THEORETICAL FRAMEWORK AND RESEARCH
Commercial banks introduction
A commercial bank is a type of financial institution that accepts deposits and provides various financial products, including savings accounts and certificates of deposit, while also offering business loans and mortgages Unlike investment banks, commercial banks have distinct functions, although some may engage in dual business At its core, a commercial bank's primary functions include accepting deposits and providing loans, with specific types of deposits and loans varying across institutions Deposits can range from savings account deposits to fixed and recurring deposits, while bank loans may include cash credit, money at call, overdraft facilities, and bill discounts.
In Vietnam, a commercial bank is broadly defined, aligning with the global understanding of the term According to the 1997 Vietnam Law on Banking, a commercial bank is a type of credit institution authorized to conduct a wide range of banking activities These activities encompass monetary transactions and banking services, primarily focusing on accepting deposits and using those deposits to offer credit and payment services.
Vietnam's commercial banks align with international definitions in terms of their functions, yet they operate with a flexible scope that allows for diverse activities This flexibility enables banks like BIDV to serve dual roles as both investment and commercial institutions BIDV accepts public deposits and engages in typical commercial banking activities while also acting as a significant investor in various projects and key economic sectors This dual function positions BIDV as a major contributor to Vietnam's economic growth, supporting numerous enterprises and driving development.
General review of Bank profitability
The profitability of commercial banks is a crucial indicator of their operational efficiency and competitiveness compared to other institutions, as well as a reflection of the management quality of their boards Profitability is influenced by both internal and external determinants; internal factors are controllable elements related to management practices aimed at achieving expected profits, while external factors encompass macroeconomic influences and bank-specific conditions that are beyond the banks' control This study focuses on profitability management at the bank level, emphasizing the importance of internal determinants, which can be derived from the bank's financial statements for relevant data analysis (Li & Zou, 2014).
For commercial banks, the profit might come from various sources including transfer fee, interest on bank loan and other banking services (Li &Zou,
In 2014, bank loan services constituted a significant portion of overall bank revenue and profit, primarily determined by the net interest income, which is the difference between interest earned on loans and interest paid on deposits While most commercial banks charge a higher interest rate on loans than what they offer depositors, there are instances, such as with checking accounts, where no interest is charged Ultimately, a bank's profit is calculated by subtracting operational expenses—such as staffing, rent, and utilities—from its total revenue.
The DuPont model serves as a valuable framework for analyzing profitability in firm-level management, with Return on Equity (ROE) as its cornerstone This model further breaks down ROE into Return on Assets (ROA), which is analyzed through asset turnover and net profit margin While this detailed breakdown offers specific profit measurement methods, the research focuses on ROE and ROA as the primary indicators of profitability These two variables are crucial within the DuPont model and are widely recognized in existing literature as key proxies for profitability.
The most common way to measure bank profitability and overcome the limitations of net income is through ROA and Return on Equity (ROE)
Return on Assets (ROA) and Return on Equity (ROE) are essential metrics for assessing bank profitability, highlighting the effectiveness of a bank in utilizing its assets and equity to generate profits The calculation of ROA and ROE provides valuable insights into a bank's financial performance.
Return on equity (ROE) is a key indicator of profitability, measuring the earnings generated for each dollar of capital equity contributed by shareholders (Gizaw, Kebede and Selvaraj, 2015) It reflects the efficiency of transforming capital investments into profits, making a high ROE desirable for stockholders However, striving to maximize ROE can lead to increased risks for banks, such as a relative decrease in equity compared to net income, which may result in regulatory capital violations and a heightened risk of insolvency (Misker, 2015) Therefore, it is essential to carefully set ROE to strike a balance between profitability and risk management ROE is calculated by dividing net income by total shareholders' equity and multiplying by 100.
Return on Assets (ROA) is a key financial metric that evaluates a bank's profitability in relation to its total assets It serves as an indicator of how efficiently a bank converts its assets into profit Similar to Return on Equity (ROE), ROA is generally expected to have a positive correlation with profitability during profit maximization, although this relationship may not always hold true To calculate ROA, divide net income by total assets and multiply the result by 100.
Return on assets (ROA) and return on equity (ROE) are widely recognized as key indicators of profitability in various studies, effectively showcasing a business's profit-making capacity over time However, it is not essential for these metrics to yield identical outcomes when assessing the relationship between profitability and its influencing factors Consequently, incorporating both ROA and ROE in the analysis is crucial for achieving a more comprehensive understanding of profitability.
