A com parative study of financial performmance in the Vietnammese banking sector evidence for vietnamese leading joint stock commercial nanks Luận văn thạc sĩ

These financial characteristics are total assets, total shareholder’s equity, loans to customers, deposit from customers and the financial ratios such as probability, asset quality, oper

HOCHIMINH CITY UNIVERSITY OF ECONOMICS

-

Nguyen Huu Nhan

Ho Chi Minh City – December, 2010

HOCHIMINH CITY UNIVERSITY OF ECONOMICS

-

Nguyen Huu Nhan

Specialized in Banking & Finance

THE RESEARCH ADVISOR: VUONG DUC HOANG QUAN, Ph.D

Ho Chi Minh City – December, 2010

First of all, I would like to thank my supervisor Dr Vuong Duc Hoang Quan, whose never-ending optimism and patience encouraged me to continue on my path I appreciate very much the fact that Dr Vuong Duc Hoang Quan took the time to listen, discuss and help me fulfill this research

I would like to thank to the Banking Faculty, which support me to finish this thesis My sincere thanks to Mr Vo Xuan Vinh, Mr Dao Trung Kien for their supports during my hard time of study

Finally, I would like to say thanks to my family, who always support and motivate me all the life

Ho Chi Minh City,

Nguyen Huu Nhan

The purpose of this study is to classify the Vietnam commercial joint stock banks

in cohesive categories on the basis of their financial characteristics revealed by the financial ratios These financial characteristics are total assets, total shareholder’s equity, loans to customers, deposit from customers and the financial ratios such as probability, asset quality, operational efficiency and liquidity ratios

A sample of seven large Vietnam commercial joint stock banks total loans to customers comprise of 63% of total outstanding loans of the whole Vietnam commercial joint stock bank were financially analyzed, and simple regression was used to estimate the impact of asset management, operational efficiency, and bank size on the financial performance of these banks

The study found that the bank with higher total capital, deposits, credits, or total assets does not always mean that has better profitability performance The regression analysis results showed that financial performance of the bank was not strongly and positively affected by the operational efficiency, the asset management and the bank size

ACB :Asia Commercial Joint Stock Bank

AHP model : Analytical Hierarchy Process

ALM : Asset and Liability Management

ANOVA : Analysis of variance

ASEAN : Association of South East Asian Nations

ATM : Automated Transaction (or Teller) machine

AVSC : Au Viet Securities Co

BDD : Bad and doubtful debt

CAMELS model : Capital, Asset Quality, Management, Earning, Liquidity,

Sensitivity to Market Risk

CIC : Credit Information Center

EAGLES model : Earning ability, Asset quality, Growth rates, Liquidity,

Equity level and capital adequacy, effective SRQ

management-Eximbank (EIB) : Vietnam Export Import Commercial Joint Stock Bank GSO : General Statistics Office of Vietnam

IPO : Initial Public Offering

JSCB : Joint Stock Commercial Bank

Military Bank (MB) : Military Commercial Joint Stock Bank

RAROC : Risk-adjusted return on capital

ROA (A) : Return on assets (average)

ROE (A) : Return on equity (average)

ROSF : Return on Shareholder’s Fund

Sacombank (STB) : Sai Gon Thuong Tin Commercial Joint Stock Bank

SOCB : State-owned Commercial Bank

SRQ : Strategic response quotient

SWOT : Strengths, Weaknesses, Opportunities, and Threats

Techcombank (TCB): Vietnam Technological and Commercial Joint Stock Bank Vietcombank (VCB) : Joint Stock Commercial Bank For Foreign Trade of Vietnam Vietinbank (CTG) : Vietnam Joint Stock Commercial Bank for Industry and

