THE IMPACT OF CREADIT RISK MANAGEMENT ON THE FINANCIAL RESULTS OF COMMERCIAL BANK IN VIETNAM

After reviewing previous research, the author decided to use STATA 14.0 software to estimate the effect of risk management variables such as Non-Performing Loan NPL, Capital Adequacy Rat

THE STATE BANK OF VIETNAM MINISTRY OF EDUCATION AND TRAINING

BANKING UNIVERSITY AT HO CHI MINH CITY

-

HOANG THUY LINH THE IMPACT OF CREDIT RISK MANAGEMENT ON THE FINANCIAL

RESULTS OF COMMERCIAL BANK

IN VIETNAM

THESIS PROPOSAL FINANCE AND BANKING

CODE: 7340201

ADIVISOR by NGUYEN DUY LINH, PhD

THE STATE BANK OF VIETNAM MINISTRY OF EDUCATION AND TRAINING

BANKING UNIVERSITY AT HO CHI MINH CITY

-

HOANG THUY LINH THE IMPACT OF CREDIT RISK

MANAGEMENT ON THE FINANCIAL

RESULTS OF COMMERCIAL BANK

IN VIETNAM

THESIS PROPOSAL FINANCE AND BANKING

CODE: 7340201

ADIVISOR by NGUYEN DUY LINH, PhD

THE IMPACT OF CREDIT RISK MANAGEMENT ON THE FINANCIAL

RESULTS OF COMMERCIAL BANK IN VIETNAM APPROVED BY: Advisor

Nguyen Duy Linh, PhD

APPROVED BY: Committee

THESIS COMMITTEE

ACKNOWLEDGE

This thesis is the author's own work, the research findings are accurate, so there is no previously published material or content created by others in the thesis except for the mentioned references

During my thesis period, I received a lot of support and encouragement from the lot of people Without their valuable feedback, support, counsel, and advice, this thesis would not have been completed

First and foremost, I would like to express my appreciation to my advisor – PhD Nguyen Duy Linh – Lecturer at Banking University of Ho Chi Minh City , for

his sincere and unreserved support, valuable guidance, and recommendation

Thanks for his efforts and extensive knowledge to make my research a reality; his suggestions, guidance, and advice are always admired and greatly contribute to the thesis' success I would also like to express my gratitude to the professors and lecturers at the University of Banking for their support during my studies The experience and skills that I've gained have benefited me in completing this thesis

Last but not least, my family has been the most supportive Words fail me whenever it comes to expressing my gratitude for my parents' unending affection

To all of the above, as well as so many others, I simply want to convey my

gratefulness for all of your encouragement, support, and love

ABSTRACT

In the current economic climate, one of the key factors determining the

existence and growth of commercial banks in Vietnam is the ability to manage

risks, especially credit risks, in a comprehensive and systematic manner Credit risk

is often difficult to manage, resulting in capital and income losses for the bank

While credit risk prevention and limitation is a difficult and complicated problem, if

done correctly, it can benefit the bank in a number of ways, including cost savings,

increased income, capital maintenance concept for commercial banks, increased

consumer and investor trust, money to grow the market, and improved credibility,

position, brand, and profit margins The purpose of this thesis is to contribute to the

improvement of risk management efficiency and, as a result, the financial results of

commercial banks in Vietnam

After reviewing previous research, the author decided to use STATA 14.0

software to estimate the effect of risk management variables such as

Non-Performing Loan (NPL), Capital Adequacy Ratio (CAR), Bank Size (SIZE),

Loan-to-Deposit Ratio (LD), Cost-to-Income Ratio (CI), Gross Domestic Product (GDP)

and Inflation rate (INF) on financial performance factors such as Return On Asset

(ROA) and Return On Equity (ROE)

The results of previous empirical studies show that an increase in credit risk

variables such as Non-performing loan and Cost-to-income have a negative effect

on the financial performance of commercial banks On the other hand, the increase

of Capital Adequacy Ratio, Bank size and Loan-to-deposit Ratio have a positive

impact on the financial results of commercial banks in Vietnam In addition, the

research results show that social variables such as Gross Domestic Product and

Inflation Rate have an impact on financial results of commercial banks in Vietnam

CONTENTS

LIST OF CHART i

LIST OF TABLE i

LIST OF PICTURE i

LIST OF SPORTENED WORDS ii

CHAPTER 1: OVERVIEW OF THESIS 1

1.1 Introduction 1

1.1.1 Research background 1

1.1.2 Research issue and the urgency of the topic 2

1.2 Aim of study and research questions 4

1.2.1 Aim of study 4

1.2.2 Research question 5

1.3 Object and scope of the study 5

1.3.1 Object of study 5

1.3.2 Scope of study 5

1.4 Research method 5

1.5 Meaning of topic 6

1.5.1 Theoretically 6

1.5.2 In term of method 6

1.6 Proposed thesis structure 7

CONCLUSION CHAPTER 1 9

CHAPTER 2: THEORETICAL BASIS OF THE IMPACT OF CREADIT RISK MANAGEMENT ON THE FINANCIAL RESULTS OF COMMERCIAL BANK IN VIETNAM 10

