Factors affecting performance of listed commercial banks: evidence on Vietnamese securities market

Factors Affecting Performance of Listed Commercial Banks: Evidence on Vietnamese Securities Market TRAN QUOC THINH Banking University of Ho Chi Minh city - thinhtq@buh.eud.vn HOANG YEN

Factors Affecting Performance of Listed Commercial Banks: Evidence on Vietnamese Securities Market

TRAN QUOC THINH

Banking University of Ho Chi Minh city - thinhtq@buh.eud.vn

HOANG YEN NHI

BNP PARIPAS Bank, Branch of Ho Chi Minh City - hoangnhi94.buh@gmail.com

Abstract

In the trend of integration with the region and the world, Vietnam has joined economic organizations such

as the ASEAN Economic Community (AEC) or Trans-Pacific Partnership (TPP) This contributes to creating conditions for the development of Vietnam, especially domestic commercial banks (CBs), the central coordinator for economic capital However, the competitive challenges also posed many problems to be solved The authors uses quantitative methods to determine the factors affecting the performance of the listed commercial banks On this basis, the authors proposed a number of policies related to cost control, credit quality, and development strategies in line with the orientation of the sector, increasing investment in machinery and application technology This should lead to enhanced operational efficiency for listed commercial banks to make their presence felt along with sustainable development

Keywords: performance; commercial banks; economic integration

1 Introduction

Bank birth and development are associated with the development of commodity economy to address the needs of capital distribution, billing, production and business expansion of economic organizations and individuals In the context of globalization, Vietnam joined the ASEAN Economic Community (AEC) in 2015; the issue of financial liberalization is the inevitable trend of the country Moreover, the Trans-Pacific Partnership (TPP) signed in 2016 brought many economic benefits to Vietnam together with favorable chances of development in many economic aspects However, the integration process requires commercial banks to improve competitiveness as well as administrative capacity and to ensure safe operation and efficiency Thus, bank performance becomes an important criterion for assessing its existence and development in such a competitive international environment

2 Overview of research and methodology

2.1 The concept of performance

There are many existing views about perceived performance, depending on the field of study A British economist, Adam Smith (1737-1790), stated that the performance is the result achieved in economic activity, the consumption of goods turnover In this view, Adam Smith equated the effectiveness and results; the different cost levels yielded the same result and the same effectiveness (Fry, 2005) Some other views for that performance are determined by the ratio of the results achieved and the cost of money to get results One typical example is Kuhn (1999), who suggested that the effectiveness is determined by taking the results calculated by dividing the unit value for business expenses, as agreed by many economists and business executives given operational efficiency However, correlations among quantity and quality and cost outcomes have not been supported Woele (1990) asserted that efficiency ratio is the relationship between output per unit in kind and the amount of input factors (labor hours, day labor, equipment units, materials, etc ), called the performance of technical nature According to this view the performance reflected rises in the productivity of inputs and outputs Doring (2000) suggested that the operational efficiency ratio is the relationship between the business expenses paid out in the most favorable conditions for business and the actual cost to spend, considered effective in terms of value Efficiency is determined by identifying the lowest business costs in the most favorable conditions bringing actual costs incurred versus planned costs (Weber, 2009)

Rivard and Thomas (1997), one of the pioneers to suggest performance efficiency measurement which was recognized by many researchers, maintained that the performance is measured through several indicators such as earnings per share (EPS), rate of return on assets (ROA), and return on equity (ROE) Within the scope of the study of all this article, the authors focus on ROE as this is one

