).
Monitoring risk ratios in banks is crucial for several reasons, as highlighted by extensive research Key metrics like the capital adequacy ratio and non-performing loan ratio can indicate potential financial distress before it escalates As noted by Ozili (2019), early detection enables timely interventions that can mitigate losses and safeguard depositors.
Evaluating the quality of a bank's loan portfolio can be effectively done by monitoring key ratios, such as the ratio of loan loss provisions to non-performing loans Research by Abbas et al (2020) highlights a significant correlation between these ratios and overall bank performance, emphasizing their critical role in credit risk assessment.
Banks must adhere to specific risk ratios as mandated by Basel III regulations, with non-compliance resulting in penalties and operational restrictions According to Giudici and Pagano (2021), these risk ratios are crucial for regulatory compliance and significantly influence the stability of banks.
The risk ratios are one of the features investors look out for in assessing the financial health and risk exposure of a bank According to Lepetit et al., research in
2008, indicated that a bank with higher capital adequacy ratios and a low ratio of non- performing loans is associated with high investor confidence and stock price.
Monitoring aggregate risk ratios in the banking sector is crucial for understanding systemic risks and identifying potential vulnerabilities within the financial system Drehmann and Tarashev (2013) highlight the significance of this monitoring for ensuring macroeconomic stability.
The loan-to-deposit ratio (LDR) indicates the proportion of bank deposits that are issued as loans, with a higher LDR signifying increased credit risk and potential liquidity issues if depositors withdraw their funds Research by Vodova (2011) highlights a positive correlation between LDR and bank risk, emphasizing the importance of monitoring this ratio for effective liquidity management.
RESEARCH METHOD AND PROCEDURES
Qualitative approach with Porter’s five forces model
Porter's Five Forces model is a strategic framework used to analyze the competitive dynamics within an industry It starts by defining the industry and then assesses five key forces: the threat of new entrants, the threat of substitute products, the bargaining power of suppliers, the bargaining power of buyers, and the level of competitive rivalry.
The threat of new entrants in a market is influenced by barriers such as economies of scale, brand loyalty, and government regulations Similarly, the threat of substitutes hinges on the ease with which customers can switch to alternative products Supplier bargaining power is shaped by the number of suppliers and the uniqueness of their offerings, while buyer bargaining power is affected by the number of buyers, their purchasing volume, and the availability of substitutes Lastly, competitive rivalry is assessed by examining the number of competitors, the industry growth rate, and the degree of product differentiation.
This analysis provides a literature summary that evaluates industry forces as high, medium, or low, reflecting the overall attractiveness of the market The insights derived from this assessment can guide the development of strategies to address threats and capitalize on opportunities, ultimately enhancing decision-making and strengthening competitive positioning.
Data collection
For this study, we compiled a list of banks listed on the Ho Chi Minh Stock Exchange (HOSE) and the Hanoi Stock Exchange (HNX) The selection criteria aimed to ensure a diverse representation of commercial banks within Vietnam's financial sector.
Twenty commercial banks were selected for analysis due to their consistent presence on stock exchanges and the availability of comprehensive financial data Financial information for these banks was gathered over a five-year period, from 2019 to 2023, using the Vietstock finance website.
The study utilizes a panel data approach to analyze both cross-sectional and time-series data, allowing for a detailed examination of variations within and between banks over time With each bank representing one observation per year, the research encompasses a total of 100 observations, enabling the tracking of trends and patterns in Vietnam's banking sector This longitudinal dataset provides valuable insights into the competitive forces and broader economic factors affecting the industry's performance during the specified period.
The study incorporates bank-specific financial data alongside macroeconomic indicators such as inflation and GDP growth rates sourced from Vietstockfinance This comprehensive approach allows for a thorough evaluation of how broader economic conditions affect the banking sector, ensuring that external economic factors are considered By analyzing the interplay between macroeconomic trends and bank performance, the research aims to uncover valuable insights into the competitive dynamics and economic influences shaping the Vietnamese banking industry during the study period.