1.2.3 Internal factors effecting the bank profitability
Non-performing loans (NPLs) refer to payments that remain overdue after their maturity date, representing a significant challenge in the financial sector The non-performing loan ratio, calculated as the ratio of NPLs to total loans, serves as a key indicator of credit risk Research by Maxwell and Peter (2016) highlights that a rising NPL ratio signals an increased likelihood that banks may struggle to recover outstanding payments As a result, commercial banks facing elevated levels of non-performing loans are likely to experience substantial financial losses, ultimately leading to decreased profitability.
A negative relationship exists between bank profitability and the non-performing loan rate, indicating that banks must effectively manage and minimize bad debt to maintain financial health (Messai & Jouni, 2013).
In 2009, it was argued that the complex definition of non-performing loans (NPLs) could lead to inconsistencies in how this financial indicator is recorded across different countries, particularly those with varying bad debt recognition practices Although the calculation of NPLs is standardized, the intricate definition of overdue terms contributes to confusion Specifically, the International Monetary Fund (2005) established a minimum standard for overdue terms, which may not be uniformly applied, further complicating the assessment of NPLs globally.
The timeframe for recognizing credit risks varies significantly among countries, with a notable difference in non-performing loan recognition periods In Russia, loans are classified as non-performing after just 30 days, whereas Estonia and Lithuania extend this period to 60 days, highlighting the diverse approaches to credit risk management across different regions.
In Vietnam, the definition of a non-performing loan (NPL) is established by the Central Bank's Decision No 493/2005/QĐ-NHNN, which classifies loans as non-performing if they are overdue by 90 days This adherence to international standards enhances the ability to compare Vietnam's NPL levels with those of other countries, highlighting the impact of differing deadlines on the overall level of non-performing loans.
The capital adequacy ratio (CAR) is a critical measure of a bank's equity level, designed to safeguard against risks from credit transactions Serving as a reserve, the CAR protects both depositors and banks from unforeseen losses, with a regulatory minimum set at 8% by the Basel Accord This reserve is believed to help banks mitigate financial losses and ensure long-term profitability, as supported by Olalekan and Adeyinka's (2013) study, which found a positive correlation between CAR and profitability However, critics argue that maintaining higher reserves may restrict banks from operating at full capital capacity, potentially leading to lower short-term profitability (Gizaw, Kebede & Selvaraj, 2015).
The inclusion of the capital adequacy ratio in assessing credit risk is essential, as it accurately reflects credit risk management practices and regulatory efforts aimed at ensuring the long-term stability of commercial banks Consequently, this variable is crucial for this study's analysis.
Loan to deposit ratio (LDR)
The loan to deposit ratio is a key indicator of a bank's liquidity, essential for balancing profit maximization and risk management As noted by Gizaw, Kebede, and Selvaraj (2015), this ratio reflects a bank's ability to withstand depositor withdrawals and meet market loan demands A bank with higher liquidity is generally less susceptible to insolvency, particularly in the face of significant credit risks, as emphasized by Misker (2015) However, maintaining excessive security can hinder profitability, creating a complex interplay between risk-taking and profit maximization that complicates the determination of adequate liquidity levels in commercial banks.
Loan Loss Provision ratio (LLPR)
OVERVIEW THE BIDV AND PROFITABILITY OF BIDV16 2.1 Review of BIDV and profitability in 2006-2017 intervals
Introduction to BIDV
BIDV, one of the five largest state-owned commercial banks in Vietnam, ranks 351st among the 500 largest banks in Asia, as reported by Asia-week magazine Established in 1957 under Decision No 177/TTg by the Prime Minister as the Bank for Construction of Vietnam, it adopted its current name in 1990.
BIDV has established a robust network throughout Vietnam and maintains a commercial presence in various countries worldwide The bank offers a diverse range of financial services, including banking, finance, and insurance, covering areas such as currency and credit, along with non-banking services Unique among commercial banks, BIDV actively engages in agency funding projects both domestically and internationally To sustain its competitive advantage in the increasingly fierce banking sector, BIDV has embraced a comprehensive technological infrastructure, positioning itself at the forefront of modern banking solutions.