Trade

VND : The currency of Vietnam

WTO : World Trade Organization

ACKNOWLEGEMENTS

ABSTRACT

ABBREVIATIONS

CONTENTS

LIST OF TABLES

LIST OF FIGURES

1.1 Background 1

1.2 Rationale of the study 3

1.3 Problem statement 3

1.4 Overall objective 3

1.5 Specific objectives 4

1.6 Scope and limitation 4

1.7 Structure of the thesis 4

2.1 Evaluating bank financial performance 6

2.1.1 Financial performance 6

2.1.2 Profitability 7

2.1.3 Capitalization 7

2.1.4 Asset quality 8

2.1.5 Operating efficiency 8

2.1.6 Liquidity 9

2.1.7 Other financial ratios 9

2.2 Asset and liability management (ALM) 10

2.3 Some models used in assessing the performance of bank 11

2.3.1 CAMELS model 11

2.3.2 SBV’s bank assessing framework 12

2.3.3 The EAGLES model 12

2.4 Some previous researches 13

2.5 Summary 15

3.1 Research framework 17

3.1.1 Suggested model in assessing and comparing banks 19

3.1.2 Financial indicators and ratios used in comparing banks 19

3.1.3 Variables 23

3.1.4 Hypothesis 24

3.2 Data for the study 25

3.2.1 Sampling 25

3.2.2 Data gathering 26

3.2.3 Data level of confidence 28

3.2.4 Data analysis 28

4.1 Comparisons of Vietnam leading joint stock commercial banks 30

4.1.1 Total assets 30

4.1.2 Total shareholder’s equity 32

4.1.3 Loans to customers 34

4.1.4 Deposits from customers 37

4.1.5 Return on total assets – ROAA 39

4.1.6 Return on shareholder’s equity – ROEA 41

4.1.7 Efficiency ratio 42

4.1.8 Asset quality 43

4.1.9 Liquidity 45

4.1.10 Ranks of chosen commercial banks 47

4.2 Hypotheses Testing 53

4.2.1 Relationships among the financial performance measured by ROA, and interest income size, and the independent variables (operational efficiency, asset management, bank size) 54

4.2.2 Independent variables impact on financial performance measured by ROA and interest income size 56

5.1 Conclusions 61

5.2 Implications 63

5.3 Recommendations for further study 63

REFERENCES

: Selected financial criteria and ratio for the comparison and ranking 20

: Selected variables in testing hypothesis 24

Total outstanding loans 25

Selected commercial banks to compare 26

: Data source to extract and calculate financial ratios 27

: Total assets of commercial banks 30

: Total shareholder’s equity 32

: Loans to customers 36

: Deposits from customers 38

: Return on total assets – ROAA 39

: Return on shareholder’s equity – ROEA 41

: Net interest income/total operating expenses 42

Provisions for loans losses ratio 44

: Loans to deposits 45

: Ranks of chosen commercial banks based on financial indicators 47

: Chosen commercial banks: Key average data (2004-2009) 54

: Correlations results 56

: (ANOVA) independent variables impact on financial performance measured by ROA and interest income size 57

: Research framework

: Suggested model in assessing and comparing banks 19

: Positive orrelations between variables 24

: The impact of asset management, operational efficiency and the bank’s size on the financial performance 25

Individual bank’s asset growth 31

: Total assets of commercial Banks 32

: Total shareholder’s equity 34

: Assets – Loans growth 35

: Loans to customers 37

: Deposits from customers 38

: Return on total assets – ROAA 40

: Return on shareholder’s equity – ROEA 42

: Net interest income/total operating expenses 43

Provisions for loans losses ratio 44

: Loans, deposits growth 46

: Loans to deposits 46

1

This chapter presents the overview of the study, including the background, rationale of the study, overall and specific objectives, scope and limitation At the end of the chapter, the structure of the study is presented

In recent years, Vietnam has been considered to be a dynamic economy in ASEAN region and the world The investors are attracted to Vietnam due to its largely untapped market with a population of over 86 million people according to General Statistics Office of Vietnam (GSO), strategic geography position, stable political conditions, and a high economic growth Over the last five years, the changed market economy has brought Vietnam to an average growth of six point nine per cent (6.9%) annually Normally, the country aims to gain the economic growth from seven to eight percent (7-8%) to bring Vietnam out of its position as

an undeveloped country [32]