Descriptive statistics
The table 3.1 shows the summary of the dataset:
Table 3 1: Descriptive statistics of the dataset
Variable Observation Mean Standard deviation
The dataset comprises 100 observations from the banking sector, featuring key financial performance indicators such as Return on Assets (ROA) and Return on Equity (ROE) It also includes various bank-specific factors like Bank Size (BS), Debt-to-Equity Ratio (DER), Debt-to-Assets Ratio (DAR), Debt-to-Equity Asset Ratio (DEAR), Loan-to-Deposit Ratio (LDR), and Equity Asset Ratio (EAR), alongside important macroeconomic factors including Interest Rates (IR) and Gross Domestic Product Growth Rate (GDPGR).
The data demonstrates significant variability among the variables, highlighting the diversity within the sample Specifically, bank size (BS) varies from -11.62 to 44.69, and return on equity (ROE) spans from -12.33 to 30.33, indicating that the sample encompasses banks with different sizes and performance metrics.
The table outlines essential variables analyzed within the banking sector, offering insights into their distribution and value ranges This information can help identify potential relationships among the variables However, to reach more detailed conclusions, further analysis, including correlations and regressions, is necessary.
Monitoring and assessment of the risk ratios
Among the five key financial ratios—Loan-to-Deposit Ratio, Debt to Assets Ratio, Debt to Equity Ratio, Deposit to Assets Ratio, and Equity to Assets Ratio—the Loan-to-Deposit Ratio (LDR) and the Equity-to-Assets Ratio, often referred to as the Capital Adequacy Ratio, are particularly effective for assessing bank risk management.
The Loan-to-Deposit Ratio (LDR) serves as a crucial measure of a bank's liquidity risk, reflecting the proportion of deposits allocated to loans A high LDR raises concerns about liquidity, as it suggests that a large share of the bank's funds is tied up in loans, potentially limiting its ability to meet unexpected withdrawals or new financial commitments These insights align with the research findings of Ghosh.
(2023), as he points out the importance of an optimal LDR in order that banks are in a position to meet their liabilities while striving to generate profits.
The Equity-to-Assets Ratio (EAR), also known as the Capital Adequacy Ratio (CAR), is a crucial indicator of a bank's capital strength, serving as a buffer against potential losses A higher EAR signifies a stronger equity capital cushion, enabling banks to endure financial shocks without facing insolvency This aligns with the Basel III regulatory framework, which establishes minimum capital requirements to protect banks from unexpected losses Research by Bouwman and Zhang (2023) highlights the significance of CAR in promoting financial stability and mitigating systemic risk across the banking system.
While the Debt-to-Assets Ratio and Debt-to-Equity Ratio offer insights into a bank's financial structure and funding sources, they do not address core risk management aspects like the Loan-to-Deposit Ratio (LDR) and Equity-to-Asset Ratio (EAR) The Debt ratios focus on leverage and financial risk, whereas the LDR and EAR emphasize funding structure and liquidity risk.
Liquidity and capital adequacy are crucial components of effective risk management for banks, with the Loan-to-Deposit Ratio (LDR) and the Equity to Assets Ratio (EAR) playing a significant role in assessing these aspects.
34 will be used to monitor and assess bank’s risk management by horizontal analysis method.
Profitability determinant factor analysis
Following Yuan et al., (2022), we employ the panel data analysis procedure
To examine the profitability determining factors of the banking sector, the empirical model is specified as follows:
The profitability determining factors of the banking sector by the following models; Model - 1: 𝑅𝑅𝑅𝑅𝑅𝑅 𝑖𝑖𝑖𝑖 = 𝛼𝛼 𝑖𝑖 + 𝛽𝛽 1 (𝐵𝐵𝐵𝐵) 𝑖𝑖𝑖𝑖 + 𝛽𝛽 2 (𝐷𝐷𝐷𝐷𝑅𝑅𝑅𝑅) 𝑖𝑖𝑖𝑖 + 𝛽𝛽 3 (𝐷𝐷𝑅𝑅𝑅𝑅) 𝑖𝑖𝑖𝑖 + 𝛽𝛽 4 (𝐷𝐷𝑅𝑅𝑅𝑅) 𝑖𝑖𝑖𝑖 +
Where, 𝛼𝛼= Intercept of the model; 𝑖𝑖 = Index of Banks; 𝑡𝑡= Time index; 𝛽𝛽 𝑘𝑘 Regression Coefficient to be estimated; 𝑢𝑢 𝑖𝑖𝑖𝑖 = Random error tern
Understanding key financial metrics is essential for evaluating a bank's performance Key ratios include Return on Assets (ROA) and Return on Equity (ROE), which measure profitability relative to assets and equity, respectively The Deposit to Asset Ratio (DEAR) indicates the proportion of deposits to total assets, while Bank Size (BS) reflects the scale of the institution The Debt to Equity Ratio (DER) assesses financial leverage, and the Loan to Deposit Ratio (LDR) shows the relationship between loans and deposits Additionally, the Debt to Asset Ratio (DAR) and Equity to Asset Ratio (EAR) provide insights into capital structure Finally, monitoring the Inflation Rate (IR) and GDP Growth Rate (GDPGR) is crucial for understanding the broader economic environment affecting banking operations.