2007 onward witnesses the leading position of BIDV in Vietnam ICT Index, demonstrating the huge advancement and adaptability of the bank in the digital era (Le & Pham, 2017)
Brief of BIDV profit making performance in 2006-2017
The charts illustrate the Return on Assets (ROA) and Return on Equity (ROE) of BIDV from 2006 to 2017, highlighting its position as the leading bank in Vietnam with impressive performance Throughout this period, the indicators demonstrate significant fluctuations, reflecting the bank's operational efficiency and growth Figure 1 clearly depicts these trends, emphasizing BIDV's remarkable results during these years.
Figure 2.1 – BIDV ROA & ROE from 2006-2017
ROA (Return on Asset) is calculated as net profit divided by total assets
Return on Assets (ROA) is a key financial ratio that indicates the percentage of profit a company generates relative to its resources, reflecting the effectiveness of asset management A higher profit results in a greater ROA BIDV has consistently maintained an ROA of nearly 1% over the years, though it decreased from 1.04% in 2009 to 0.63% in 2017, primarily due to the challenging business environment during the economic crisis, which put many businesses at risk of bankruptcy Despite these challenges, the bank's efforts helped sustain its performance.
ROA ROE stability ratio in the acceptable level of fluctuations This illustrates the ability of banks to operate the business and its ability to manage its assets effectively
In addition, because BIDV‟s Total assets increased rapidly in this period also made ROA ratio decrease
Return on Equity (ROE) is a key profitability ratio that evaluates a company's ability to generate profits from shareholder investments, serving as a crucial performance indicator ROE has shown significant fluctuations between 13% and 18%, particularly notable when compared to Return on Assets (ROA) In 2009, ROE peaked at 18.41% before declining to 17.96% in 2010, despite the bank experiencing substantial profits amid the financial crisis of 2008-2009 However, by the end of 2011, following the completion of the joint stock process and a rapid increase in chartered capital, ROE sharply decreased to 13.20%, further declining to 12.38% in 2012.
Despite facing challenges, BIDV remains one of the most profitable banks in Vietnam According to Tran (2015), its declining profitability can be attributed to the domestic recession of 2011-2012, which has had lasting effects on economic growth This downward trend was not unique to BIDV, as the average Return on Equity (ROE) for Vietnamese commercial banks fell to 9.56% in 2012 from 14.19% in 2011 (KPMG, 2013) Analyzing the Return on Assets (ROA) and ROE reveals insights into the effectiveness of BIDV's banking operations during this period, highlighting significant changes in its size and structure.
The ROA and ROE ratios for BIDV have shown improvement, reaching normal levels, while the income structure has positively shifted Despite the severe impact of the 2008-2009 financial crisis, the bank's profits surged However, from 2011 onwards, BIDV experienced a decline in profits, hitting a low of 12.38% ROE in 2012 Despite this setback, BIDV remains one of the most profitable banks in Vietnam According to Tran (2015), this profitability can be partly attributed to the domestic recession during 2011-2012, which has long-term effects on economic growth The downward trend in profitability was a common pattern among commercial banks during this period, with the sector average dropping to 9.56% in 2012 from 14.19% in 2011 (KPMG, 2013) It is important to note that BIDV's performance still exceeded the average, reflecting the board's efforts to maintain competitiveness.
Between 2012 and 2017, BIDV achieved remarkable and comprehensive growth across all indicators, with an average annual growth rate of 17% Total assets surged more than 2.1 times, capital mobilization rose 2.5 times, outstanding loans increased by 2.6 times, and outstanding retail sales nearly quadrupled, while profit before tax grew 1.7 times Additionally, BIDV expanded its network to include 182 first-level branches and nearly 800 transaction offices nationwide, marking an increase of 63 branches and 284 transaction offices since 2011.
In the past five years, BIDV has strengthened cooperation with domestic and foreign organizations, "paving the way" in investment activities abroad, strengthening international economic integration and comprehensive
To thrive in the financial landscape, it is essential to proactively engage with both regional and international markets This involves ensuring secure and sustainable credit growth, particularly in key sectors such as rural agriculture, exports, supporting industries, small and medium-sized enterprises (SMEs), and high-tech businesses Addressing bad debts requires comprehensive solutions and strategies, while also focusing on the development and diversification of products and services Additionally, implementing an effective international economic integration strategy is crucial for long-term success.
BIDV are the key factors help BIDV becomes the leading in banking industry and earn more profit every year
After reviewed the ROA and ROE through 10 years, we can see the high quality in BIDV operation ability and especially the positive changes in structure of the bank
Table 2.1 - Quality Criteria of BIDV
BIDV CAR NPL LDR LLPR DR
Bank operations inherently involve risks, particularly in credit, deposit, and payment transactions The ability to manage and mitigate these risks, including the potential for bad debt, is crucial for assessing credit quality and overall operational effectiveness within the banking sector.