2.1 Credit risk management 10

2.1.1 Theoretical basis for credit risk and credit risk management 10

2.1.2 Measurements represent credit risk management 12

2.2 Theoretical basis of financial results of commercial banks 16

2.2.1 Definition of financial result 16

2.2.2 Theoretical basis of macro factors affecting the financial results of commercial banks 17

2.2.3 Theoretical basis of financial performance of commercial banks 17

CONCLUSION CHAPTER 2 20

CHAPTER 3: DATA AND METHODOLOGY 21

3.1 Research data 21

3.1.1 Research process 21

3.1.2 Research sample 22

3.2 Research model and hypothesis 23

3.2.1 Research model 23

3.2.2 Description of variables and research hypotheses used in the model 24

3.3 Analysis of descriptive statistics and Correlation 26

CONCLUSION CHAPTER 3 34

CHAPTER 4: METHODS SELECTION RESULTS FOR THESIS MODEL 35

4.1 Result of method selection of model 1 35

4.2 Result of method selection of model 2 36

CONCLUSION CHAPTER 4 37

CHAPTER 5: THE RESULTS ON THE IMPACT OF CREADIT RISK MANAGEMENT ON THE FINANCIAL RESULTS OF COMMERCIAL BANK IN VIETNAM 38

5.1 Regression results (Model 1) 38

5.2 Regression results (Model 2) 40

CONCLUSION CHAPTER 5 43

CHAPTER 6: CONCLUSION AND SOLUTION TO INCREASE THE FINANCIAL RESULTS OF COMMERCIAL BANKS IN VIETNAM 44

6.1 Conclusions 44

6.2 Solutions to increase financial results of commercial banks in Vietnam 44

6.2.1 Group of suggestions to improve financial results 44

6.2.2 Group of recommendations to manage credit risk 46

6.3 Limitations of the topic and the next research direction 47

CONCLUSION 48

REFERENCE 49

APPENDIX 57

APPENDIX A: DESCRIPTIVE STATISTIC AND CORRELATION 57

APPENDIX B: RESULT OF POOLED OLS, FEM, REM AND GLS 59

APPENDIX C: Hausman test in each model 63

APPENDIX D: TESTING ERRORS OF ESTIMATED MODELS 64

APPENDIX E: DATA 67

i

LIST OF CHART

Chart 3 1 The average value of ROA fluctuation from 2016 – 2020 28

Chart 3 2 The average value of ROE fluctuation from 2016 – 2020 28

Chart 3 3 The average value of NPL fluctuation from 2016 – 2020 29

Chart 3 4 The average value of CAR fluctuation from 2016 – 2020 29

Chart 3 5 The average value of SIZE fluctuation from 2016 – 2020 30

Chart 3 6 The average value of LD fluctuation from 2016 – 2020 30

Chart 3 7 The average value of CI fluctuation from 2016 – 2020 31

Chart 3 8 The average value of GDP fluctuation from 2016 – 2020 31

Chart 3 9 The average value of INF fluctuation from 2016 – 2020 32

LIST OF TABLE Table 2 1 Research Hypotheses and Expectations 12

Table 3 1 Descriptive statistics 27

Table 3 2 Correlation analysis 33

Table 4 1 Fixed effect estimation results 35

Table 5 1 Regression results by Robust method 39

LIST OF PICTURE Picture 3 1 Research process 21

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CHAPTER 1: OVERVIEW OF THESIS

Introduce the topic and the necessity of the paper Determine research objectives, research questions, subject and scope of research In addition, verify research method, meaning and contribution of the thesis

1.1.1 Research background

The financial system's soundness is essential to the country since its failure could disrupt the country's economic growth (Das and Ghosh, 2007) A commercial bank is an organization that creates financial services such as issuing money in different ways, taking deposits, lending money and handling transactions, and generating credit Credit risk management is critical for banks and is an important part of the lending process (Campbell, 2007)

A commercial bank is a special type of enterprise doing business in the field

of currency, credit, payment, related to the whole economy, so this model contains a lot of risk potential Credit risk is the most common and likely characteristic in banking activities.The cause of that situation is subjective on the part of the bank (capacity, business organization ) and customers (with fraudulent acts to borrow bank loans increasingly appearing in sophisticated forms because of business losses; policy changes; capital investment in low economic efficiency projects ) or objective things such as natural disasters, epidemics, etc Even so, if risk is managed, systematic and methodical credit will reduce potential risks, bring benefits to banks and increase the confidence of consumers and investors After that, the bank will continuously develop strongly in terms of resources, improving the prestige, position, brand and market share of the bank

The author decided to conduct research on the topic “The Impact of Credit Risk Manegement on The Financial Results of Commercial Bank in Vietnam” in order to better understand the internal and macro factors affecting banks' financial activities, as well as to analyze and propose steps to improve the effectiveness of risk management at Vietnamese commercial banks

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1.1.2 Research issue and the urgency of the topic

In Vietnam, credit risk management has become a critical issue for financial institutions Risk management is also the most effective strategy that all businesses can use in order to avoid losing money or their investment capital The credit capital risk management system includes the following basic issues, which are based on international risk management principles: a complete and standard legal basis for credit extension; the quality of human resources in risk management; developing a system of market segmentation and customer segmentation; credit assessment and approval; and developing clear, specific processes for compliance with regulations

The credit institution system in Vietnam has remained stable, and commercial banks' financial management capability, especially risk management, has improved significantly in recent years, gradually meeting the requirements of international integration According to the roadmap, Vietnamese commercial banks have implemented Basel II capital adequacy requirements

Since Non-Performing Loan (NPL) level of Vietnamese commercial banks

remains high in comparison to other countries, risk management in the financial industry needs special attention