This study examines the factors influencing bank-specific and macroeconomic variables, along with the impact of profit-making considerations on the banking sectors in Bangladesh and India According to Isayas (2022), the profitability of banks is assessed using two key metrics: return on equity (ROE) and return on assets (ROA), which serve as the dependent variables in this research.
Return on Asset (ROA): In the banking industry, ROA is a profit ratio used to assess a bank's ability to generate revenue from all of its assets One popular and
Return on assets (ROA) is a vital metric for evaluating bank performance, as highlighted by Tan (2016) This ratio enables banks to determine their efficiency in allocating and investing financial resources to generate profits.
Return on Equity (ROE) measures the profitability of a bank in relation to the equity invested by its shareholders It highlights the effectiveness of bank management in utilizing shareholder capital to generate profits, while also downplaying the risks associated with financial leverage, which is often restricted by regulations According to Olorunniwo and Hsu (2006), ROE is essential for assessing a bank's ability to leverage investment capital to enhance profitability.
This study investigates two key factors influencing bank profitability: internal factors specific to the bank and external microeconomic variables The internal factors analyzed include the Debt-to-Equity Ratio (DER), Loan-to-Deposit Ratio (LDR), Earnings-at-Risk (EAR), and other bank-specific metrics Additionally, external factors such as the inflation rate (IR) and GDP growth rate (GDPGR) are examined as significant microeconomic drivers affecting profitability.
The Hausman test is a key statistical tool in econometrics, designed to evaluate the efficiency of two estimators—one consistent under both correct and incorrect model specifications, and the other efficient only with correct specifications A significant discrepancy between the estimates from these two estimators indicates model misspecification, suggesting that the more efficient estimator may not be reliable.
The Hausman test serves multiple purposes in econometrics, including the selection between fixed and random effects models in panel data analysis (Baltagi, 2008), assessing endogeneity in regression models (Wooldridge, 2010), and aiding in model selection between two consistent estimators (Green, 2003) Its versatility and reliability make the Hausman test an essential tool for researchers in the field.
The Hausman test is utilized to determine the appropriate model for the dataset, comparing the Random Effect model and the Fixed Effect model The results indicate that the P-values for both Model-1 and Model-2 exceed 0, suggesting that the Random Effect model is the most suitable choice for this analysis.
RESULTS AND DISCUSSIONS
Porter's Five Forces Model to the Vietnamese Banking Sector
The Vietnamese banking sector is rapidly growing and marked by evolving competitive dynamics Utilizing Porter's Five Forces model to analyze this sector provides critical insights into its attractiveness and potential for profitability.
The Vietnamese banking sector has seen some liberalization, yet significant entry barriers remain due to stringent regulatory requirements, substantial capital investments, and the necessity of building a solid reputation and customer base Meanwhile, the rise of fintech companies and the growing adoption of digital banking solutions pose a challenge to traditional banks.
The Vietnamese banking sector faces a moderate threat from new entrants due to stringent regulatory and capital requirements, existing competition, and significant reputational barriers Despite government efforts to liberalize the sector, the challenges associated with entering the market are both time-consuming and costly, which may discourage potential new competitors (Vo, 2018).