One of the sectors in Vietnam exposed to rapid change is the banking sector It carries out the bridge for capital mobilization and distribution, satisfy the capital demand for the economy After the region financial crisis year 1997, the credit institution system in Vietnam has been restructured and developed with various ownership types As stated on the State-bank of Vietnam’s website at current, the credit institutions consists of three state-owned commercial banks; thirty nine joint-stock commercial banks; forty eight foreign bank branches; five joint-venture banks; fifty three foreign bank’s representative offices; sixteen finance companies; thirteen financial leasing companies; and other nine hundred fifteen local credit funds Total assets of credit institutions increased rapidly, especially

in JSCB group [22]

As a result of the imminent WTO accession and the obligations arising from bilateral trade agreements, Vietnam has committed itself to move to a market based economy and to create a level playing field for all participants, either state-owned or private, domestic or foreign (Bao Toan Tran, 2008) [3] Besides, five of 100% foreign banks allowed setting up business in Vietnam These banks are Standard Chartered, ANZ, HSBC, Shinhan, and Hong Leong bank as showed

on the SBV’s website The competition is increased not only commercial banks

of Vietnam but also foreign banks

In order to compete with foreign banks, domestic banks have to expand their sizes, networks operations The Government published paper no.141/2006/ND-

CP to push credit institutions increasing charter capital to 3,000 billion VND at end of year 2010 However, according to the banking industry report of BSC, most of commercial banks have presented the charter-capital-increasing plan except 21 banks [24] These 21 banks are finding way to attract capital of 31,400 billion VND This is a great pressure for bank to comply the new charter capital regulation

Because of lacking capital, therefore capital must be used with profitability In order to attract capital, bank’s financial performance has an important role for investors or shareholders to decide whether to invest or not

In addition, the world financial crisis was originated from the housing loan crisis

in the United States, and spreading around the world Many large banks declared bankruptcy or was purchased or taken over by other banks such as Lehman Brother, Merrill Lynch [30] So that, banks in Vietnam need to reconsider their financial performance

Fitch, the credit rating agency has lowered its ratings for two big banks, citing

3

rapid growth in their outstanding loans Fitch lowered its grades for the two banks, Vietcombank (VCB) and Asia Commercial Bank (ACB), from D to D/E, a level suggesting that they have serious problems that may require outside assistance [31]

In the banking sector, there has apparently been no in depth study of comparing financial performance of Vietnamese banks This thesis aims to fill in the gap, at least partially

The study looks at financial performance in the banking sector in Vietnam Bank managers can understand its major banking activities that may increase the bank ranking and financial performance position comparing with other banks

The study provides such information should help the management of commercial banks in creating appropriate financial strategies for attaining the required planned financial performance

In addition, the SBV reconsiders published policies and have relevant solutions to support commercial banks to develop based on information of this study

Commercial banks need to re-consider their financial performance in order to discover its advantages as well as disadvantages to attract capital, deposits from depositors, shareholders and investors

The purpose of this study is to compare the Vietnam seven leading commercial joint stock banks on the basis of their financial characteristics

The specific objectives of the thesis include:

 To obtain an overview of the financial performance evaluation of bank, some models and previous researches involved

 To develop a research framework for making comparison among seven leading joint stock commercial banks in Vietnam

 To gain better understanding the financial performance of seven leading joint stock commercial banks base on applying the proposed research framework

 To provide some recommendations on how to improve financial performance position for banks

The scope of the study is Vietnam joint-stock commercial banks, which consists

of seven (07) large commercial banks These banks account for 63% total loans

of the Vietnam joint-stock commercial banks at the year end 2009 indicated by CIC report at December, 2009

Like any other study, this study is also not without its limitations The result of this study is written based on the declared-figures available to the researcher and based on the proposed research framework, variables and hypothesis as selected

by the author Some results, assessments in this thesis were belonged to the author’s analysis

The thesis is presented in 5 chapters: The details of these chapters are:

is the introduction

deals with theoretical the relevant literatures, models and previous

5

studies

defines the methodology of the study

provides details of the results and discussions

presents the main conclusions, implications and recommendations for further study

Chapter 2 presents the literature review, which explains the financial performance evaluation of a bank, and some models commonly used in assessing bank financial performance This chapter also reviews a number of previous researches selected to the subject study

