The effect of bank capital and ownership structure on bank performance, evidence in vietnam

The findings show that long-termdebt has a positive impact on ROA and ROE, while short-term debt and total debthave a negative impact on business performance measured by ROA and ROE.Rese

VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

THE EFFECT OF BANK CAPITAL AND OWNERSHIP STRUCTURE ON BANK

PERFORMANCE: EVIDENCE IN VIETNAM

BY NGUYEN THI VIET ANH

HO CHI MINH CITY, DECEMBER 2015

VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

THE EFFECT OF BANK CAPITAL AND OWNERSHIP STRUCTURE ON BANK PERFORMANCE: EVIDENCE IN VIETNAM

I, Nguyen Thi Viet Anh hereby declare that this thesis is my own work under the guidance

of instructor, Dr Nguyen Thi Thuy Linh It has not yet been presented and will not bepresented to any similar or other degrees

Date: 2nd December 2015Signature

Nguyen Thi Viet Anh

First and foremost, I would like to express my sincere thanks to my mainsupervisor, Dr Nguyen Thi Thuy Linh, for her candid comments, helpful hints andvaluable scientific guidance during times of deployment, research and completion

of this thesis

I am greatly indebted to the Board of Directors, the teachers and all staff inVietnam-Netherlands Programme for M.A in Development Economics– VNP, fortheir directly teaching, conveying knowledge and experiences as well as supporting

me and my class-mates necessary information in the last two years

I express my heartfelt thanks to General Director of Asia Commercial Bank - Mr

Do Minh Toan, the Board of Managers of ACB Saigon Branch – Mr Ngo Tan Longand Ms Bui Thi Anh Hoa for advice and creation of all favorable conditions for mywork to attending VNP

I am grateful to Dr Pham Phu Quoc and Dr Truong Dang Thuy, who suggestedresearch topic and gave me enthusiastic guidance in the early stages of writing theconcept note and thesis research design

I greatly express my special thanks to my colleagues at The Center for CorporateCredit and Financial Institutions – Asia Commercial Bank, ACB SecuritiesCompany – ACBS, for supporting me in collecting data; colleagues at ACB -Saigon Branch, especially Corporate Department, for being always cooperative,enthusiastically supporting and encouraging me

I would like to acknowledge the enthusiastic help of fellow practitioners VNP Class 20, especially these members, Nguyen Son Kien, Vo Tan Thanh Diep,

-Nguyen Le Phuong Linh, -Nguyen Phuong Tram and Vu Thi Thuong, for being myclose companions during the last two school years.

Finally, I wish to dedicate this thesis for my family, my parents, siblings, especially

my dear husband, Nguyen Hoang Than for trust, love, sharing, help, following,encouragement and being always beside me I would also like to thank my lovelychildren, little daughter, Nguyen Hoang Viet Ha and little son, Nguyen HoangQuan You are the endless motivation that helps me overcome all difficulties andmove forward

This study aimed at assessing the impact of capital structure and ownershipstructure on Vietnamese bank performance The study used secondary data of forty-nine Vietnamese banks with 387 observations in the period 2005-2014, employingFeasible General Least Square as well as Discoll-Kraay Robust for cross-sectionaldependenceestimation Empirical results show that capital structure is significantlyand positively related to Vietnamese bank performance Meanwhile, ownershipstructure impact negatively on profitability of Vietnamese banks (measuring byreturns on total assets) The findings indicate that the profitability of the PrivateBanks is higher than the State-owned ones

Keys words:Bank performance, Capital structure, Ownership structure, Net Interest Margin, Returns on Assets, Returns on Equity.

TABLE OF CONTENTS

DECLARATION I ACKNOWLEDGEMENTS II ABSTRACT IV LIST OF TABLES VIII LIST OF FIGURES IX LIST OF ABBREVIATIONS X

CHAPTER 1:INTRODUCTION 1

1.1 Problem Statement 1

1.2 Research Objectives 4

1.2.1 General research objective 4

1.2.2 Specific research objectives 5

1.3 Research questions 5

1.4 Significances of the study 5

1.5 Scope of the Study 6

1.6 Thesis structure 6

CHAPTER 2:LITERATURE REVIEW 7

2.1 Introduction 7

2.2 Conceptual Definitions 7

2.2.1 Capital Structure 7

2.2.2 Ownership structure 9

2.2.3 Bank performance 9

2.3 Theoretical review 11

2.3.1 Capital structure theory developed by Modigliani and Miller (MM Model) 11

2.3.2 The trade – off theory 12

2.3.3 Agency cost theory 13

2.4 Empirical review 14

2.4.1 Bank capital structure and Bank performance 14

2.4.2 Ownership structure and bank performance 17

2.5 Conceptual Framework 19

CHAPTER 3:RESEARCH METHODOLOGY 20

3.1 Introduction 20

3.2 scope of Study 20

3.3 Epirical model 21

3.3.1 Bank performance measures: 21

3.3.2 The Models 23

3.4 Methodology 30

3.4.1 The Pooled OLS method 30

3.4.2 The Fixed Effects Model (FEM) 31

3.4.3 The Random Effects Model (REM) 32

3.4.4 Relevant tests to choose the most appropriate estimation method 33

3.4.5 The Feasible Generalized Least Square (FGLS) 34

3.4.6 Discoll-Kraay Robust for cross-sectional dependence – XTSCC 35

3.4.7 Problem of Endogeneity 36

CHAPTER 4:EMPIRICAL FINDINGS AND ANALYSIS 37 4.1 Introduction 37

4.2 The overview on Vietnamese banks 37

4.3 Descriptive statistics 44

4.4 Empirical results 47

4.4.1 Explanatory variables and bank performance 47

4.4.2 Control variables and bank performance 49

4.5 Robustness test - common panel data methods 50

CHAPTER 5:CONCLUSIONS AND POLICY IMPLICATIONS 56 5.1 Main findings 56

5.2 Policy implications 56

5.3 Limitation of the study 58

5.4 Suggestions for further studies 58

REFERENCES 59

APPENDIX 69

LIST OF TABLES

Table 2-1 – Indirect performance indicators for financial institutions 9

Table 3-1 Definitions of variables in equation 3.2 28

Table 4-1 Summary statistics for variables 45

Table 4-2 Correlation 46

Table 4-3 Vif index 46

Table 4-4 Results from feasible generalized least square (fgls) and discoll-kraay robust for cross-sectional dependence (xtscc) 47