Starting a new bank demands significant initial investment, posing challenges for smaller competitors Additionally, the banking sector is already saturated with well-established brands and robust distribution networks, making it hard for new entrants to effectively compete.
The emergence of fintech companies, coupled with government initiatives to liberalize the banking sector, is likely to introduce new competitors in the Vietnamese banking industry To sustain their competitive advantage, existing banks must continuously monitor this evolving landscape and adapt to the challenges posed by potential new entrants.
The Vietnamese banking sector currently faces a moderate threat from new entrants, requiring incumbent banks to continuously adapt and negotiate strategies to maintain their competitive advantage.
The rise of fintech companies is transforming the financial services landscape by providing alternatives such as mobile payments, peer-to-peer lending, and digital wallets, which pose a significant threat to traditional banking products (Dinh, 2020) Furthermore, the growing adoption of cryptocurrencies and blockchain technology is likely to further challenge the conventional banking sector.
The Vietnamese banking sector is increasingly challenged by fintech companies that provide alternative financial services like mobile payments and digital wallets These agile, technology-driven firms are gaining popularity, but traditional banks face uncertainties due to the evolving regulatory landscape as they compete with these innovative solutions.
The rise of cryptocurrencies and blockchain technology poses a significant challenge to traditional banking services in Vietnam; however, their influence varies across different products and services While the impact of these innovations is notable, traditional banking continues to maintain dominance in more complex financial areas.
The Vietnamese banking sector faces a moderate to high threat from substitutes, necessitating traditional banks to stay vigilant To mitigate this risk and maintain competitiveness, banks must adapt to shifting customer preferences and embrace technological innovations.
In the Vietnamese banking sector, depositors and investors serve as the main suppliers While individual depositors face limited bargaining power due to the high volume of participants and competitive conditions, institutional investors possess the ability to influence interest rates and investment terms (Vo, 2018).
Vietnamese banks benefit from a vast potential depositor base, which minimizes reliance on individual suppliers and facilitates diverse funding sources, leading to lower supplier bargaining power (Vo, 2018) Additionally, Dao (2021) emphasizes the fierce competition within Vietnam's banking sector, empowering banks to set terms and interest rates, even for institutional investors with substantial deposits, thanks to the standardization of services.
The Vietnamese government's stringent regulatory framework diminishes suppliers' bargaining power, while its proactive management of interest and monetary policies restricts their impact on interest rates and pricing within the banking sector (Vo, 2018).
The banking industry's low bargaining power, driven by numerous suppliers, intense competition for deposits, product uniformity, and significant government involvement, allows banks to secure favorable funding terms, thereby enhancing competitiveness and profitability.
Corporate clients and high-net-worth individuals possess greater bargaining power due to their substantial deposit volumes and borrowing requirements, allowing them to negotiate more favorable terms Additionally, as customers become increasingly aware and sophisticated, banks are compelled to provide more competitive products and services.
The trends and tendency of LDR and EAR
The table 4.1 Present the descriptive statistic of LDR and EAR
Table 4.1: Descriptive statistics of LDR and EAR
Variable Obs Mean Std dev Min Max
The average loan-to-deposit ratio (LDR) of 73.58% among Vietnamese banks indicates a moderate credit expansion, suggesting a healthy lending environment that could support economic growth However, this level of lending also raises concerns about potential credit risks if not managed effectively (Vo, 2018).
The standard deviation of the Loan-to-Deposit Ratio (LDR) among Vietnamese banks is 8.79, signifying a moderate variation in lending practices This variation suggests that certain banks adopt more aggressive lending strategies than others, influenced by their distinct risk appetites and business approaches.
The mean Effective Annual Rate (EAR) of 8.74% indicates that Vietnamese banks maintain a relatively low capitalization level when compared to international benchmarks, potentially increasing their susceptibility to financial shocks and economic downturns (Nguyen & Nguyen, 2020).
Standard Deviation of EAR 3.05 indicates a moderate level of variation in capitalization among banks Some banks may have stronger capital buffers than others, which could affect their resilience in a crisis.
The average Loan-to-Deposit Ratio (LDR) reflects a balanced credit expansion, highlighting the Vietnamese banking sector's proactive role in fostering growth through lending However, this expansion necessitates careful risk management to maintain stability and safeguard the financial system against potential vulnerabilities.