As stated in an article of Bora Aktan and Cagri Bulut (2008), financial performance refers as a firm’s ability to generate new resources from day to day operations over a given period of time [4] According to the website of Investopedia, financial performance is defined as a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues This term is also used as a general measure of a firm's overall financial health over a given period of time, and can be used to compare similar firms across the same industry or to compare industries or sectors in aggregation According to Benton and James (2005), the bank financial performance is evaluated with financial ratios Based on the accounting data contained in the bank’s annual report, financial ratios are extracted or constructed to assess the various characteristics of the performance There is a wide variety of financial ratios to measure the performance of the bank However the key ratios commonly used by analyst in evaluating are profitability, capitalization, asset quality, operational efficiency, liquidity and other financial criteria [5]

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The principal bank goal is to achieve cash-flows and maximize shareholder wealth Therefore, the profitability is very important to evaluate the bank performance This indicator is measured by profitability ratios These ratios measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return In banking sector, there are lots of profit ratios such as the rate of return on assets (ROA), the return on equity (ROE), the unraveling profit ratios, the net interest margin, etc… however, the two most frequently used

by bank’s managers to measure the profitability of a bank are ROA and ROE ROA measure the ability of management to utilize the real and financial resources of the bank to generate returns, and it is commonly used to evaluate the bank management

Another ratio is ROE, which stated the rate of return on the ownership interest of the shareholders It measures a bank's efficiency at generating profits from every unit of shareholders' equity ROE shows how well a bank use investment funds to generate earnings growth

Capitalization is an important form of financing for a bank It is understood as the leverage of a bank, which refers to the use of debt to finance for banking business The source of capital of bank comes mostly from liabilities Unlike other industries, these liabilities include deposits from customers, other financials institutions, borrowings from the SBV and other liabilities Capitalization directly influences the rate of return on equity It should be obvious that a high equity multiplier can increase both ROE and the growth rate

of the bank as long as ROA is positive On the other side, if ROA is negative,

ROE would be magnified in a negative direction

Asset quality can be assessed only using financial ratios Because most of earning assets of the bank focus on loans to customers, so the outstanding loans

is certainly best way to evaluate asset quality Some ratios can be computed to provide as loan ratio, provisions for loan losses, non performing loans, bad debt, etc… Loan ratio indicates which assets are devoted to loan while provisions for loan losses: each bank calculates the estimate future loans losses as an expense

on its income circumstance

Generally, the concept of efficiency can be regarded as the relationship between outputs of a system and the corresponding inputs used in their production Within the financial efficiency literature, efficiency is treated as a relative measure which reflects the deviations from maximum attainable output for a given level

of input (English M and Warng, 1993) [7]

Operating deals with the production of outputs, such as deposit and loan accounts and securities services, at a minimum cost per account This is a primary factor to distinguish high- and low-profit banks The efficiency ratio measures the proportion of net operating revenues absorbed by overhead expenses It is calculated by dividing non interest expense less amortization of intangibles by total revenues

Most previous studies concerning company performance evaluation focus merely

on operational efficiency and operational effectiveness which might directly influence the survival of a company By using an innovative two-stage data

9

envelopment analysis model in their study, the empirical result of this study is that a company with better efficiency does not always mean that it has better effectiveness A paper in the title of efficiency, customer service and financing performance among Australian financial institutions of Elizabeth and Elliott (2004) showed that all financial performance measures as interest margin, return

on assets, and capital adequacy are positively correlated with customer service quality scores [6]

Liquidity can be defined as the extent to which the bank has funds available to meet cash demands for loans and deposit withdrawals Four common liquidity ratios frequently used by bank analyst to measure the bank liquidity are:

 Loans / deposits

 Loans / non-deposit liabilities

 Unencumbered liquid assets/non-deposit liabilities

 Near-cash assets/large-denomination liabilities

Besides the ratios discussed previously, the analyst can construct other financial ratios if it is believed that it can help to reveal the strengths and the weaknesses according to the study