In theory, as credit risk arises, it would have an immediate impact on commercial banks' profits It then has an effect on commercial banks' business activities as well as their financial performance There are studies in the banking sector that demonstrate several factors influencing commercial bank financial efficiency, such as Kutsienyo (2011); Kaaya & Pastory (2013); Abiola, I & Olausi (2014); Alshatti (2015); Saeed and Zahid (2016); Hamza (2017), Ekinci and Poyraz (2019)

Commercial banks are concerned with credit risk management

All commercial banks must deal with credit risks, which are unavoidable and objective, often linked to credit activities, and are both complex and diverse Credit risk is difficult to manage and sometimes results in defaults, as well as a loss of capital and profits for the bank

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If a commercial bank has difficulties, it would have an immediate impact on the rest of the banking system As a result, credit risk management provides market protection and stability

Commercial banks will suffer severe consequences as a result of poor credit risk management The explanation for this is that a bank's equity is so limited in comparison to its overall asset value that only a small percentage of a problem loan portfolio will put a bank in danger of bankruptcy If a loan with a high value from a business cannot be repaid, it can cause significant harm to the business and to the bank

Commercial banks follow a stringent credit risk management procedure that includes risk detection, risk measurement, risk monitoring, and risk treatment Especially, by following four steps:

Credit risk identification: Credit risk identification is a continuous and

systematic procedure The recognition of the borrower's financial and Non-financial signs for problem loans helps to minimize bank losses

Financial risk management and control: The most important stage in a commercial bank's credit risk management is financial risk management and control Credit risk management and control is a collection of tools, rules, standards, and measures that

a bank uses to prevent and manage credit risk: credit policy, credit process, credit risk management apparatus, and credit limits

Handling credit risk: The final step in credit risk management is to handle

credit risk The bank will make decisions and take actions to fund, resolve, and minimize the costs of risks and losses caused as a result of the credit risk

The four steps in the credit risk process are connected and essential to credit risk management's success Steps 1 and 3 are the most critical of these 4 steps; the more involved the bank is in managing and controlling risks, the less losses in credit operations can occur The central issue in banking credit management is to include strategies and methods for early detection of risks Many banks have developed risk early warning systems, incorporated credit assessment, and integrated the credit management information reporting system in recent years

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Issues posed in the sense of integration:

According to Vietnam Business Insider magazine (2017), the banking industry is undergoing a time of unparalleled change and uncertainty The rivalry between banks, non-banks, and financial technology companies (FinTech) is getting more severe Continuously, the low economic climate and low interest rates are placing pressure on the conventional system of profit generation The problem of risky debts, which has yet to be properly resolved, remains a risk for Vietnamese commercial banks Furthermore, the Technological Revolution 4.0, which is based

on the foundations of connected internet, big data, and cloud computing, is having

an impact on the banking industry's information systems, leading to its rapid development

There is a need for a systematic risk management system Basel II is the most detailed and relevant standard currently in use in commercial banking management Moreover, the types of risks raised by the 4.0 Revolution have a huge effect on the security of banking records, justifying the safety of consumer accounts and internal databases technology-based solutions correlated with growing team ability and professional ethics training

1.2.1 Aim of study

The following are the author's general and precise objectives:

• Determine and examine the effect of credit risk management on commercial banks' financial results in Vietnam, with an emphasis on:

- Discover how credit risk management is influenced by various factors

- Analyze the information have gathered about the variables that influence credit risk management

- Determine the financial effect of the newly discovered agents on Vietnam's commercial banks

• Propose solutions to strengthen credit risk management performance, thereby improving commercial banks' financial results in Vietnam, specifically:

- The cause of the risk to commercial banks' financial results in Vietnam has been identified based on the data obtained following the report

• What are the motivating forces in commercial banks' credit risk management?

• What impact do actors have on commercial banks' financial results in Vietnam?

• What improvements are recommended to fix commercial banks' credit risk management in Vietnam?

Loan-1.3.2 Scope of study

The author chose 25 commercial banks from a list of 31 commercial banks in Vietnam compiled by the website nganhangviet.org for the questionnaire survey (Shown in Appendix A, Table A.1)

The research will be conducted periodically for five years, beginning in the first quarter of 2016 and concluding in the fourth quarter of 2020

The author chose to construct a research model based on Kutsienyo (2011); Kaaya & Pastory (2013); Abiola, I & Olausi (2014); Alshatti (2015); Saeed and Zahid (2016); Hamza (2017), Ekinci and Poyraz (2019) research using STATA 14.0

Pit represent performance of bank i at time t

Yit is the vector of variable characteristic of banks i at time t

Zit represents features of the commercial bank

eit is the error term

The empirical frame work for the investigation of the link between credit risk management practices and commercial banks’ performance is given as follows:

Pit = β0 + β1NPLit + β2CARit + β3SIZEit + β4LDit + β5CIit + β6GDPit + β7INFit + eit

NPL, CAR, SIZE, LD, CI, GDP and INF are independent variables

1.5.1 Theoretically

The results of this thesis can be used as a reference for administrators, policymakers, and academics to help improve the efficiency of the Bank's operations and the banking system benefit of the entire Banking governance and research

Simultaneously, aiding banks in developing strategies and policies to reduce credit-related risks, losses, and capital losses

1.5.2 In term of method

Using quantitative research methods and STATA 14.0 software to perform estimation analysis, the author evaluated the effect of risk management on the financial performance of commercial banks in Vietnam The following are the specific steps:

• Data collection method: The study's research theory, study sample design, and data collecting were all developed The research framework must satisfy the following requirements: selection of independent variables related to the bank's internal and macro aspects, dependent variables representing the bank's assets and capital, and research models that give credible results and