The NPL ratio for BIDV has consistently remained under control, recorded at 3% and slightly increasing to 3.03% in 2012, which highlights the bank's effective management of non-performing loans Additionally, BIDV's equity experienced significant growth during this period, attributed to factors such as increased chartered capital, a substantial rise in bank funds, and annual profit contributions, resulting in a Capital Adequacy Ratio (CAR) that consistently exceeded 8% from 2009 onwards.
Since 2017, BIDV has maintained a Capital Adequacy Ratio (CAR) above 9%, consistently meeting the minimum requirements set by the State Bank While the CAR has not increased, it has remained stable as BIDV strategically utilized its capital to enhance its assets and expand its business operations, ultimately driving profit growth.
LDR from 2014 to 2017 around 90%, nearly ensuring the minimum ratio prescribed by the State Bank of Viet Nam
LLDR well controlled, proving that bad debt is strictly controlled
This ratios shows the bank's ability to operate and its credit quality is extremely effective
The primary goal of a bank's operations is to generate profit, which is evident in its annual financial performance To achieve this, banks must focus on maximizing total revenue while minimizing operational costs, all while ensuring safety and meeting regulatory standards.
From 2006 to 2017, BIDV experienced significant growth in income from financial activities, despite the need to manage costs effectively The bank prioritized increasing reserves and operating expenses to safeguard its assets and maintain credit stability, thereby enhancing its reputation among customers and investors Notably, the provision for credit loss surged from 1,437 billion VND in 2006 to 11,349 billion VND by 2017 Additionally, BIDV consistently ensured stable annual increases in both pretax profit, which rose from 1,112 billion VND in 2006 to 8,665 billion VND in 2017, and net profit, which climbed from 1,001 billion VND to 6,786 billion VND during the same period.
Figure 2.2 – BIDV Profit before and after tax from 2006-2017
Moreover, the asset size growth with reasonable structure Total assets of
BIDV have continuously increased from 161,223 billion VND in 2006 to
In 2017, BIDV reported total assets of 1,202,284 billion VND, solidifying its position as one of the largest banks in Vietnam The majority of these assets are derived from credit activities, which serve as the bank's primary source of income.
Despite the challenges posed by the global recession on both customers and the banking sector, BIDV has significantly enhanced its credit quality Following extensive efforts to navigate the financial crisis prior to 2010, BIDV achieved its objectives, evidenced by a consistent increase in profit from 2010 to 2017, as illustrated in Figure 3.
Profit before Tax and Profit after Tax of BIDV (Bil VND)
Profit before Tax Profit after Tax
Figure 2.3 – BIDV Total assets and Owner’s equity
In response to liquidity challenges, the Government has implemented a policy package aimed at stimulating interest Despite credit growth outpacing capital growth, which has created competitive pressure in the share market and led to a slowdown in bank growth, BIDV maintains strong liquidity indicators, including deposit growth and a favorable debt-to-capital ratio Prioritizing safety in liquidity and capital growth, BIDV manages its liquidity daily by closely monitoring cash inflows and outflows across its entire system Through regular analysis and forecasting of market conditions, BIDV remains proactive and adaptable, ensuring the security and liquidity of its operations.
BIDV Total Assets and Owner’s equity (Bil VND)
Comparative review of profitability in BIDV and Vietinbank in the
In 2011, Vietinbank demonstrated impressive profitability with a 26.74% return on equity (ROE), outperforming BIDV However, from 2015 onwards, Vietinbank experienced a significant decline in performance, with its ROE plummeting to as low as 10%.
Figure 2.4 – Comparison of BIDV and Vietinbank profitability
(Source: BIDV and Vietinbank annual report)
This section analyzes the profitability operations of BIDV, highlighting key variables that contribute to maximizing profitability for Vietnamese commercial banks By comparing BIDV's financial performance with that of Vietinbank, we can assess the efficiency of BIDV's profit-making strategies Notably, a review of the data reveals contrasting profit trends between Vietinbank and BIDV, providing valuable insights into their respective financial efficiencies.