Vietnamese banks play a significant role in the economy, yet the low average EAR highlights serious concerns about their ability to withstand financial shocks To address these risks and improve resilience during economic downturns, it is essential for banks to prioritize strengthening their capital buffers.
The differences in Loan-to-Deposit Ratios (LDR) and Equity-to-Asset Ratios (EAR) among banks highlight the diversity within the Vietnamese banking sector This variation reflects distinct risk profiles, target markets, and strategies employed by each bank, necessitating adaptive regulatory frameworks and tailored risk management practices to ensure the overall stability and health of the industry.
In the five-year time, the banks’ LDR tends to increase, referring to the table 4.2.:
Higher loan-to-deposit ratios (LDRs) indicate greater lending activity, which can enhance investment, consumption, and overall economic performance This surge in lending may result in elevated GDP growth rates and job creation Additionally, increased lending generates higher interest income for banks, potentially enhancing their profitability and attracting further investment in the banking sector, thereby fueling continued economic growth.
An increase in Loan-to-Deposit Ratios (LDRs) can heighten credit risk for banks, as borrower defaults may lead to substantial losses and liquidity issues Aggressive lending without proper assessment can deteriorate asset quality, jeopardizing the stability of both the banking sector and the overall economy Elevated LDRs also increase vulnerability to external shocks like interest rate changes, economic downturns, and geopolitical events, potentially resulting in financial instability and a banking crisis.
Researchers and policymakers can enhance their understanding of the Vietnamese banking sector by analyzing a comprehensive range of data and factors, enabling them to formulate effective strategies that promote stability and resilience within the industry.
Similarly considering the EAR, table 4.3 presents the change in five-year period.
The equity-to-asset ratio serves as a crucial measure of a bank's financial strength, impacting its risk profile and overall stability A higher equity-to-asset ratio indicates greater capitalization, enhancing resilience and contributing positively to the stability of the financial system.
It also discourages too much risk-taking in pursuit of a more sustainable banking model
Achieving the right balance between stability and profitability is a significant challenge for bank managers and regulators, especially in developing economies like Vietnam, where the banking sector plays a vital role in economic growth and stability This challenge is intensified by the fact that equity financing is generally more expensive than debt, putting pressure on profitability (Berger & Bouwman, 2013).
Higher EARs also allow banks to extend lending activity without compromising their financial health, contributing to economic growth and attracting
Increasing foreign investment can enhance equity, but it may also negatively impact bank profitability To address higher capital requirements, banks must focus on improving efficiency and diversifying their revenue streams The complexities and costs associated with raising capital and adhering to regulatory changes demand substantial investments in risk management systems and compliance processes.
Profitability determinants analysis
The average Return on Assets (ROA) for the banks in the sample is 1.47%, indicating a significant range of performance, with some banks experiencing negative ROA while others achieving returns as high as 3.58% The standard deviation of 0.81 reflects a moderate dispersion around the mean In contrast, the average Return on Equity (ROE) stands at 16.69%, substantially exceeding the average ROA.
The banks in the sample are utilizing leverage to enhance returns for their shareholders, as evidenced by a wider range of Return on Equity (ROE) values compared to Return on Assets (ROA) Additionally, the higher standard deviation of 7.32 for ROE indicates greater variability in the returns experienced by equity holders.
The table 4.4 is the correlation matrix of the variance
ROA ROE BS DER DAR DEAR LDR EAR IR GDP
The 0.7902 result of the correlation coefficient implies a strong positive correlation between Return on Assets (ROA) and Return on Equity (ROE) This means that banks that are more profitable in terms of asset utilization also tend to extend higher returns to shareholders This may be reflective of good management or good use of leverage The level of debt ratios: DER, DAR, and DEAR appear to be negatively correlated with the profitability ratios: ROA, ROE This is indicative that with a higher magnitude of debt, it may lead to poor profitability, perhaps due to interest expenses and resultant financial risk.
The EAR shows a moderately positive correlation with ROA, indicating that higher equity financing may enhance asset utilization; however, its effect on ROE remains ambiguous Conversely, LDR presents a weak positive relationship with both ROA and ROE, suggesting that increased lending from deposits could lead to greater profitability for banks, although further research is necessary to fully understand this relationship due to potential influencing factors.