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conclusions To gather data for the study, the author used secondary data collected from commercial bank websites, such as annual reports, cash flow reports, business performance, and so on in period 2016 to 2020

• Data processing method: After the data has been collected, it will be calculated into variables using Microsoft Excel software in accordance with the study's requirements Then, using the statistical program STATA 14.0, these data are processed using econometric models (Pooled OLS, FEM, REM) to verify the credit risk management factors affecting commercial bank credit risk financial results

• Quantitative method: are used to detect relationships and connections between variables and to verify the outcomes of data analysis

There are six chapters in the research topic:

Chapter 1: Overview of Thesis

Providing an overview of a research subject, including the topic's urgency, research purpose, research issue, research scope, and significance

Chapter 2: Theoretical basis of The Impact of Credit Risk Manegement on The Financial Results of Commercial Bank in Vietnam

Present theories and related studies that have been conducted in order to develop research models and research hypotheses

Chapter 3: Research methods and data

Clearly state the order in which the steps should be completed and the procedure for putting the analysis into action Determine the number of samples require

Chapter 4: Methods selection results for thesis model

Analyze the results of the tests to determine which model perfectly suited the models in this thesis

Chapter 5: Results on The Impact of Credit Risk Manegement on The Financial Results of Commercial Bank in Vietnam

Presentation of empirical research findings on the effect of risk management

on commercial banks' financial results in Vietnam

The author has chosen to base research questions, methods, and structures on the research objectives in order to ensure that the goals are reached during the thesis' completion The findings of this thesis can be utilized by administrators, politicians, and academics to assist enhance the efficiency of the commercial bank and the financial system as a whole

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CHAPTER 2: THEORETICAL BASIS OF THE IMPACT OF CREADIT RISK MANAGEMENT ON THE FINANCIAL RESULTS OF

COMMERCIAL BANK IN VIETNAM

After learning about the factors that cause credit risk and have an effect on commercial banks' financial results in Vietnam To conduct the study, the author

chose the following key factors: Non-Performing Loan (NPL), Capital Adequacy Ratio (CAR), Bank Size (SIZE), Loan-to-Deposit Ratio (LD), Cost-to-Income Ratio (CI), Gross Domestic Product (GDP), Inflation rate (INF), Return on Equity (ROE), and Return on Assets (ROA)

2.1.1 Theoretical basis for credit risk and credit risk management

• Credit risk

“Credit risk is the propensity of the creditor to the bank or counterparty to not fulfill payment obligations under the terms agreed,” according to Basel 2's "17 principles of credit risk management," published by the Basel Committee in September, 2000 Furthermore, the Basel Committee on Banking Supervision (BCBS) has described credit risk as “the risk of asset loss that can occur when a counterparty fails to meet a financial obligation or contractual obligations with the bank, including failure to pay debt when it is due, whether it is principal or interest.” That is, credit risk has been assessed based on the borrower's performance

of financial commitments, including principal and interest repayment

Credit risk is considered as the loss caused by the client's failure to repay the loan or the deterioration of the loan's credit quality, according to Joel Bessis' book Risk management in Banking (2001)

In Clause 1, Article 3 of Circular 02/2013/TT-NHNN dated January 21,

2013, The State Bank of Vietnam described credit risk as follows: “Credit risk in banking operations is: Potential losses to debts of credit institutions, international bank branches due to customers' failure to perform or fulfill part or all of their obligations as committed.”

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According to Kaaya & Pastory (2013), credit risk is also linked to lending, which is also the key practice in banking operations, so credit risk is a dangerous threat to commercial banks' earnings

As a result, credit risk may arise at any time and refers to the uncertainty surrounding the creditors' ability to meet their payment obligations to the bank in compliance with signed commitments Credit risk is an unavoidable part of a bank's operation; in fact, a bank engaged in financial-credit business may be assumed to be

a profitable business enterprise based on the risks associated with that activity

• Credit risk management

Credit risk management is defined as the process of detecting, analyzing risk factors, and measuring risk levels, and then selecting, implementing, and managing credit operations to reduce credit risk By removing risks from the credit-granting procedure Maximizing profits for owners, becoming the best commercial bank in terms of credit risk management, and using assets in credit extension activities are two main goals in credit risk management (phantichtaichinh.com)

Credit risk according to the Basel Banking Supervisory Committee Basel Committee on Banking Supervision (2001) is the possibility of partial or total loss

of outstanding loans due to credit events (default risk), non-payment of obligations service due, denial/suspension or change and credit rating restructuring

The Basel Committee on Banking Supervision The Basel Committee on Banking Supervision (1999) defined credit risk as the possibility that a bank borrower or counterparty will not meet its obligations under the agreed account

Credit risk management, according to the Basel Committee (2006), is defined as “the application of measures to maximize the rate of return adjusted to credit risks while maintaining credit balances with in permissible parameters.” The Basel Committee's principle of credit risk management makes it clear that the aim

of credit risk management is to increase profits by guaranteeing losses incurred by credit risks All of that is achieved within the limits that the bank will recognize

Credit risk management is the mechanism by which a bank establishes and maintains management strategies that impact credit activities in order to determine, advise, measure, control, and reduce credit risk (Le Thi Huyen Dieu, 2010)

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Based on the research results of Kutsienyo (2011), Capital Adequacy Ratio