Table 4-5 Regression result of nim model 51

Table 4-6 Regression result of roa model 52

Table 4-7 The results of f test and breusch – pagan test 53

Table 4-8 Hausman test 53

Table 4.9 Test of heteroskedasticity 54

Table 4.10 Test of autocorrelation 54

LIST OF FIGURES

Figure 2-1 Components of Capital Structure 8

Figure 2-2 Static trade-off theory of capital structure 13

Figure 2-3 Conceptual Framework 19

Figure 4-1 Banks' Charter Capital updated to December 31th, 2014 38

Figure 4-2 Vietnamese banks’ total assets in the period 2005-2014 39

Figure 4-3 Vietnamese banks’ total equity capital in the period 2005-2014 40

Figure 4-4 The Return on Total Assets of the Vietnamese banks in the period 2005-2014 41 Figure 4-5 The Return on Total Equity of the Vietnamese banks in the period 2005-2014 42 Figure 4-6 The Net Interest Margins of the Vietnamese banks in the period 2005-2014 .43

Figure 4-7 The average equity ratio and ROA, ROE, NIM of the Vietnamese banks in the period 2005-2014 44

LIST OF ABBREVIATIONS

Chapter 1: INTRODUCTION

One of the main causes leading to the global financial crisis in 2007-2008 period isthe weakness of the banking system In particular, it might be due to the creditinstitutions do not comply strictly with the regulations on capital adequacy(Norgren, 2010) Due to the severe consequences of the global financial crisis andtheir long-term effects on the global banking and financial system, the BaselCommittee on Banking Supervision drafted and promulgated the third edition(Basel III) with changes and improvements in order to stabilize the banking system

as the main objectives Focusing on raising equity capital standards, Basel III aims

at three major issues First, it requires an increase in the minimum common equitycapital ratio from 2% to 4.5% Second, while the minimum total capital ismaintained at 8%, the high-quality capital standards, i.e equity capital and Tier 1capital standards have been increased Specifically, the minimum Tier 1 capitalincreases from 4% in Basel II to 6% in Basel III Besides, the assets with inherentquality issues will be gradually eliminated from Tier 1 capital and Tier 2 capital, asthese investments exceed the limit of 15% of financial institutions In particular, theBasel III requirements apply additional minimum leverage ratio of 3% This is theratio of Tier 1 capital to total assets plus off-balance sheet items Applying this ratioallows the Basel Committee on Banking Supervision to monitor changes infinancial leverage ratio that the banks make in accordance with economic cycles andthe relationship between capital requirements and leverage ratio

In Vietnam, after the global financial crisis, Vietnamese commercial banks wereexposed to many problems of instability One of the most important factorsaffecting the competitiveness of Vietnamese commercial banks was the weakfinancial capability, especially the extremely low level of equity capital With theaim of enhancing the banking system performance and stability, on March, 1st,

2012, the Prime Minister issued the plan to restructure the system of banks andother credit institutions during the period 2011-2015 with Decision 254 / QĐ-TTg.According to this process, the Prime Minister required the Ministry of Financecombine with the State Bank of Vietnam to approve plan to increase charter capital

of State-owned Commercial Banks From 2008 until now, Vietnamese commercialbanks have actively increased their registered capital to meet the regulatoryrequirement of capital under the provisions of Decree No.141 / 2006 / ND-CP andDecree 10/2011 / ND-CP dated 26/01/2011 on amending and supplementing somearticles of Decree 141 To achieve such requirement, all commercial banksimplemented different approaches, such as selling shares to domestic or foreignshareholders, merging with other joint stock commercial bank(s)

Besides that, Decision 254/QĐ-TTg also required State-owned Corporationsgradually exit their investment capital in the credit institutions The equitization ofstate-owned commercial banks and decreasing state-owned capital in these bank arealso seen as a solution to reduce state ownership and increase the capacity of thebanks based on various ownership structures (state, economic entities andindividuals come from foreign countries) aiming at increasing competitiveness

There are many studies examining the impact of capital structure as well asownership structure on bank performance

Based on agency problem (Jensen and Meckling, 1976), the agency view suggeststhat the banks with higher equity capital ratio have lower profitability (Berger and

Di Patti, 2006) Bank management suffers less pressure to maximize the value ofthebanks which maintain higher equity capital ratio This causes conflicts betweenmanagement and shareholders so agency cost increases

On the other hand, many other researches prove that well-capitalized capital impactspositively on bank performance Using US banking system data in period 1984: Q.1– 2010: Q.4, N.Berger and Bouwman (2013) suggested that equity capital enhancesbank performance through three channels Higher equity capital banks

require managers to monitor more and choose safer portfolios to invest Bank withhigher equity capital can make customers, investors and other partner believe that it

is more reliable and safer so the banks can mobilize deposit money with lowerinterest rates as well as increase the volume of loans Therefore they can improveperformance and increase market share as well Supporting this view, Demirgüç-Kunt & Huizinga (1999); Maudos & Guevara (2004); Fiordelisi et al., (2011);Chortareasa et al., (2012) remark that higher equity capital ratio can improve bankefficiency Study on determinants of Net Interest Margin in VietnameseCommercial Banks, Thu and Huyen (2014) indicate that leverage impacts positively