of the indicators used in the field of popular economy

2.2 Previous studies

Staikouras (1999) used quantitative analysis method to study the effectiveness of the 685 European banks during 1994-1998 Many factors found to positively affect performance include the stock market size, total assets, total loans to total assets, risk provisions, and loans to total loan amount, which also affects bank performance but in the opposite direction Naceur (2003) performed non-parametric analysis of the impacts of these factors on the performance of 10 banks in Tunisia for the period 1980-2000 The results showed that the economic indicators such as inflation and macroeconomic growth have no impact on net profit Badola and Verma (2006) used multivariate regression models to study the factors affecting the profitability of 27 listed banks in India for the period 1998-2004 They detected effects of total revenue, expenditures for technology upgrades, credit risk reserves, and the difference between interest receivable and interest payable Athanasoglou et al (2006) adopted quantitative methods to study the factors affecting the performance of 132 banks in southeast Europe (1998-2002), indicating that credit risk, operating costs, and capital size negatively impact on performance and that high credit risks as ROE decrease the impact Tariq et al (2014) studied the determinants of the efficiency of commercial banks in Pakistan for the period 2004-2010 with a sample of 17 commercial banks They explored the capital resources of banks that make sense in the performance of the bank Recently, Duraj and Moci (2015) examined the factors affecting the banking operation efficiency by means of multivariate regression for the case of 16 banks in Albania in 1999-2014, and demonstrated that except for ratio of nonperforming loans to total loans, the remaining factors such as liquidity risk or inflation negatively influence ROE, while debt levels and economic growth may have similar effects on ROE

In Vietnam, Nguyen (2008) applied a combination of qualitative and quantitative methods to their study of the factors affecting the performance of 32 commercial banks in Vietnam, 2001-2005 His empirical results showed significant factors affecting liquidity risk and proportion of loans As such,

in order to improve efficiency, banks need to reduce liquidity risk, strengthening the capacity of managers, reducing the proportion of lending to those that cannot afford to finance Trinh and Nguyen (2013) also studied the factors affecting the performance of 39 Vietnamese commercial banks for the period from 2005 to 2012 and concluded that the rate of return, ratio of equity to total assets, and ratio of loans to total assets have significant impact levels Most recently, Nguyen (2015) analyzed the factors affecting the profitability of 9 listed commercial banks in Vietnam stock market between

2009 and 2014, showing the five factors affecting margins, the operating cost factors that affect the most profitable banks, followed by loans, liquidity, inflation and the end user and credit risk

2.3 Research methods

The authors use quantitative methods with the assistance of SPSS 20 software as well as Microsoft Excel to make the calculations, statistical description, data processing, and analysis of regression models

3 Study design

3.1 Sample

The research sample contains 9 listed joint-stock banks in the stock market of Vietnam, whereas the research phase covers the 2010 – 2015 period

3.2 Description of the variables studied

Table 1

Description of the variables used in the regression model

Dependent variable:

ROE (Y)

margins on equity = (Net Profit / Average Equity) x100%

Independent variables:

TCTR (X1)

The ratio of operating expenses to total revenues

= (Total operating expenses / net sales) x100%

Independent variables:

logTA (X2)

Independent variables:

LOANTA (X3)

rate of loans to total assets = (Loans to customers / Total assets) x100%

Independent variables:

ETA (X4)

Ratio of equity to total assets = (Equity / Total assets) x100%

Independent variables:

TK (X5)

Liquidity Index = (assets with high liquidity / Total assets)

x100%

Independent variables:

NCA (X6)

The percentage value of the investment

in machinery and equipment and computer software on assets

= (Value of investment in machinery and equipment and computer software / Total assets) x100 %

Independent variables:

GDP (X7)

Economic growth y = (dY/Y)x100%

3.3 Research model

The authors employ a combination of approaches as suggested by Athanasoglou et al (2006) and Nguyen (2015) in addition to surveying a number of experts to compute the ratio of investments in machinery computer software and equipment to total assets to match the characteristics and conditions of the commercial banks in Vietnam Therefore, a multivariate regression model is designed as follows:

Yi= β + β1*X1+ β2*X2+ β3*X3+ β4*X4+ β5*X5+β6*X6+β7*X7+ ε

where:

Yi: dependent variable

Y: Rate of return on equity (ROE)

Xi: independent variable

X1: The ratio of operating expenses to total revenue (TCTR)

X2: The size of assets (logTA)

X3: The rate of loans to total assets (LOANTA)

X4: The ratio of equity to total assets (ETA)

X5: Liquidity index (TK)

X6: Percentage value of investment in machinery and equipment and computer software on assets (NCA)

X7: Economic growth (GDP)