Interest rates exhibit weak negative correlations with various economic variables, indicating that higher rates could potentially hinder profitability and economic growth (GDPGR) Conversely, GDP growth shows weak positive correlations with Return on Assets (ROA) and Return on Equity (ROE), implying that a flourishing economy may enhance bank profitability.
To find the relationship between the variances, the table 4.5 presents the Random-effects GLS regression, with ROA is the dependent variance
Table 4.5: Random effect OLS regression of ROA
Random-effects GLS regression Number of obs = 100
Group variable: BANK Number of groups = 20
Wald chi2(8) = 137.39 corr(u_i, X) = 0 (assumed) Prob> chi2 = 0
ROA Coefficient Std er r z P>lzl [95% conf interval]
- cons 59.7962 169.038 8.35 0.724 -271.51 391.105 sigma_u 0.19343 sigma_e 0.31932 rho 0.26844 (Fraction of variance due to u_i)
The table presents findings from a random-effects GLS regression analysis aimed at understanding the influence of independent variables—BS, DER, DAR, DEAR, LDR, EAR, IR, and GDPGR—on the dependent variable, ROA This approach accounts for potential correlations among observations within individual banks.
The R-squared values indicate a significant relationship between independent variables and Return on Assets (ROA) Specifically, 30.29% of the variation in ROA within individual banks is explained by these variables, while 80.15% of the variation in ROA between banks is accounted for Overall, the model explains 70.70% of the total variation in ROA Additionally, the extremely low p-value of 0.0000 confirms the model's significance, suggesting that at least one independent variable has a meaningful impact on ROA (Verbeek, 2017).
In the analysis of independent variables, DAR, EAR, IR, and GDPGR were found to be statistically insignificant, as indicated by their p-values exceeding the 0.05 threshold for statistical significance (Verbeek, 2017).
Similarly, the table 4.5 presents the Random-effects GLS regression, with ROE is the dependent variance
Table 4.6: Random effect OLS regression of ROE
Random-effects GLS regression Number of obs = 100
Group variable: BANK Number of groups = 20
Wald chi2(8) = 59.38 corr(u_i, X) = 0 (assumed) Prob> chi2 = 0
ROE Coefficient Std er r z P>lzl [95% conf interval]
- cons 1374.841 1838.608 0.75 0.455 -2228.764 4978.446 sigma_u 2.3325501 sigma_e 3.3493051 rho 0.3266048 (Fraction of variance due to u_i)
The model demonstrates a within R-squared of 0.2285, indicating that 22.85% of the variance within banks is accounted for In contrast, the between R-squared is 0.6429, signifying that 64.29% of the variance between banks is explained Overall, the R-squared value stands at 0.5181, suggesting that 51.81% of the total variance in Return on Equity (ROE) can be explained by the model Additionally, the Wald chi-square statistic is 59.38, with a p-value of 0.0000, highlighting the model's high significance (Verbeek, 2017).
The independent variables DAR, EAR, IR, and GDPGR are statistically insignificant, as indicated by their p-values, which all exceed the standard significance threshold of 0.05 (Verbeek, 2017).
In summary, both models indicate much insight into what controls bank profitability They highlight the significance of BS, DER, DEAR, and LDR in
49 determining both ROA and ROE But the models also reveal that some factors might not have significant effects on profit, at least in the context of these models.
CONCLUSION
Findings and implications
The Vietnamese banking sector is characterized by intense competition, marked by a multitude of players, market saturation, and low switching costs, prompting aggressive marketing strategies In this challenging landscape, banks must continually innovate to optimize their processes This thesis explores the intricate dynamics of the industry by examining the factors influencing bank profitability, risk appetite, and the competitive forces at play.
The Vietnamese banking sector is characterized by intense competition due to numerous industry players, market saturation, low switching costs, and aggressive marketing strategies In this challenging environment, banks must innovate and optimize operations to retain their competitive edge Strategic agility is essential for navigating the Vietnamese banking landscape, as only those banks that embrace technology, diversify their products, and provide exceptional customer service can sustain a competitive advantage and effectively create and deliver value.