on Net Interest Margin However, their study uses data for thirty-three commercialbanks in the period 2008-2011 with lower observations than my one Phuc (2014)uses the data of 217 companies listed on the Ho Chi Minh City and Ha Noi StockExchange in the period 2007 to 2012 to study the effects of capital structure on theperformance of the company after equitisation The findings show that long-termdebt has a positive impact on ROA and ROE, while short-term debt and total debthave a negative impact on business performance measured by ROA and ROE.Research on the relationship between ownership structure and bank efficiency byusing cost and profit frontier approach to examine efficiency of banks with differentownership types in German, Altunbas, Evans et al (2001) shows that public banksare less efficient than privately owned banks Study on ownership structure reform

in Nigeria in period 2004-2006, Ani, Odo et al (2012) points out that governmentownership is negatively correlated with bank performance Uses data forcommercial banks in 179 countries around the world in period 1995-2002 toexamine the relationship between ownership and bank performance, Micco, Panizza

et al (2007) concludes that, in developing countries, the performance of owned banks is lower than their private counterparts because their profitability arelower while non- performing loans and overhead cost are higher However, Fuentesand Vergara (2007) points out the opposite conclusion that it still exist one state-

state-owned bank that is more efficiency than privately state-owned banks in Chile bankingsystem in 1990–2004 period.

On the impacts of the ownership structure as well as capital structure on Vietnamesebank performance, there are many researches including the study of Son, Tu et al.(2015) However, most of these studies use data with shorter and earlier timeperiods For example, Son, Tu et al (2015) use data of thirty –four banks with onehundred and two observations in the period 2010-2012 while this study uses data offorty-nine banks with three hundred and eighty-seven observations in the period2005-2014.This study describes the construction of larger data on Vietnamesebanking sector in comparison with previous studies, including larger number ofobserved banks in longer time period

Although there have been many studies on the impact of capital structure andownership structure on Vietnamese bank performance, they still at earlier stage andues smaller dataset The mixed results and inconclusive literature motivates thisstudy on the impact of capital structure and ownership structure on bankperformance using Vietnamese data during the period from 2005 to 2014.Particularly, the bank performance is reviewed through two proxies: Net InterestMargin (NIM) and Returns on Assets (ROA)

1.2 RESEARCH OBJECTIVES

1.2.1 General research objective

Under the scheme to restructure the Vietnamese banking system in 2010-2015periods, two out of four solutions given by Vietnamese Government to improve theoperational efficiency of the banking system are increasing equity capital andequitization of state-owned commercial banks This plan is going into the finalstage In order to investigate the relationship between capital structure, ownershipstructure and bank performance, I carry out this research

1.2.2 Specific research objectives

This thesis aims at the following two specific research objectives to achieve theabove general research objective:

The first one is to evaluate the impact of capital structure on Vietnamese bankperformance

The second one is to investigate the effect of ownership structure on Vietnamesebank performance

This study focuses on answering the following two research questions

Research question 1: Does bank capital structure impact on Vietnamese bank

performance?

Research question 2: Does bank ownership structureeffect onVietnamese bank

performance?

1.4 SIGNIFICANCES OF THE STUDY

This study aims at testing the impact of capital structure as well as ownershipstructure on Vietnamese bank performance Based on the results, the study offerssome suggestions for the State Bank of Vietnam for its policies related torequirements in raising equity capital, as well as changing in ownership structurebased on recommendations of Basel Committee on Banking Supervision andconsistent with activities of commercial banks in Vietnam This study also supportsVietnam commercial banks to find an appropriate solution to build up a suitablecapital structure, ownership structure to improve bank performance

1.5 SCOPE OF THE STUDY

The Vietnamese banking system has a total of fifty banks, including one WhollyState - Owned Commercial Bank, thirty-four Joint – Stock Commercial Banks inwhich there are three banks which the government owns more than 50% of thebanks’ charter capital but is not the only shareholder, five Wholly Foreign OwnedBanks, two Policies Bank, four Joint-Venture Banks, one Cooperative Bank andforty-nine Foreign Bank Branches updated to December 31th, 2014

This study focuses on forty-nine banks (whose names are listed in Appendix 1) forwhich during the period from 2005 to 2014 are available This limit is due to thefact that I cannot collect complete financial statements of Joint-Venture Banks,Policies Bank, Cooperative Bank, Wholly Foreign Owned Banks as well as theForeign Bank Branches The selected banks also have limited data in some yearsduring the sample period Thus, the final sample only includes 387 bank-yearobservations (unbalanced panel data)

1.6 THESIS STRUCTURE

This thesis consists of five chapters:

Chapter 1: Introduction

Chapter 2: Literature review

Chapter 3: Research Methodology

Chapter 4: Study findings and analysis

Chapter 5: Conclusion and policy implications

In which, Chapter 1 introduces the research objectives Chapter two presents theliterature review In this chapter, some conceptual definations, previous findings ofother authors related totopic are introduced Chapter three introduces the researchmethodology employed in this study Chapter four presents and analyzes thefindings Chapter 5 concludes the thesis as well as provides some policyimplications and suggests further research

Chapter 2: LITERATURE REVIEW

2.1 INTRODUCTION

This chapter introduces some conceptual definitions of capital structure, ownershipstructure as well as bank performance measures such as net interest margin andreturns on total assets It also synthesizes the theoretical and empirical literaturesrelated to the thesis’s research objectives The chapter builds up a conceptualframework on the relationship between capital structure, ownership structure andbank performance

2.2 CONCEPTUAL DEFINITIONS

2.2.1 Capital Structure

The capital structure is a term used to describe the origin and method of forming thecapital to the business can be used for purchase of assets, tangible material meansand support for production and business activities There are many differentdefinitions of capital structure

For example, according to Chandra (2011, p.464): “Capital structure is how a firmdecides to divide its cash flow into broad components, including a fixed componentthat is earmarked to meet the obligations toward debt capital and a residualcomponent that the belongs to equity shareholders Alternatively, Abor and Biekpe(2005) defines that: “the capital structure of a firm is the specific mixture of debtand equity that it employs in financing the operations” Besides that, in theperspective words of Gerestenbeg “Capital Structure of a company refers to thecomposition or make up of its capitalization and it includes all long-term capitalresources” (as cited in Paramasivan C & Subramanian T., chapter 5, p.47) Anotherdefinition of capital structure is: “The mix of a firm’s permanent long-termfinancing represented by debt, preferred stock, and common stock equity”,

according to James C Van Horne (as cited in Paramasivan C & Subramanian T.,chapter 5, p.47).