(CAR), Bank Size (SIZE), Loan-to-Deposit Ratio (LD), Cost-to-income ratio (CI), Money Supply (LMS), Concentration (BKC), Liquidity (AOD) and two macro factors, including Gross Domestic Product (GDP), Inflation Rate (INF) are

variables that represent the financial results of banks Moreover, Non-Performing Loans, according to authors Abiola and Olausi (2014), illustrate how banks manage their credit risk by determining the ratio of Loan Loss to Total Loan Amount With

limited data, the author selected the variables Non-Performing Loan (NPL), Capital Adequacy Ratio (CAR), Bank Size (SIZE), Loan-to-Deposit Ratio (LD), Cost-to- Income Ratio (CI), and two macro factors, including Gross Domestic Product (GDP) and Inflation Rate (INF) used in this thesis

Table 2 1 Research Hypotheses and Expectations

name

Expectation

1 NPL + Kutsienyo (2011), Abiola and Olausi (2014)

2 CAR + Kutsienyo (2011), Abiola and Olausi (2014)

Source: Compiled by the author

2.1.2 Measurements represent credit risk management

• Non-Performing Loan

The entire amount borrowed for which the consumer has not made payments

within a specified time period is referred to as Non-performing loans The NPL ratio

reveals how much of a bank's loan portfolio is classified as Non-performing loans per 100 dong of loans, indicating the quality and risk of the loan portfolio This percentage is high in comparison to the industry average and is on the rise, which could indicate that the bank is having trouble managing loan quality This ratio, on the other hand, is low in comparison to past years, indicating improved credit

Many negative effects of the Covid-19 outbreak have been felt by Vietnamese commercial banks since the beginning of February 2020 This epidemic has been largely contained in our country to date However, the economy remains challenging, and many companies can not afford to borrow money, and many businesses do not have a need to borrow because they have not already secured loans or signed commodity consumption contracts Trends indicate that credit risk forecasts will remain high from now until the end of 2020 and the first months of

2021, affecting commercial banks' business results The effect of Non-Performing Loans on the commercial banking system has had extremely difficult consequences Not only do Non-Performing Loans reduce commercial banks' productivity in the use of resources, earnings, cash flow risk, and solvency, but it also damages their credibility.[23]

• Capital Adequacy Ratio

Capital Adequacy Ratio (CAR) is a financial metric that represents the

relationship between commercial banks' equity and risk-adjusted assets

The capital adequacy ratio (CAR) is a risk-based capital adequacy ratio National regulators keep an eye on a bank's CAR scheme to make sure it can absorb

a fair loss while still meeting regulatory capital requirements According to previous research, there is a mixed relationship between capital and bank profitability It is

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said that the relationship between capital and bank profitability is unpredictably complex A number of studies have found a connection between capital and bank profitability Some research, on the other hand, indicate that capital has a negative relationship with bank profitability As a result, the effect of capital on returns can

be said to be potentially unpredictable

The capital adequacy ratio (CAR) maintains the financial solvency of banks

in captivating an equitable loss Historical research has indicated that announcement

of regulatory revolution is perceived as negative by the market A research conducted by (Djan, 2015) extents over cost per loan assets, capital adequacy ratio and default rate, initiate that these limitations have a contradictory impact on the banks performance, the furthermost conjecturer of the financial performance of the bank is the default rate

Charged with a global depression and prolonged recession, as well as the failure of a number of major banks around the world, Vietnamese banks have extended far too much credit to real estate and securities Via Circular No 13/2010/TT-NHNN dated May 20, 2010, the State Bank of Vietnam (SBV) raised the capital adequacy ratio to 9%, higher than the 1% stated in Decision 457/2005/QD - The State Bank of Vietnam, and increased the risk weight for real estate and securities-related credits.[28]

• Bank Size

Bank size can show the economies of scale The large banks benefit from economies of scale which reduces the cost of production and information gathering (Boyd and Runkhle, 1993)

Harris and Raviv (1990), Wiwattnakantang (1999), and Chen (2004) found a positive relationship between firm size and financial leverage in their research As a result of their improved risk tolerance and management, large banks also have higher debt levels or financial leverage than small banks Beven & Danbolt (2002) found that the size of a company has an inverse relationship with short-term debt and a positive relationship with long-term debt, proving the validity of this claim Furthermore, due to their higher creditworthiness, large commercial banks have an easier time raising capital from public deposits and borrowing from other

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institutions than small banks It can be seen that banks, due to their size, have greater potential in both finance and human capital, allowing them to diversify business fields and provide credit and Non-banking products Credit where credit is due These banks have a consistent cash flow, and their chances of going bankrupt are lower than those of small banks

According to the principle of asymmetric information (Asymmetric Information), the size of the company has a positive impact on the debt ratio Antoniou et al (2002) used survey data from French, German, and British companies to explain this Domestic research by Tran Hung Son (2013), which looked at companies listed on the Vietnamese stock exchange, backs up this argument

The total assets of a bank can be used to determine its size; the larger a bank's assets are, the larger it is According to international standards, this is one of the most important criteria for evaluating the financial strength of a bank's business activities In this study, asset size is analyzed using the natural logarithm of total assets of banks to lessen the gap across banks Credit risk and bank size have a negative association, according to Fernandez de Guevara et al and Tabak et al As a result, it is expected that the size of total assets and bank financial stability will have

a positive relationship (Quoc, N Q (2020))

• Loan-to-deposit Ratio

The loan-to-deposit ratio (LD) is used to assess a bank's liquidity by

comparing a bank's total loans to its total deposits for the same period The LD is expressed as a percentage If the ratio is too high, it means that the bank may not have enough liquidity to cover any unforeseen fund requirements Conversely, if the ratio is too low, the bank may not be earning as much as it could be (vnbiz.com)