Regression coefficients: β1, β2, β3, β4, β5, β6, β7

Regression error: ε

4 Results and discussion

4.1 Descriptive statistical analysis

Table 2

Results of descriptive statistics of variables

Valid N (listwise) 54

Source: data analysis using SPSS 20

The average of ROE reaches 12.20%; however, the standard deviation of up to 706.13% shows significant differences in the uses of capital efficiency by the bank owner, or in other words they do not resemble each other

TCTR average value is 60.13%, implying that the cost-to-income ratio reveals a very high proportion The range from 35.62% to 103.71%, which is a large gap, shows no similarities between commercial banks in the use of cost

LogTA average value is 8.29%, according to which the standard deviation of up to 40.24% does not indicate the presence of similarities in terms of total assets among the Banks

LOANTA average value is 56.14%, so the loan accounts for the majority of the total assets of the bank However, the range from the minimum value to the maximum value (36.23% - 71.00%) is relatively large, showing no similarities in the scale of customer loans among the banks

ETA average value of 8.02% and standard deviation of 2.11% show the similarity of the ratio of equity to total assets of commercial banks listed on the stock Vietnam stock

TK average value is 22.00%, while the minimum value is 6.41%, and the maximum value is 42.90%, so the very large range shows no similarities in liquidity among the banks

NCA average value of 0.09% and standard deviation of 6.05% illustrate a very high level of similarity as seen in the increase in investments in the machinery and equipment and computer software by the joint-stock banks

GDP average value of 5.88%, and a low range from 6.78% to 0.00% show the stability of economic growth between years

4.2 A correlation analysis

Table 3

Results of correlation analysis in the model

(ROE)

X1 (TCTR)

X2 (log(TA))

X3 (LOANTA)

X4 (ETA) X5(TK)

X6 (NCA)

X7 (GDP)

Y (ROE) Pearson

correlation

1 -.766 ** 434 ** -.127 -.431 ** 264 254 210

X1 (TCTR) Pearson

correlation

-.766 ** 1 -.412 ** 070 205 -.361 ** -.140 -.210

X2 (logTA) Pearson

correlation

.434 ** -.412 ** 1 489 ** -.609 ** -.092 119 -.055

X3

(LOANTA)

Pearson

correlation

-.127 070 489 ** 1 -.135 -.738 ** 137 -.078

X4 (ETA) Pearson

correlation

-.431 ** 205 -.609 ** -.135 1 -.014 043 -.106

Variable Y2

(ROE)

X1 (TCTR)

X2 (log(TA))

X3 (LOANTA)

X4 (ETA) X5(TK)

X6 (NCA)

X7 (GDP) X5(TK) Pearson

correlation

.264 -.361 ** -.092 -.738 ** -.014 1 -.157 182

X6 (NCA) Pearson

correlation

X7 (GDP) Pearson

correlation

.210 -.210 -.055 -.078 -.106 182 039 1

Source: data analysis using SPSS 20

Table 3 shows the independent variables CI, logTA, LOANTA, ETA, TK, and NCA with Sig <5%, but GDP with Sig.> 5%

4.3 Assessing the suitability of the model

R2 and adjusted R2 is used to evaluate the suitability of the model However, the adjusted R2, which is greater, indicates the better relevance of the model

Table 4

Evaluation of the relevance of the model

R R Square

Adjusted R Square

Std Error of the Estimate

Change Statistics

Durbin-Watson

R Square Change F Change df1 df2

Sig F Change

Source: data analysis using SPSS 20

The results of analysis and evaluation of the relevance of the model show that the value of adjusted R2 is 69.3%

4.4 Testing for the suitability of the model

The test is conducted with the following hypothesis of the relevance of the overall linear regression model:

H0: βi = 0: Variables included in the model do not affect the performance level H1: βi ≠ 0: Variables included in the model affect the degree of operational efficiency

Table 5

Results of model ANOVA analysis

Source: data analysis using SPSS 20

According to ANOVA analysis, Sig = 0.000 implies that H0 should be rejected So, this model is suitable for analyzing the factors affecting ROE