In a different point of view, Presana Chandra defines capital structure as: “Thecomposition of a firm’s financing consists of equity, preference, and debt” (as cited

in Paramasivan C & Subramanian T., chapter 5, p.47)

Additionally, in the research of R.H Wessel, capital structure is defined as: “Thelong term sources of fund employed in a business firm” (as cited in Paramasivan C

& Subramanian T., chapter 5, p.48)

Based on these definitions, the components of Capital Structure are demonstrated asfollowing diagram:

Figure 2-1 Components of Capital Structure

Components of Capital Structure

Source: structure-with.html

http://articles-junction.blogspot.com/2013/10/components-of-capital-An optimal capital structure is the capital structure that maximizes the market value

of the firm, minimizing costs, maximizing earnings per share thus increased thedividend to shareholders, improving the ability for the firm to access newinvestment opportunities

Some academic theories suggest that the capital structure is also known as financialleverage Financial leverage is a concept showing the level of debt in total of capital

of the firm Firms use financial leverage when their demand for investment capitalincreased while they are not enough equity to finance Normally, businesses ingeneral and banks in particular, only use leverage when the expected return rate onassets higher borrowing interest rates and thus increase profits for their owners

2.2.2 Ownership structure

According to Gürsory & Aydogan (2002), ownership structure is understood in twoways, including ownership concentration and ownership mix In particular,ownership concentration represents the ownership rate of major shareholders whoown at least 5% charter capital of the firm The shareholders holding dominantshares suffer the higher risks incurring during the operations of the firm Topreserve their investment capital and ensure the expected profitability rate, theyusually strongly monitor business operations of the firm as well as the decision ofthe executive committee Therefore, capital concentration may improve firmperformance Meanwhile, ownership mix shows the type of shareholders in the firm,includes state ownership, private ownership or foreign ownership

2.2.3 Bank performance

Bikker (2010) points out some types of performance indicators mentioned in Table2-1 for financial institution

Table 2-1 – Indirect performance indicators for financial institutions

Performance indicators Indicators represented as

Profit X-efficiencyScale economiesScope economies

Cost marginTotal costs/total income

Return on assetsNet interest margin

by Returns on Assets (ROA) (Goddard et al., 2008, as cite in Arias, Jara-Bertin, andRodriguez (2013)) and Returns on Equity (ROE) (Al-Kayed, Zain, and Duasa(2014); Micco, Panizza, and Yanez (2007))

Net Interest Margin - NIM, calculated by the difference between interest incomeand interest expense divide to total profitable assets It is suggested that bank withhigher NIM has better performance because higher NIM indicates higherprofitability(Saunders and Schumacher (2000))

The first model concerning to NIM was mentioned in the study of Ho and Saunders(1981) At first, these authors established the formula for calculating net interestmargin Accordingly, net interest margin function depends on the followingvariables: elasticity between demand and supply of capital in the market, the level

of risk aversion of the bank, the size of transactions and the variance of interestrates After that, Ho and Saunders built up a model of factors affecting the netinterest margin in which, Net Interest Margin depend on the degree of risk aversion

of the banks, the market structure, the average transaction size and the variance ofinterest rates

ROA is a financial ratio used to demonstrate the profitability of a firm It showsprofits generated from total assets or overall resources of a firm It is measured bythe ratio of Net Income on Total Assets

2.3 THEORETICAL REVIEW

Some theories on capital structure

2.3.1 Capital structure theory developed by Modigliani and Miller (MM Model)

The theory of modern capital structure was given by (Modigliani & Miller, 1958)referred as MM model These authors made given some of assumption of perfectmarket: (1) Asymmetric information, (2) No transaction costs, (3) There is no firmincome tax, (4) There is no personal income tax, (5) Lending interest rate andBorrowing interest rate are the same, (6) Opportunity accessing to funding is thesame for individuals or firm, (7) No bankruptcy costs, no financial distress costs, (8)The entire profit is distributed to the owner: no reinvestment, no increase growth.Although the assumption of perfect capital markets is not true, however, there aretwo hypotheses need to be emphasized and they have a significant impact on theoutcome of Modigliani and Miller study First, the assumption that there is notaxation: this is an important issue and one of the key advantages of the debt is taxrelief for interest expenditure Second, the risk in the Modigliani and Miller theory

is calculated entirely by variability of cash flows They ignore the possibility of cashflow may stop because of insolvency This is a significant problem with this theory

if other high debt

With the above assumed perfect capital market, postulate I of Modigliani and Millersaid that the firm value is not affected by capital structure It was explained that theuse of debt gives the owner a higher rate of return so higher income but this is offset

to the increased risks due to increased debt/equity ratio

Vg = Vu: The total value of firm using debt equal the total value of firm with nodebt

In 1963, Modigliani and Miller launched a follow-up study with the removal of theassumption of firm income tax According to Modigliani and Miller, the firm

income tax, the use of debt will increase the value of the firm Because interestexpense is reasonable expenses are deductible when calculating firm income tax, sothat part of income of firm that use debt can be transferred to the investors by theequation:

Vg = Vu + T*D: value of the firm using debt equal value of firm does not use debtplus any benefits from the use of debt In particular, D is the market value of totaldebt, T is the firm income tax rate, T*D is benefits from the use of debt Thus thevalue of the firm using financial leverage will be higher than firm unlevered anamount equal the present value of the tax shield

2.3.2 The trade – off theory

The trade-off theory founded by Myers (1984)said that, besides the benefits fromtax shield, the use of debt raises additional cost, typically bankruptcy cost includingdirect costs and indirect costs of bankruptcy caused by debt When the debt ratiorises to the point where present value of benefit from tax shield equal to presentvalue of bankruptcy cost, the use of debt is no longer beneficial to the firm Because

of this, the firm always seeks solution to optimize its value basing on the principle

of balance to determine how much debt and equity in its capital structure Thecapital structure is optimal when the present value of the tax shield equals thepresent value of bankruptcy costs

According to the trade-off theory, the value of a firm is demonstrated as follows:

Vg = Vu + T * D - PV (bankruptcy costs)

In which:

Vg: total value of firm without debt

Vu: total value of firm using debt

T: firm income tax rate,

D: the market value of total debt T * D is benefits from using debt

PV (bankruptcy cost): present value of bankruptcy cost

Optimal capital structure is the structure in which T * D = PV (bankruptcy cost)

Figure 2-2 Static trade-off theory of capital structure

Source: Myers (1984:577)

2.3.3 Agency cost theory

According to Jensen and Meckling (1976), agency cost arises because of therepresentatives of asymmetric information between agencies and shareholders Theagencies did not make decisions aiming to maximize the profit for the shareholders;even their decision may hurt shareholder’s rights There are two major reasonsleading to the asymmetric information between agencies and shareholders The first,there is difference in goals between agencies and shareholders Second, the level ofrisk aversion of the agencies and shareholders are different To monitor theseproblems, the firm should increase using of debt As the debt ratio increases,business managers will make decisions carefully not only in sponsor decisions butalso in use of capital that help them manage business more effectively

2.4 EMPIRICAL REVIEW

2.4.1 Bank capital structure and Bank performance

Results on the association between bank capital structure and bank performance aremixed While some studies show a positive relationship between the level of bankcapital and its performance (Hirschey (1999); Arias et al (2013); Valverde andFerna´ndez (2007); J Maudos and Guevara (2004); Saunders and Schumacher(2000); J Maudos and Solís (2009); Claeys and Vennet (2008) and Ahokpossi(2013)), others provide contradictory evidence, suggesting a negativerelationship(Berger and Patti (2006), Hamadi and Awdeh (2012) and Chortareasa et

al (2012)) The following section discusses both views and then develops the firsthypothesis

2.4.1.1 Bank leverage is negatively related to bank performance

On the one hand, using the data of 695 commercial banks in The United Statesduring the period from 1990 to 1995,Berger and Patti (2006) indicate that the ratio

of equity to total assets decrease 1% lead an increase of 16% in bank profit Itmeans the banks with higher equity capital, have lower profitability Such resultsupports the agency cost theory, banks’ management suffers less pressure tomaximize the value of the banks which maintain higher equity capital ratio Thiscauses conflict between management and shareholders so agency cost increases Inline with Berger & Patti (2006), the findings of Hamadi and Awdeh (2012) andChortareasa et al (2012) suggest that the relationship between equity ratio and bankperformance, measured as net interest margin (NIM), is negative Investigating thedeterminants of Lebanese banks’ NIM in period 1996-2009, Hamadi and Awdeh(2012) explains that bank with higher capital equity, i.e, higher financial autonomyability, could be willing to pay higher deposit interest rate to mobilize more andmore money so the loan volume of these banks increases as a result Besides that,well-capitalized banks are also willing to lend with lower interest rate aiming to

expand market share and benefit from economic scale, which then causing lowerbank net interest margin.

2.4.1.2 Bank leverage is positively related to bank performance

On the other hands, other recent researches indicate that the relationship betweenleverage and bank performance is strongly positive Some of those researchesinclude Hirschey (1999); Ash Demirgüç-Kunt and Harry Huizinga (1999); Saundersand Schumacher (2000); Maudos and Guevara (2004); Valverde and Ferna´ndez(2007); Claeys and Vennet (2008); J Maudos and Solís (2009);Chortareasa et al.(2012); N.Berger and Bouwman (2013); Ahokpossi (2013); Ameur and Mhiri(2013); Jara-Bertin, Moya, and Perales (2014) and Al-Kayed, Zain, and Duasa(2014)

Using ROA as an indicator measuring bank, Hirschey (1999) finds that debt to assetratio is negative related to bank ROA This means equity to asset ratio is positivelycorrelated with bank performance

The findings of Ash Demirgüç-Kunt and Harry Huizinga (1999) is consistent withHirschey (1999) They use data of 80 countries around the world in period 1988-

1995 to investigate the determinants of commercial bank’s NIM ROA Theyconclude that equity to total assets lagged one period ratio is positive related to NIMand ROA According to Saunders and Schumacher (2000), because holding equitycapital is relatively more costly than holding debts, banks with high capital ratio forregulatory or credit reasons are willing to cover some of the cost by generating anextra spread in the NIM over the pure spread for the interest rate risk Their findingsremark that equity ratio positively impacts on NIM To offset the cost of holdinghigh equity capital, banks often apply higher NIM Using FEM method to determinethe factors affecting NIM of the banks, located in European countries includingGermany, France, The United Kingdom, Italy and Spain in the period 1993-2000,Maudos and Guevara (2004) point out that the degree of risk aversion, proxied byequity to total assets ratio, is positively correlated with NIM J Maudos and Solís

(2009) use FEM to estimate the determinants of Mexican banks’ NIM in period1993-2005 Their findings is consistent with Maudos and Guevara (2004) Valverdeand Ferna´ndez (2007 ) use GMM estimator to verify the factors affecting Europeanbanks' NIM The results of this study indicate that equity ratio is positively

associated with NIM The same result is found by Claeys and Vennet (2008) whenthey investigate the determinants of Central and Eastern European countries’ banks