As credit needs emerge in the future, banks with low ratios will have more room for loan growth, particularly now that the State Bank has increased the ratio of

outstanding loans to loans to total deposit (LD) for all banks to 85% When it comes

to the impact of Circular No 22/2019/TT-NHNN, some observers believe that the

unified LD regulation is promoting greater equality among banking groups and,

The cost-to-income ratio Aside from ROE, ROA, NIM, and other important indicators, the ratio is one of the most important indicators for evaluating a bank's

business efficiency In other words, the lower the CI, the worse the bank's results operate effectively, resulting in a lower cost per dollar of sales The CI of larger banks is typically lower than that of smaller banks On the other hand, CI may be

temporal Due to the system's "austerity" response to Covid-19's influence, the

banks with the lowest CI ratio.[27]

2.2.1 Definition of financial result

Financial results in a commercial bank represent the method of using the bank's resources to achieve the highest benefit at the lowest expense There are numerous points of view on commercial bank financial outcomes, and depending on the thesis's objective, this notion can be viewed from several positions

Financial and banking stability, according to Nadya and Thomas (2011), is a situation in which the banking sector effectively fulfills activities such as resource allocation, risk distribution, and revenue distribution import Pirre and Terhi (2010) further claim that bank financial stability is the polar opposite of bank financial instability, which happens when banks are at risk of going bankrupt Payments will

be made in the next quarters

It can be observed from there that the financial results have the same meaning as the bank's business results and financial soundness This outcome not only shows the bank's profitability, but it also represents the bank's liquidity stability and future risk tolerance

Domestic Product (GDP) It serves as a comprehensive scorecard of a country's

economic health because it is a wide measure of entire domestic production.[12]

Inflation is defined as a phenomenon in which prices rise fast and continuously over time.[28]

GDP growth has been considered to have a negative influence on credit risk

in empirical research If the economy grows and develops, it will create good conditions for the business activities of customers who have been provided credit,

so credit risk will be reduced during this period Due to the extreme recent economic crisis, commercial banks' credit risk management will be more effective

Inflation rate (INF), like GDP growth, has a significant impact on credit risk

management at commercial banks: High inflation rate is one of the causes that makes it harder for businesses and individuals to operate Speculation and hoarding are common when people participate in the economy, in circulation, and when the price of products rises too quickly, generating an artificial imbalance that disrupts circulation This has a detrimental impact on company activity as well as revenues

in all areas of the economy

Inflationary pressures, such as hyperinflation, put the credit system's operation in risk The society's money supply is fast reducing, players in the economy may become insolvent, and economic calculations are becoming increasingly distorted over time, making it difficult to carry out activities Credit risk will inevitably arise as a result of investment, and credit risk management efficiency will be lower than during periods of low inflation (Tien, N V (2005))

2.2.3 Theoretical basis of financial performance of commercial banks

Due to a lack of capacity and time, the author of this research project mainly considers and analyses the financial results of commercial banks using two financial indicators of profitability, namely the profitability ratio and profitability the ratio of

Return on Equity (ROE), and the ratio of Return on Assets (ROA)

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Profitability, according to Ehow (2012), is a measure of money efficiency that is a required but insufficient condition for sustaining financial balance A reference period should be used when assessing profitability

• Ratio of Return on Assets (ROA)

The rate of return on total assets is known as ROA The return on each dollar

of the bank's assets is calculated by the ROA It represents the capacity of a bank's management to produce income from its assets Most regulators consider ROA to be

the best metric for measuring bank profitability, according to Hassan and Bashir (2003) This measure shows that the higher the bank's total assets, the lower the

ROA value, meaning that the assets are less profitable This is also rational, given

that banks are finding it more difficult to pick superior investment projects as they increase their business size

• Ratio of Return on Equity (ROE)

Return on equity (ROE) is a metric that determines how effectively a

company's equity is used Nguyen Thi Quynh Huong (2012) also stated that the

analysis of ROE will assist banks in identifying the strengths and weaknesses in

banking operations in general and in bank profitability in particular

Apart from ROA, which represents a bank's average return on total assets,

ROE reflects a particular target of commercial banks: the efficiency in which equity

is used in operations action in the field of investment the value of ROE, according

to analysis, moves in lockstep with the trend of ROA; additionally, this index

demonstrates the resiliency and impact of financial leverage in commercial banks business-related (Dr Nguyen Quang Minh,2020)

Managers would be able to appreciate the real results of commercial banks' financial performance as well as the bank's financial strength by analyzing return on

assets (ROA) and return on equity (ROE) to determine their profitability Regarding

that, carry out a scientific reform of the banking system in order to achieve term growth and potential competition with foreign financial institutions (Period 2

long-of Financial Magazine No 11 – 2015)

In fact, commercial banks in Vietnam are constantly evolving, increasing the

two financial ratios of ROE and ROA in order to increase their profitability From

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2009-2014, the general trend of ROE of commercial banks is to decrease over the

years During the period 2009 – 2014, commercial banks implemented the project

“Restructuring the system of credit institutions for the period 2011 – 2015” and handled bad debts in accordance with Prime Ministerial Decision No 254/QD-TTg dated March 1, 2012, the profits of commercial banks tend to decrease significantly.Decision No 1058/QD-TTg in 2017 of the Prime Minister approving the Project “Restructuring the system of organizations’ credit associated with bad debt settlement in the period 2016 – 2020” has helped commercial banks orient their business activities to increase profits.[22]