As the above framework for assessing bank performance, traditional measures of bank performance on both risks and returns because the relationship between risk and return is accepted that the higher the expected return attach with the higher risk Simply stated by Hempel G Coleman (1986), much of the current bank performance literature shows the goal of financial institutions is to earn

acceptable returns and minimizing the related-risk to take this return [8]

In order to earn profits, bank must accept risk They balance alternative strategies in seeking to maximize shareholder wealth Management decisions include various strategies on the returns and the risks In general, the ultimate objective of bank management is to maximize the value of the shareholder’s equity shares by attaining the optimal mix of returns and risks

Bankers make decisions everyday about making loans, funding their investment, trading securities, value papers to earn profit Based on the fluctuation of the market, inflation and volatile interest rates, consumer, competition, globalization, the decisions include the structure of assets and liabilities and the degree of risk that the bankers are willing to take… Obviously, these decisions affect directly to the bank income and also the balance sheet value ALM is generally considered as a short run strategy focusing on balance sheet management necessary to achieve financial goals The traditional objective of ALM has been to control the size of the bank’s net interest income

According to risk concept, ALM decisions extend to hedging, or off-balance sheet policies, and to business, or on-balance sheet policies to obtain the risk and the expected values of the target variables, interest income or the mark-to-market value of the balance sheet at market rate

Arzu Tektas, and Gunay (2005) discussed the asset and liability management in financial crisis [1] They argued that an efficient asset-liability management requires maximizing bank's profit as well as controlling and lowering various risks, and their study showed how shifts in market perceptions can create trouble during crisis

11

There are some models or frameworks used in assessing bank performance The model or framework showed in this study, which are CAMELS, SBV frameworks, EAGLES model The details of these models are as follows:

Showed in the study of Tihomir H and Drago J (2001) that CAMELS model was developed in the early seventies in the United State of America [15] The system that lays down the bank rating foundations was developed by the government Federal Deposit Insurance Corporation (FDIC) and is known as CAMELS The CAMELS acronym stands for Capital adequacy, Asset quality, Management, Earnings and Liquidity

The essence of the system is for the bank rating to be done on the basis of five components reflecting the bank’s performance: capital, assets, management, equity shares and liquidity Although nearly all the components (apart from management) can be quantitatively measured, due to the existence of developed metrics, the CAMEL model assesses them on the scale 1 - 5, in accordance with the expert assessment on the problem identification level Following the achieved rating, the frequency of the bank operations auditing is then determined; the banks with CAMEL 3, 4 and 5 rating need to be audited on an annual basis while those with 1 or 2 rating need to be audited at least once in two years This system is mentioned in this paper merely as an example showing how

it is possible to transform normally precisely measurable bank performance data into quality-related, less precise information, subsequently integrated into a complete evaluation

According to the decision number 06/2008/QD-NHNN issued on March 12th,

2008 by the SBV to rate commercial bank, the SBV built ratings indicators the same as CAMEL model The component of these criteria consists of capital account for (15%), asset quality (35%), management (15%), earnings (20%) and liquidity (15%) on total (100) points Each component has some attached elements that commercial banks have to satisfy so that they can get the maximum points for each indicator If the bank do not satisfy, it will be deducted the points The points based on the performing of the bank and instructed in the ratings regulation

According to Mr John V discussion about why CAMEL failed to recognize the weakness of banks, he stated that many analysts or bank inspectors use the CAMEL for analyzing banks and not knowing the disadvantages of the model

[19]

In the CAMEL, analysts assess five key aspects of the operations of a financial institution, rating them on a scale of 1 to 5 An overall rating of 1 is best while a rating of 5 implies a bank being laden with existing or potential problems However, the CAMEL approach suffers from indeterminacy, subjectivity and even inconsistency As most bank analysts and examiners will acknowledge, there are instances when an examination of the accounting records cannot decide whether to give an average or below average score The ‘good’ and ‘bad’ indicators are easy to spot, but not so the ‘in-betweens’ This is a problem of indeterminacy But when bank inspectors are forced to make judgment, then it leads to the second problem of subjectivity And where human minds are at