It has been argued by Chortareasa et al (2012) that capitalization presented byequity ratio is related to higher NIM Using US banking system data in period 1984:Q.1 – 2010: Q.4, N.Berger and Bouwman (2013) suggested that equity capitalenhances bank performance through three channels Higher equity capital banksrequire managers to monitor more and choose safer portfolios to invest Bank withhigher equity capital can make customers, investors and other partner believe that it

is more reliable and safer so the banks can mobilize deposit money with lowerinterest rates as well as increase the volume of loans Therefore they can improveperformance and increase market share as well As noted by Ameur and Mhiri(2013), well-capitalized banks are more profitable in comparison with others located

in Tunisia Investigating factors affecting performance of Latin American bankingsystem in the period of 1995-2010 by using Generalized Method of Moment(GMM), Arias et al (2013) use both NIM and ROA as proxies of banksperformance Their conclusions indicate that capital level may improve banksperformance including NIM and ROA The findings of Ahokpossi (2013) are thesame when they show a positive relationship between LEV and NIM Study ondeterminants of Net Interest Margin in Vietnamese Commercial Banks, Thu andHuyen (2014) use data for thirty-three commercial banks in the period 2008-2011.Their findings indicate that equity to total assets ratio impacts positively on NetInterest Margin Phuc (2014) uses the data of 217 companies listed on the Ho ChiMinh City and Ha Noi Stock Exchange in the period 2007 to 2012 to study theeffects of capital structure on the performance of the enterprise after equitisation.His findings show that long-term debt has a positive impact on ROA and ROE,

while short-term debt and total debt have a negative impact on businessperformance measured by ROA and ROE.

To improve bank performance, the solution given by The State Bank of Vietnamand Vietnamese Commercial Banks seem to focus on increasing the charter capitaland equity capital Basing on following studies mentioned above, the firsthypothesis is developed as following:

Hypothesis 1: Capital structure impacts positively onVietnamese bank

performance.

2.4.2 Ownership structure and bank performance

It is argued that, in poor countries, banks with dominant shareholders who areforeigners, perform better than others (Demirgüç-Kunt and Harry Huizinga, 1999).This result is explained as, in poor countries banks with foreign ownership typehave some advantages including higher capital capacity, better banking technology

as well as better management skills in comparison with others However, inindustrial countries their findings show negative relationship between foreignownership and bank performance because of more competitive environment thatmake advantages of foreign-owned banks disappear Use DEA method toinvestigate the efficiency of banks located in Croatia in period 1995-2000, Jemricand Vujcic (2002) claims that the most efficient banks are banks owned byforeigners According to Altunbas et al (2001), among German banks in period1989-1996, the efficiency of private banks is highest Mutual and public banks areless efficient in comparison with private owned but they do not point out anyagency problem in these banks As noted by Micco, Panizza, and Yañez (2004), indeveloping countries, state owned banks perform lower than others However, inindustrial countries, their findings indicate that ownership type does not impact onbank performance

Researching on Chinese banks performance in the period of 2003-2008, Wen (2010)uses both ROA and ROE to represent for bank performance His study focuses onthe impacts of ownership structure including ownership concentration andownership type on banks performance He finds out a positive relationship betweenstate-owned type and ROE, in this case state-owned banks have better ROE Hisresult does not give any conclusion about relationship between Ownership andROA Otherwise, determining the effects of government ownership type onNigerian banks performance, represented by ROA indicator, in the period of 1998-

2008, the research results of Ani, Odo, and Okelue (2013) emphasizes thatgovernment ownership type is negatively and significantly correlated with ROA.They suggest that the government should decrease the rate of governmentownership in Nigerian banks to improve banks performance Similar to Ani et al.(2013), the findings of Micco, Panizza, and Yañez (2004) points out the same resultwhich indicates that dummy variable representing state-owned banks is negativelyand strongly associated with banks performance represented by ROA, ROE andNIM indicators in developing countries It means that, in developing countries,private banks have better performance than their state-owned counterparts Research

on the relationship between ownership structure and banks performance of TheMiddle East and North African banking system in the period of 2000-2007,Kobeissi et al (2010) highlights that private banks have better performance incomparison with other ones Son, Tu et al (2015) use data of thirty – fourVietnamese banks with 102 observations in the period 2010-2012 to investigate theimpact of ownership structure on bank performance Their findings show that thepercentage of private ownership impacts positively on bank profitability proxied byROA

The equalization of State-owned Banks and requirement of the State-ownedEnterprises divest capital gradually from commercial banks is being considered one

of solutions to improve the competitiveness of the banking system and the health of

Vietnamese banking system Based on reality of Vietnamese banking system andstudies mentioned above, the second hypothesis is constructed as following:

Hypothesis 2: Ownership structure proxied by State-owned Ownership type is associated with lower Vietnamese bank performance.

2.5 CONCEPTUAL FRAMEWORK

Based on previous discussion from theoretical and empirical evidences, this studybuilds up the below framework which demonstrates the factors affecting theVietnamese bank performance In particular,this study focuses on two mainelements, including the Capital Structure(LEV) and the Ownership Structure(OWNERSHIP) Other control variables including Bank Size, Credit Risk, Cost toIncome ratio, Liquidity and Market Share will be discussed in chapter 3

Figure 2-3 Conceptual Framework

Source: Author’s own Design

Chapter 3: RESEARCH METHODOLOGY

3.1 INTRODUCTION

This chapter introduces the research methodology used to estimate the impact ofcapital structure and ownership structure on Vietnamese bank performance Itclarifies the scope of study as well as the collected data It also presents researchdesign and economic model