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CONCLUSION CHAPTER 2

In Chapter 2, the author explained the reasons for choosing the model and the influencing variables and clearly stated the reference articles for each variable and also stated the expected signs that the variables will achieve after running the model

The author establishes the theoretical foundation of credit risk, credit risk management; background theories on independent variables with intrinsic and macro factors include Non-Performing Loan, Capital Adequacy Ratio, Bank Size, Loan-to-Deposit Ratio, Cost-to-Income Ratio, Gross Domestic Product, Inflation rate, Return on Equity, and Return on Assets for the period 2016-2020

Moreover, the author has gathered and presented the current regulations being used for each variable affecting the financial results of commercial banks in Vietnam

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CHAPTER 3: DATA AND METHODOLOGY

3.1.1 Research process

Picture 3 1 Research process

Source: Compiled by the author

Picture 3.1 shows the research process of the thesis including the following steps:

Step 1: The author will conduct a review of the background theory related to

credit risk management of banks and business performance of commercial banks

At the same time, the author analyzes and reviews the results of related previous studies to serve as a basis for identifying variables and building research models

Step 1: Review of background theory and

previous studies

Step 2: Build the model and research method

Step 3: Analyze the impact of dependent variables on the bank's financial results

Build and design variables

Data processing

Regression analysis

Step 4: Test the regression model

Step 5: Analyze the regression results and

discuss the research results Step 6: Suggest policy implications and limitations of the topic

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Step 2: On the basis of theory and related studies, the author builds a

research model and applies appropriate research methods to analyze the impact of the risk management factors of the enterprise bank to the bank's business performance in the next step

Step 3: From the proposed research model, including Pooled, FEM and

REM, the author will estimate the impact of each element of the bank's risk management on the business performance of the joint stock commercial banks in Vietnam

Step 4: Test the regression model: to ensure reliable research results, the

author conducts related tests such as testing for multicollinearity, autocorrelation, and methodological phenomena error error changes

Step 5: Analyze the regression results and discuss the research results

Step 6: Suggesting policy implications and limitations of the topic as well as

future research directions

3.1.2 Research sample

Data of the author were collected by using a sample of observations from 25 Vietnamese commercial banks (listed in Table A.1 of Appendix A) The author selects these 25 banks because it is 31 commercial banks in Vietnam who have the most complete data from the required indicators for the essay This bank data is collected using financial statements and annual reports This is panel data (shown in Appendix E), with n being the number of commercial banks and t representing the research period (5 years)

The formula for determining sample size, according to Tabachnick, B G., & Fidell, L S (1996), is n ≥ 50 + 8m, where n is the minimum sample size required and m is the number of independent variables To calculate sample size, use the formula: The thesis's sample size was calculated to be n ≥ 106 (because the study has 7 independent variables)

The sample size of the thesis, according to Tabachnick's formula, is 125 observations, which is more than 106 observations, ensuring that the sample size represents the research population

measured by their return on assets (ROA) and return on equity (ROE) Although the author mentioned two indicators (ROE, ROA) in Chapter 2 that reflect commercial

bank performance, after reviewing related previous studies, the author determined

that most studies use ROE and ROA as a measure of commercial bank performance,

so the author chose these two indicators to represent the dependent variable

Pit (ROE, ROA ) = F (Yit, Zit) + eit

Including:

Pit represent performance of bank i at time t

Yit is the vector of variable characteristic of banks i at time t

Zit represents features of the commercial bank

eit is the error term

In order to have more accurate results, the author first analyzed variables bearing variables with internal factors of banks including Non-Performing Loan, Capital Adequacy Ratio, Bank Size, Loan-to-Deposit Ratio, Cost-to-Income Ratio affect the financial results of commercial banks Next, the author used two macro factors: Gross Domestic Product and Inflation rate to study the influence of macro factors on the business results of commercial banks Therefore, from the above model, the author proposes two specific research models as follows:

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Model 1:

ROA = β0 + β1NPLit + β2CARit + β3SIZEit + β4LDit + β5CIit + β6GDPit + β7INFit + eit

Model 2:

ROE = β0 + β1NPLit + β2CARit + β3SIZEit + β4LDit + β5CIit + β6GDPit + β7INFit + eit

3.2.2 Description of variables and research hypotheses used in the model

The thesis uses the quantitative research method with the model inherited from the research of Kutsienyo (2011); Kaaya & Pastory (2013); Abiola, I & Olausi (2014); Alshatti (2015); Saeed and Zahid (2016); Hamza (2017), Ekinci and Poyraz (2019)

3.2.2.1 Dependent variable

Return on Assets (ROA) is defined as the rate of return on total assets ROA

measures the return on each dollar of assets of the Bank It reflects a Bank's management ability to generate profits from the Bank's assets

𝑅𝑂𝐴 = Net Income

Total Assets

Return on equity (ROE) is defined as the ratio of net income to equity ROE

measures profitability per dollar of equity

𝑅𝑂𝐸 = Net Income

Total Equity

3.2.2.2 Independent variables

Non-performing loan(NPL)

Non-performing loan is the total amount borrowed for which the customer

has not made payments within a given time period The NPL variable is referenced

through previous studies by Kutsienyo (2011), Boahene et al (2012), Afriyie et al (2012), Abiola and Olausi (2014), Alshatti (2015) and Saeed and Zahid (2016),

Ekinci et al (2019) The author expects NPL to have a positive effect on ROA and

ROE

𝑁𝑃𝐿 = Total Non − Performing Loan

Total Customers Loan

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Capital adequacy ratio (CAR)