13

work, they come with differing levels of expectations and perspectives

So in is of little wonder why CAMEL has failed to recognize weaknesses in banks before the crisis The EAGLES is able to measure and compare banks performance in a more determinate, objective and consistent manner The name

is derived from the key success factors confronting banks today, i.e Earnings ability, Asset quality, Growth, Liquidity, Equity and Strategy This approach has been pioneered by the writer and has gained creditability among the banking community and fund management industry in Asia, for competitor analysis and investment planning respectively It also predicted the Asian financial crisis in the 1980s when the writer was “banned” from data collection in many countries

There are a lot of researches concerning the rating among banks Most of researches used various models or frameworks to make comparison between banks

Based on their assets size, Spathis and Doumpos (2002) investigated the effectiveness of Greek banks [13] They used in their study a multi criteria methodology to classify Greek banks according to the return and operation factors, and to show the differences of the banks profitability and efficiency between small and large banks The evidence of this study indicated that large banks were more efficient than small ones; the size of a bank was crucial; small banks seem to be more efficient and vulnerable; and large ones had lower operating cost due to the scale economies and their network

Medhat Tarawneh (2006) conducted a study involved in comparing the financial performance in the Omani commercial banks [10] The research classified commercial banks in Oman on the basis of their financial characteristics as a

guide line for future development, and to assess their financial performance Financial indicators and financial ratios are constructed from the bank financial reports to evaluate the performance of a commercial bank The study took into account financial ratios like return on assets (ROA), asset utilization, and operational efficiency are calculated, Also, measures as assets size, and the interest income size are used to assess the performance of a commercial bank However, it is hypothesized for this study that there exist positive correlations among return on assets, asset management, operational efficiency, bank size, and the interest income size In addition, there exist an impact of asset management, operational efficiency, and the bank's size on the financial performance of the bank The result of the study is showed that financial performance of the bank was strongly and positively influenced by the operational efficiency, assets management, and the bank size It also provided bank managers with understanding of activities that would enhance their banks financial performances

Also, there are analysis reports about the Vietnam banking industry of some domestic financial institutions such as MHB Securities co and Au Viet Securities

co (AVSC), etc…

The MHB securities company analyzed Vietnam banking industry in November,

2009 [20] This report showed the historical banking industries, banking situation

in 2008, SWOT analysis, and some factors affect to the listed bank then some forecasts proposed to the bank’s stock price With the strengths, Vietnamese banks had the advantages of large networks and understood the business Vietnamese banks developed in a very short time so that they have less experience in response to the outside affects, especially the financial crisis since

15

2007-2008 However, the prospect of banking market is still high because according to Moody’s, only 17% Vietnam population had the account in banks and retail banking services is less developed

In a report in February, 2010 of AVSC, they had some assessments on total assets, capital structure, operational efficiency of six commercial banks listed on the stock market The assets of banks strongly increased in 2009 after low growth in two previous years because of the government’s monetary policy The liquidity was quite in troubles because the strong increase in loan but low increase in deposits The ROA of the banking industry nearly did not change over the years [21]

The world financial crisis was originated from the housing loan crisis in the United States, many large banks declared collapsed This crisis was spreading around the world and affected a lot of countries Vietnam was also influenced by the crisis, however the impacts were not too serious because the joint to the world’s economics of Vietnam has not in depth Also, Vietnam exploded lots of troubles, such as high inflation, trade deficit, etc… The troubles caused the Government adjust the monetary policy to control inflation, and stimulate the economy to grow In spite of the involved-monetary policy, commercial banks were affected strongly although they have had high growth rate as before Nevertheless, it is about time for bank managers and investors to re-evaluate the commercial banks of Vietnam towards operational efficiency, the competitive ability

Based on the above literature and some previous studies, we need to test whether the bank with higher bank’s size bring more profitability than smaller

bank’s size or not There are studies comparing and rating bank in domestic and foreign countries However, no in depth study has ever been done because of probably lack of sufficient information The main contribution of this study is to make financial comparison based on total assets, total shareholder’s equity, loans

to customers, deposits from customers, return on assets, return on equity, and other financial ratios to determine the performance and classifications of Vietnam leading commercial joint stock banks