3.2 SCOPE OF STUDY

The Vietnamese banking system has a total of fifty banks, including one WhollyState - Owned Commercial Bank, thirty-four Joint – Stock Commercial Banks inwhich there are three banks which the government owns more than fifty percent ofthe banks’ charter capital but is not the only shareholder, five Wholly ForeignOwned Banks, two Policies Bank, four Joint-Venture Banks, two Policies Banks,one Cooperative Bank and forty-nine Foreign Bank Branches as of December 31th,2014

Due to the limit of data on Joint-Venture Banks, Policy Banks, Wholly Owned Banks, this thesis could not include these banks in the sample Similarly, thefinancial statements of some banks are not fully collected during the period 10 yearsfrom 2005 to 2014 Therefore, this study uses the data of forty-nine banks (listed inAppendix 1) for which data are available during the period from 2005 to2014.These selected banks also have limited data in some years during the sample period.Thus, the final sample only includes 387 bank-year observations (unbalanced paneldata)

Foreign-Most of the bank-specific information is collected from financial statements andannual reports of Vietnamese commercial banks, which are publicly available on

their websites Further information is also collected from other websites includinghttp://www.cafef.vn, vietstock.vn and http://www.cophieu68.vn/ Based on thebanks’ financial statements, all indicators are calculated to run regression mentioned

in Chapter 4

3.3 EMPIRICAL MODEL

3.3.1 Bank performance measures:

Although NIM (Net Interest Margincalculated as the difference between interestincome and interest expense divided by total average earning assets) is a commonand important indicator used to represent bank performance, many empirical studiesuse other indicators such as return on assets (ROA) and return on equity (ROE)instead of NIM Following previous studies, for example, Chortareasa, Girardoneb,and Ventouri (2012), Claeys and Vennet (2008), J.Maudos and Guevara (2004),Hirschey (1999), Arias, Jara-Bertin, and Rodriguez (2013), Kobeissi, Nada, Sun,and Xian (2010), this study employs ROA and NIM indicators as proxies to

having better performance

To assess European bank performance in the period of 2000-2008, Chortareasa,Girardoneb, and Ventouri (2012) uses NIM as one of two basic proxies Their studyuses two banks specific characteristics which are determinants of NIM includingequity to total assets ratio presenting capitalization and natural logarithm of banks’total assets presenting bank size Their findings show the negative relationshipbetween NIM and capitalization as well as bank size Using the data of 1,130 banks

in Western and Eastern European countries in the period of 1994-2001 toinvestigate the determinants of NIM, Claeys and Vennet (2008) inserts three bankspecific factors affecting NIM including capitalization, market power as calculated

by total assets of banks divided by total assets of all banks at time t and credit riskmeasured by total loans divided by total assets in their estimated model To

investigate the determinants of NIM in the European banking system, besidescapitalization, J.Maudos and Guevara (2004) adds some control variables includingcredit risk calculated by total loans divided by total assets and quality ofmanagement presented by cost-to-income ratio into NIM model Their resultsconclude a negative relationship between NIM and cost-to-income ratio and adverserelationship between NIM and credit risk Besides all bank-specific factors affectingNIM mentioned above, Hamadi and Awdeh (2012) introduces another controlvariable which is liquidity measured by liquid assets divided by total assets Theysuggest that the relationship between NIM and liquidity is negative.

Hirschey (1999) uses ROA as an indicator measuring the profitability orperformance of the banks in which ROA depends on bank size presented by totalassets and leverage (a quotient of debt and total assets), an inverse measure ofcapitalization His findings show a negative relationship between ROA and leveragewhich means a positive relationship between ROA and capitalization Investigatingfactors affecting performance of Latin American banking system in the period of1995-2010 by using Generalized Method of Moment (GMM), Arias, Jara-Bertin,and Rodriguez (2013) uses both NIM and ROA as proxies of bank performance.Their conclusions indicate that capital level may improve bank performanceincluding NIM and ROA

Research on relationship between ownership structure and performance of bankslocated in the Middle East and North African countries in the period of 2000-2007,Kobeissi, Nada, Sun, and Xian (2010) also uses both ROA and ROE indicators topresent performance Focusing on ownership type, their findings indicate a betterperformance of private banks in comparison with state-owned banks

In summary, following previous studies, this thesis employs ROA and NIM asdifferent measurements of bank performance

3.3.2 The Models

To examine factors affecting Vietnamese bank performance, based on previoustheoretical and empirical researches mentioned above, the Vietnamese bankperformance, in this study, is demonstrated through the following model:

PERF it = β 0 + β 1 LEV it + β 2 CR it + β 3 MS it + β 4 CIO it + β 5 LIQ it + β 6 SIZE +

In which:

PERF indicates of bank performance, measures as NIM and ROA

NIM: Net Interest Margin, calculated by the difference between interest income andinterest expense divide to total profitable assets

ROA: is a financial ratio used to demonstrate the profitability of a firm It showsprofits generated from total assets or overall resources of a firm It is measured bythe ratio of Net Income on Total Assets

Besides the two main explanatory variables including capital structure (proxied byleverage) and ownership structure, model 3.1 also takes into account other controlvariables such as credit risk (CR), market share (MS), cost to income ratio (CIO),liquidity risk (LIQ) and bank size (SIZE) to control for other bank characteristics

uit is the error term

LEV (LEVERAGE)

In this study, LEV is defined as the ratio between Equity and Total assets (inpercentage) It represents capitalization or level of equity capital of the bank It isused to assess the financial autonomy of the banks

According to Hirschey (1999); Arias et al (2013); Valverde and Ferna´ndez (2007);

J Maudos and Guevara (2004); Saunders and Schumacher (2000); J Maudos and

Solís (2009); Claeys and Vennet (2008) and Ahokpossi (2013), well-capitalizedbanks presented by high level of equity to total assets ratio, are more profitable incomparison with others Based on these findings, the positive correlation betweenLEV and three bank performance indicators mentioned above, including ROAandNIM are expected.