Capital adequacy ratio (also known as Tier 1 Capital Ratio) is the ratio between equity and total assets This variable is used to make comparisons between

banks between operational security and financial strength The CAR variable is

referenced through previous studies by Kutsienyo (2011), El-Ansary & Hafez (2015), Abiola and Olausi (2014) The author expects CAR to have a positive effect

on ROA and ROE The standard formula for CAR is:

𝐶𝐴𝑅 = Total Tier I and Tier II Capital

Risk Adjusted AssetsHowever, with limited data on commercial banks, the author will calculate

CAR using the formula by Abiola and Olausi (2014):

𝐶𝐴𝑅 = Equity

Total Assets

Bank size (SIZE)

Bank size is chosen by many authors to include in the research model, which

is measured by taking the natural logarithm of total assets The SIZE variable is

referenced through previous studies by Kutsienyo (2011), Ekinci et al (2019) and

Kosmidou (2008) The author expects Bank Size to have a positive effect on ROA and ROE

𝑆𝐼𝑍𝐸 = Ln(Total Assets)

Loan-to-deposit (LD)

The loan-to-deposit ratio is used to assess the Bank's liquidity, and measures the Bank's ability to finance loans through funds raised from deposits The variable

LD is referenced through previous studies of the authors Kutsienyo (2011), Kolapo

et al (2012) and Bizuayehu (2015) The author expects the Loan-to-deposite ratio to

have a positive effect on ROA and ROE

𝐿𝐷 = Loan OutstandingTotal Margin Deposit

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Cost-to-income (CI)

The cost-to-income measures a bank's ability to convert resources into income and indicates how efficiently the bank is managing its business operations

The variable CI is referenced through previous studies by Dao et al (2020) and

Kutsienyo (2011) The author expects the Cost-to-deposite ratio to have a negative

effect on ROA and ROE

𝐶𝐼 = Operating Expense Total Margin Deposit

3.2.2.3 Macro variable

Gross Domestic Product (GDP)

The GDP growth rate variable is calculated as the GDPG growth rate of the year of observation The GDP variable is referenced through previous studies of the

authors Ekinci et al (2019), Kutsienyo (2011), Kosmidou (2008) The author

expects GDP to have a positive effect on ROA and ROE

𝐺𝐷𝑃𝑡 = GDP𝑡− 𝐺𝐷𝑃𝑡−1

GDP𝑡−1

Inflation rate (INF)

The inflation rate variable is calculated as the inflation rate of the year of

observation The INF variable is referenced through previous studies by Ekinci et

al (2019), Kutsienyo (2011), Kosmidou (2008) The author expects INF to have a positive effect on ROA and ROE

𝐼𝑁𝐹𝑡 = Inflation rate announced by the State agency

The descriptive statistics for the variables in the study model are shown in Table 3.1 The total number of samples observed is 125 = 25×5

Table 3.1 presents descriptive statistics of the variables in the research model

The mean NPL is 0.019, the minimum 0.005 and maximum 0.069 On the average, the CAR is 0.081 and minimum and maximum is 0.040 and 0.184 respectively Regarding the average of SIZE is 8.219 where minimum and maximum is 7.279 and 9.180 respectively The mean of LD is 0.815 and bears minimum and maximum 0.476 and 1.308 respectively The mean CI is 0.514, the minimum 0.287 and

maximum 0.874

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Table 3 1 Descriptive statistics

Source: Extract data from Stata

For the macro variables, the average value of GDP is 0.060, the minimum 0.029 and maximum 0.070 While with the average value of INF is 0.031 where

minimum and maximum is 0.026 and 0.035 respectively

For the ROA variable, the average value of Net Income to Total Assets (ROA)

is 0.009 (0.9%), the minimum 0.0000143 and maximum 0.0305 While with the

average value of return on Equity (ROE) is 0.1067 (10.67%) where minimum and

maximum is 0.00028 and 0.258 respectively

To show more clearly about the reality of the variables affecting the financial results of the selected commercial banks in this thesis between 2016 and 2020, the author will present through the graphs showing the data collected by the author expressed as follows:

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Chart 3 1 The average value of ROA fluctuation from 2016 – 2020

Source: Author made

In the period 2016 - 2020, the average value of net income on total assets of Vietnamese commercial banks tends to increase markedly The average value of

ROA of banks in 2020 is at the highest level at nearly 1.2% and reached the lowest

level in 2016 at nearly 0.6%

Chart 3 2 The average value of ROE fluctuation from 2016 – 2020

Source: Author made

The average value of return on Equity tends to increase from 2016 to 2020

Like the trend of ROA, ROE of Vietnamese commercial banks is the lowest in 2016

at approximately 0.7% and the highest in 2016 The average value of ROE reaches

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Chart 3 3 The average value of NPL fluctuation from 2016 – 2020

Source: Author made

The average value of non-perfoming loans of 25 Vietnamese commercial

banks tend to decrease from 2016 to 2020 In 2016, NPL of commercial banks reached more than 2% However, NPL tends to decrease and will reach nearly 1.7%

in 2020 This is a positive sign that the risk management of Vietnamese commercial banks is effective and financial results will become better

Chart 3 4 The average value of CAR fluctuation from 2016 – 2020

Source: Author made

From 2016 to 2020, the average value of commercial banks' Capital

Adequacy Ratio is likely to change CAR's average value fell by more than 7.6% in

2017, with the largest gain fluctuating about 8.5% in 2018 The average value of