17

Chapter 3 presents the steps to carry out the research and hypotheses testing to find out the correlations and the impact of some factors on financial performance The data gathering and source of data is also indicated in this study

to ensure the reliability of the income data Besides, this chapter shows the tools

to analyze the data and compare the results

The research framework is based on the one suggested by Medhat Tarawneh (2006) involve in comparing the financial performance in the Omani commercial banks [10] With the result stated that the bank with higher predictors of total assets, credits, deposits, or shareholder equity does not always mean that it has better profitability performance; and financial performance of the banks was strongly and positively influenced by the operational efficiency, and asset management, in addition to the bank size Therefore, it needs to be checked in Vietnam banking industry again to examine the differences or similarities with the study of Medhat Tarawneh

This study used most of variables, hypotheses of Medhat T (2006) because it applied some financial indicators which the author can collect the data However, this research is adjusted by amending some financial ratios from EAGLES model because EAGLES model is able to measure and compare bank performance in a more determinate objective and consistent manner This approach has been gained creditability among the banking community and fund management industry in Asia, for competitor analysis and investment planning respectively There is a different in choosing financial ratio to compare among banks This

study uses more financial item and ratios (asset quality, efficiency, liquidity ratios) than that of Medhat Tarawneh This ratio is adjusted in order to correspond to Vietnamese banking current situation

Figure (3.1) presents the research framework, it consists of five steps The steps are modified as follows:

 Step 1: In order to comparing bank, a comparing banks model is suggested based on some models in assessing banks such as the CAMELS, the SBV’s model, EAGLES The financial indicators and ratios are extracted and calculated to make comparison among sample banks

 Step 2: Some variables are selected to measure the link between financial indicators and the measure impact of some financial predictors on

p

19

financial performance of banks

 Step 3 shows the suggested hypotheses to measure the relationship among selected variables and the impact of bank size, operational efficiency and asset management on financial performance

 The next step displays the data gathering and analysis method used in this study

 The final step is to test the hypotheses and some conclusions are extracted from the research

In order to compare and rank commercial joint stock banks, some financial indicators are chosen to determine the similarities and differences

This model is relevant to the reality of Vietnam banking sector because the financial indicators/ratios can be collected to conduct the research

The standard financial indicators and ratios are used as criteria to indicate special aspect of the bank performance In order to classify the commercial banks, this study uses the major banking activities and some financial indicators,

profitability ratio, assets quality, liquidity ratio, and efficiency ratio Table (3.1) shows the structure of criteria used in bank rating model The criteria encompass only the quantitative indicators of bank financial performance

Total assetsTotal shareholder’s equityTotal loans

Total deposits Return on assets (ROA)Return on equity (ROE) Net interest income / total operating expensesProvisions for loans losses / Loans

Total loans / total deposits consist of total assets, total shareholder’s equity, deposits and total loans These financial indicators indicate that how the bank mobilize capital and allocate their capital to earn profit The used of four main indicators show the size of the bank These financial indicators are extracted from the consolidated balance sheet form B 02/TCTD-HN according to Decision number 16/2007/QD-NHNN of the SBV

- Total loan is measured by “loans, advances and finance leases to customers” equivalent to VND

- Total deposit is measured by “deposits from customers” equivalent to VND

is frequently used by many researchers in studying the bank performance

- measures the ability of management to utilize the real and financial resources of the bank to generate returns This number tells you what the bank can do with what it has, i.e how many dollars of earnings the bank derive from each dollar of assets they control It can be computed as:

100

x assetsTotal

incomeNet

asset

on return of

- measures the rate of return on the ownership interest of the shareholders It measures a bank's efficiency at generating profits from every unit of shareholders' equity ROE shows how well a bank uses investment funds to generate earnings growth The formula of ROE as:

100capitalequity

Total

incomeNet

(%)equity

on return of

is measured by net interest income divided by total operating expenses Most of bank in Vietnam earn profit from credit facilities, so the interest income accounts for high density on total income of the bank In stead of using capital for lending, bank has to pay for interest expense The net interest income is calculated by interest income less interest expense If the net interest income can compensate for the total

operating expenses, the bank is working efficiency In contrast, the bank is not efficiency It is computed as follows:

100expenseoperating

Total

incomeinterest

Net (%)

non-100leases

andloansTotal

lossesloan for Provision (%)

ratiolossloansfor

23

ratio is used by the EAGLES ratio This study takes the loan-to-deposits ratio (LDR) to measure the liquidity of the bank to make comparison

100customersfrom

Deposits

customers to

Loans(%)

of the study are the following:

- The bank size measured by the of the bank

- Asset management measured by assets (Operational income divided by total assets)

- Operational efficiency measured by the operating (net interest income divided by total operating expenses)

Dependent

variables

Financial performance

Return on assets (ROA)

Interest income size

Independent

variables

Bank size Total assets

Asset management

Asset utilization ratio (Operational income divided by total assets)

Operational Efficiency

Operational efficiency ratio (Net interest income divided total operating expenses)

1 There exits positive correlations among return on assets, asset management, operational efficiency, bank size, and the interest income size

2 There exits the impact of asset management, operational efficiency, and the bank’s size on the financial performance of the bank

25

As stated on the State-bank of Vietnam’s website at current, the credit institutions consists of three state-owned commercial banks; thirty nine joint-stock commercial banks; forty eight foreign bank branches; five joint-venture banks; fifty three foreign bank’s representative offices; sixteen finance companies; thirteen financial leasing companies; and other nine hundred fifteen local credit funds

102 1,715,240

Source: Extracted and calculated from CIC, No 04/2010

Bank size

Asset management

Operational

efficiency

Financial Performance

ROA Interest Income Size

Total outstanding loans at year end 2009 reached equivalent 1,715,240 billion VND as report of CIC Because lacking of information, the author decides choosing JSCB group to do the research because the information of SOCB group is not public and is difficult to collect In JSCB group, a group of 07 large banks is selected to make comparison as stated in table (3.4) because these banks have large bank size and outstanding loans

of them are listed on the stock market, except Techcombank and Military Bank

The data for the study is gathered from bank’s financial statement as published

27

in the annual report for the period of (2004-2009) and the prospectus of each one These reports are downloaded from website of selected bank In addition, another source of data was through references to some journals and the reviews

of different articles, papers, and relevant previous studies

The data are used for collecting and/or calculating key financial ratios in order to assess and compare the performance of these banks is sourced as table (3.5):

RATIO

Return on assets (ROA)

Annual report Return on equity (ROE)

EFFICIENCY RATIO Net interest income / total

statements

LIQUIDITY RATIO Total loans / total deposits

Based on the data over the period (2004-2009), the author calculated the average data for all selected financial criteria and the growth rate of financial indicators (total assets, total shareholder’s equity, total loans to customers and deposits from customer) at year end 2008 compared with year 2004

All of the financial report of selected bank is audited by the Big Four The Big Four are the four largest international accountancy and professional services firms, which handle the vast majority of audits for publicly traded companies as well as many private companies, creating an oligopoly in auditing large companies The Big Four firms are KPMG, Price Waterhouse Coopers, Ernst and Young, Deloitte, so that the level of confidence of the figures is acceptable

This study uses a descriptive financial analysis to describe, measure, compare, and classify the financial situations of Vietnam leading joint stock commercial banks

For financial indicators as total assets, total shareholder’s equity, total loans to customers and deposits from customer, the growth rate is analyzed and compared among banks In addition, the average data over the years is used to rating the selected banks, which range from one (1) to seven (7), the best is number 1 and the worst is number 7 For total assets, total shareholder’s equity, loans to customers, deposits from customers, profitability, bank with higher average figure is rank better But with efficiency ratio, asset quality ratio and liquidity ratio, the lower the average ratio the better for the banks is compared and ranked

Also, this study tries to explore any kind of variance according to its different variables Therefore, correlations prediction, ratio analysis, and simple regression were applied to examine and compare the impact of independent variables on the dependent variable

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Analysis of variance (ANOVA) was used in testing the hypotheses and to measure the differences and similarities between the sample banks according to their different characteristics Pearson correlation coefficient also used to investigate the correlation between the paper variables at 5% level of confidence according to the SPSS software package