OWNERSHIP

Ownership structure mentioned in this thesis is a dummy variable representingownership type It take value of 1 if the bank has shareholder who is government oragency of the government owns more than 50% charter capital of that bank,otherwise it equals 0

As mentioned in chapter two, Micco, Panizza, and Yañez (2004) indicate thatdummy variable representing state-owned banks is negatively and stronglyassociated with banks performance represented by ROA, ROE and NIM indicators

in developing countries It means that, in developing countries, private banks havebetter performance than their state-owned counterparts The findings of Ani, Odo,and Okelue (2013); Ani et al (2013) and Kobeissi et al (2010) give the sameresults Son, Tu et al (2015) show that the percentage of private ownership impactspositively on bank profitability proxied by ROA.Vietnam is also a developingcountry so, in this study, the expected sign of impact of state-owned ownership type

on bank performance is negative

CONTROL VARIABLES

CR (CREDIT RISK)

There are many definitions of CR in different researches According to Ahokpossi(2013), CR is measured by the ratio between Loans to Deposits and Short-termfunding CR is defined as the quotient of Loan Loss Provisions over Loans in study

of J.Maudos and Solís (2009) Valverde and Ferna´ndez (2007) defines CR is a one

lagged-value of the ratio loan default/ total loan Because of lack of information,inthis study, CR is measured by the ratio of Total loans over Total assets (inpercentage) This definition is consistent with Maudos and Guevara (2004).

Valverde and Ferna´ndez (2007) investigate a negative relationship between CR andNIM They say that banks specialized in granting loans tend to charge lower NIM.The study of J Maudos and Solís (2009) gives the same result Explaining the lowerNIM in Mexican banking system, they says that banks specialized in granting loansmay benefit from economies of scale because of low intermediate costs so they mayapply lower NIM However, to find out the determinants of NIM in European Unionbanking industry, J Maudos and Guevara (2004) shows totally opposite result.Their result demonstrates a positive relationship between CR and NIM The bankswith higher loan volume are often faced with higher credit risk To offset credit risk,these banks tend to apply higher NIM Supporting this point of view are studies ofClaeys and Vennet (2008); Ahokpossi (2013) and Hamadi and Awdeh (2012) Wealso expect CR has positive effects on NIM and ROA

MS (MARKET SHARE)

MS is calculated as Total assets of bank divide by sum of Total assets of all banks(in percentage) The findings of Claeys and Vennet (2008), which based on asample of 1,130 banks in Western and Eastern Europe, highlight that MS mayimprove NIM This is interpreted that banks with higher market share, have moreadvantages as well as power to set prices autonomously aiming to achieve theexpected profit margin That might lead them to apply higher NIM Hence, thisstudy expects a positive impact of MPO on NIM, ROA in Vietnamese bankindustry

CIO (COST TO INCOME RATIO)

CIO is measured by the ratio between operating cost and income is an indicatorused to evaluate the quality of executive management and bank efficiency HigherCIO indicates lower management quality as well as less efficiency With theresearch on the Mexican banking system, J Maudos and Solís (2009) finds out anegative correlation between the CIO and NIM The same results are given byHamadi and Awdeh (2012) after they do research on the Lebanese banking sector.Based on these researches, negative relationship between CIO and NIM, ROA, isexpected

LIQ (LIQUIDITY RISK)

LIQ is defined as the ratio of Liquid assets and Total assets (in percentage) Thebank with higher LIQ has less liquidity risk Hamadi and Awdeh (2012) andAhokpossi (2013)detect a negative relationship between LIQ and NIM Theyexplain that banks with low liquid usually offer high deposit interest rates toincrease the volume of deposits or have to borrow capital at high cost to improveliquidity That makes their NIM become lower Our expectation is consistent withthese studies

SIZE (BANK SIZE)

This indicator is calculated by the natural logarithm of average total assets Usingdata of European countries in the period from 2000 to 2008 to examine the factorsaffecting banks performance, the findings of Chortareasa et al (2012) highlightsthat SIZE is negatively associated with NIM The research of Hamadi and Awdeh(2012) gives the same result Explaining this result, they say that the incomes oflarger banks are mostly based on service fees compared to smaller banks Moreover,larger banks often have more advantages, and thus they are willing to pay higherinterest rate for depositors with the aim to strengthen cross-selling products

including granting loans and more providing services in order to benefit from economies of scale That may lead to lower NIM.

The result of Wen (2010) shows that SIZE has negative relationship with ROA In this study, it is expected that SIZE to be negatively associated with NIM and ROA

1 Table 3-1 Definitions of Variables in equation 3.2

Proxy for variables Variables Definitions Data source Expected References

sign

Dependent variables – Bank performance

Net Interest Margin NIM Calculated by the difference between Author’s calculation

interest income and interest expense using banks’

divide to total profitable assets financial statements.

Return on Assets ROA ROA is the return on assets which is Author’s calculation

the ratio between Net income and using banks’

Average Total Assets (in percentage) financial statements.

Main explanatory variables

Leverage LEV by the ratio between Equity and Total Author’s calculation + Hirschey (1999); Ash

assets (in percentage) using banks’ Demirgüç-Kunt & Harry

financial statements Huizinga (1999); Saunders

& Schumacher (2000); Maudos & Guevara (2004); Valverde & Ferna´ndez (2007); Claeys & Vennet (2008); J Maudos & Solís (2009);Chortareasa et al (2012); N.Berger & Bouwman (2013); Ahokpossi (2013); Ameur

& Mhiri (2013); Bertin, Moya, and Perales (2014) and Al-Kayed, Zain

Jara-& Duasa (2014).

Ownership type OWNERSHIP Dummy variable representing Author’s calculation - Jemric and Vujcic (2002);

ownership type It takes value 1 if the using data collected Altunbas et al (2001); government or agencies of the from website of The Micco, Panizza, and Yañez