Our empirical analysis identifies key determinants of bank profitability, measured by return on assets (ROA) and return on equity (ROE) Significant predictors include bank size, debt-to-equity ratio, deposit-to-asset ratio, and loan-to-deposit ratio The positive correlation between these variables and profitability underscores the importance of scale, leverage, and effective asset-liability management in influencing bank performance.
The rising loan-to-deposit and equity-to-asset ratios among Vietnamese banks indicate a growing focus on risk management and growth ambitions An elevated loan-to-deposit ratio suggests enhanced lending activities and the potential for greater returns, yet it also heightens credit risk for these banks Conversely, higher equity-to-asset ratios reflect improved financial stability and resilience, although this may result in reduced profitability.
Higher equity capital costs can impact profitability, even though increased loan-to-deposit ratios can enhance it Banks must carefully manage credit risk to preserve asset quality Additionally, while raising equity-to-asset ratios can bolster stability, it may require strategic pricing adjustments to sustain profitability.
Understanding the factors influencing bank profitability is crucial for banks to optimize their loan-to-deposit and debt ratios, enhancing returns while managing risks This knowledge aids regulators in developing targeted policies for financial stability, empowers investors to make informed decisions, and supports academic research Ultimately, it fosters the creation of new theoretical frameworks and policy recommendations, promoting a robust banking sector that drives economic growth.
This study enhances the understanding of the Vietnamese banking sector by integrating theoretical frameworks with empirical evidence Its findings hold significant policy implications for policymakers, regulators, and bank managers, as they provide insights into the determinants of bank profitability and risk-taking Such knowledge is crucial for developing effective regulatory policies that promote a sound and stable banking system.
This research aids regulators in tracking key financial ratios to identify potential risks in the banking sector For bank managers, the findings support strategic decision-making to navigate competition, manage risks, and enhance profitability The studies emphasize the importance of maintaining optimal scale, prudent leverage management, and optimizing asset-liability structures to maximize profitability.
Therefore, policymakers should pay heed to promoting competition, ensuring adequate capitalization, and monitoring risk-taking behavior to mitigate systemic
To ensure financial stability and mitigate risks, banks must prioritize investments in robust systems for risk identification and monitoring Additionally, diversifying the loan portfolio and establishing capital buffers are essential strategies for enhancing resilience and promoting long-term sustainability.
In summary, this dissertation highlights the complex nature of the Vietnamese banking sector, which presents numerous opportunities alongside significant risks and uncertainties As the sector experiences continuous growth, stakeholders must carefully analyze competition dynamics, risk appetites, and profitability to make informed decisions that will influence its future and support the country's overall economic development.
Limitation
This research offers important insights for the Vietnamese banking sector, yet it also presents several limitations that must be taken into account when interpreting the findings and determining future research directions.
The study's findings are constrained by the small sample size, as it only examined a limited number of selected listed banks in Vietnam Consequently, the results may not be applicable to the broader spectrum of banks within the diverse Vietnamese banking sector, which varies significantly in risk profiles Future research should expand the sample to encompass a wider range of both listed and unlisted banks, enhancing the representativeness and generalizability of the findings.
While this research has highlighted significant quantitative factors influencing bank profitability and risk-taking, it has overlooked a thorough examination of the qualitative aspects shaping bank behavior Future studies on bank profitability and risk-taking in Vietnam should incorporate qualitative methods to provide a more comprehensive understanding of these dynamics.
53 interviews or case studies, in order to deeply understand the strategic decision-making and risk management practices of banks.
Certain independent variables in the regression models were found to be statistically insignificant, potentially due to factors such as a limited sample size, measurement errors, and model misspecification To address these issues, future research should explore alternative model specifications or employ different statistical methods to enhance the understanding of how these variables influence bank profitability and risk-taking.
The study relied on publicly available financial statements and regulatory reports, which, while valuable, often lack precision regarding complex bank operations and risk behaviors To improve the analysis, future research should incorporate additional data sources such as internal bank records, survey responses, or qualitative insights from industry experts, allowing for a more comprehensive understanding of the subject.
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