4.5 The regression results

Table 6

Summary of the results of regression analysis

Model

Unstandardized Coefficients

Standardized Coefficients t Sig Collinearity Statistics

X3 (LOANTA) -26.983 11.245 -.370 -2.399 021 243 4.114

Source: data analysis using SPSS 20

Model results:

ROE = 32,978 -0,679*TCTR -0,370*LOANTA -0,265*ETA+ 0,167*NCA

4.6 Discussion of research results

Taken into account are the factors affecting the performance of listed banks drawn from the research results of the factors affecting ROE: the ratio of total operating expenses in total revenue, the ratio of loans to total assets, the ratio of equity to total assets inversely and proportionally impacting on ROE; however, the value of investment in machinery and equipment and computer software have a positive impact on ROE:

β4 = -0.679 <0 represents the inverse relationship between the proportion of total operating expenses to total revenues and margins on equity; thus, while this rate increases by 1 unit, ROE will decrease by 0.679

β5 = -0.370 <0 represents the inverse relationship between the proportion of loans to total assets ratio and return on equity; thus, while this rate increases by 1 unit, ROE will decrease by 0.370 β6 = -0.265 <0 represents the inverse relationship between the ratio of equity to total assets and rate of return on equity While this rate increases by 1 unit, ROE will decrease by 0.265

β7 = 0.167 > 0 represents the positive relationship between the investment in machinery and equipment and computer software and profitability on equity While this rate increases by 1 unit, ROE will increase by 0.167

In addition, the study also shows that bank size, liquidity, and economic growth do not affect the performance of commercial banks listed on the stock market of Vietnam

5 Conclusion and policy implications

5.1 Concluding remarks

The article focuses on analysis of the factors affecting bank performance Using multivariate regression model for a sample of 9 listed joint stock banks in Vietnam in 2010-2015, the authors find that factors such as the ratio of total operating expenses to sales revenues, the ratio of loans to total assets, and the ratio of equity to total assets negatively impact on ROE, whereas the proportion of the value factors of investment in machinery and equipment and computer software has a positive impact To contribute to improving operational efficiency for listed commercial banks in Vietnam stock market it is necessary to control cost growth compared to the increase in sales, implement credit quality control by establishing a credit control department to minimize independent bank credit risk Strategic development is needed for the banks in accordance with the development orientation of the sector with increasing investment in machinery equipment and application technology

5.2 Policy suggestions

From the results of empirical research, some policy recommendations can be to given for improving performance of the listed banks

Ratio of total operating expenses to total revenue

Commercial banks need to accentuate the planning and evaluation process of system activity and network transaction in the streamlined, efficient manner; banks should avoid opening too many transactions, as growth rate and higher costs lead to the increase in revenue In addition, banks need

to control the marketing activities so the banks should only focus on the scope of the target market,

to maximize the quality of service to customers, not to make too many promotions without evaluating the effect of it brings Moreover, commercial banks need to invest in technology need to choose the direction to suit the growing conditions and the financial capacity of each bank, to avoid waste and inefficient use of capacity

Ratio of lending rate to assets

Most of the listed banks in the Vietnam stock market are relatively large-scaled Loans to customers also relatively high proportion of the total assets of the bank, however besides the increase

in loans, the bad debt also increased The bank managers need to analyze the cash flow of credit from banks, and most importantly, the banks to control credit quality by setting up credit control department independent, specific blame to individual loan officers to minimize credit risk banks

Ratio of equity to total assets

Commercial banks need to develop a specific schedule of capital increase, aligned with the strategic development of the bank and in accordance with the development orientation of the sector, prevent the massive capital increase as it may make the effectiveness of these banks decreased by facing performance problems on the scale of capital reduction

Ratio of investment in machinery and equipment and computer software to assets

Commercial banks should invest in research equipment and technology applications This contributes to efficient customer service in terms of both time and quality of the service In addition, science and technology can help administrators control over the activities of banks in order to prevent fraudulence and reduce the loss of bank assets Modernizing banking system helps banks reach international markets, increase competition from foreign banks, and especially contribute to increasing the efficiency of banking activities

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