Comparison of Vietinbankv.s BIDV profitability
Over a 15-year period, BIDV consistently outperformed Vietinbank in terms of ROA and ROE, with notable exceptions before 2007 and after 2013 The years 2007 to 2013 were particularly significant for BIDV, as the bank experienced sustainable growth by developing new credit products and enhancing its credit management model These strategic changes not only led to substantial improvements in BIDV's financial performance but also solidified its position as a leading bank in Vietnam The most remarkable growth in BIDV's profit indicators occurred between 2008 and 2011, driven by a booming stock market that increased demand for investment funds.
Despite capturing a higher profitability than BIDV prior to 2007, the following period saw quite poor performance in Vietinbank with ROE dropped to as low as 10% since 2014
Figure 2.5 – Comparison of BIDV and Vietinbank CAR
(Source: BIDV and Vietinbank annual report)
Vietinbank's emphasis on maintaining high capital adequacy aims to enhance risk coverage; however, it falls short in effectively evaluating credit risk Unlike BIDV, Vietinbank employs a decentralized appraisal mechanism that grants excessive authority to branches in credit granting and assessment, leading to significant profits being allocated to reserves for non-performing loans While this decentralized approach allows for greater operational flexibility and increased lending during economic booms, it exposes the bank to heightened risks The aftermath of the economic upswing revealed a surge in non-performing loans post-2011, severely impacting Vietinbank's profitability In contrast, BIDV's centralized appraisal strategy promotes a more sustainable lending approach, resulting in lower credit risk and higher average profits This mechanism has enabled BIDV to minimize losses from non-performing loans and maintain a significantly lower loan loss provision compared to Vietinbank, contributing to its superior financial performance during the same period.
Since the implementation of a centralized appraisal system in 2014, Vietinbank has experienced improved credit management, leading to a significant decrease in both loan loss provisions and the non-performing loan rate.
Figure 2.6 – Comparison of BIDV and Vietinbank NPL & LLR
(Source: BIDV and Vietinbank annual report)
Unlike Vietinbank's improvement, BIDV has faced an increase in non-performing loans since 2014, leading to a rise in loan loss provisions in subsequent years The significant surge in BIDV's non-performing loans in 2014 compared to 2013 necessitated higher provisions to mitigate losses A key challenge for BIDV is its ineffective market diversification, which has resulted in an over-reliance on specific sectors.
Comparison of Vietinbank and BIDV : NPL & LLR
BIDV's centralized appraisal system has proven effective in providing short-term security, particularly during crises, but it limits long-term growth and competitiveness While the bank performed adequately during the global and domestic crises of 2008-2009 and 2011-2012, it struggled to adapt to the rapid economic recovery in Vietnam from 2013-2014 The centralization of decision-making at the headquarters hindered BIDV's ability to meet evolving market demands and implement flexible diversification strategies at local branches This lack of local jurisdiction restricted tailored marketing efforts, impacting customer engagement Quantitative analysis indicates that bad debt and loan loss provisions significantly influence BIDV's profitability, while capital adequacy ratios primarily ensure stability without directly enhancing profits Therefore, addressing bad debt is essential for improving BIDV's profit performance, with practical solutions to be discussed in subsequent sections.
Potential determinants of profitability of BIDV
Based on the above analysis, we can again summarize the factors and their effect on determinants of profit in BIDV as shown in the table below:
Table 2.2 - Dependent variables on profit in BIDV
Non-performing loan rate NPL -
Loan to deposit ration LDR +
Loan Loss Provision ration LLPR -
Bank size (Total assets) TA +
METHODOLOGY AND DATA ANALYSIS
Chapter introduction
This chapter outlines the specific methods employed in the research to achieve its objectives, beginning with an overview of the relevant research paradigm and overall strategies It details the planned tactics for data and sample selection, followed by a description of the data analysis methods used to process and interpret the collected data The final section addresses ethical considerations, ensuring that various aspects of research ethics are adhered to, aligning the study with established ethical principles.
Research paradigm & strategies
Quantitative and qualitative research are two distinct academic approaches, with quantitative research focusing on statistical analysis of numeric data, while qualitative research relies on non-statistical measurements Qualitative research reflects an interpretive viewpoint, emphasizing knowledge gained through experiences and event interpretation In contrast, the quantitative approach adheres to a positivist perspective, where social phenomena are quantified for analysis and understanding (Krauss, 2005).
As far as the profitability is concerned, the vast majority of past research papers employ positivist paradigm under quantitative research Batten andVo
In 2013, it was posited that profitability must be viewed objectively, as it is significantly influenced by external factors Consequently, this research adopts a positivist perspective, asserting that job satisfaction is an objective phenomenon worthy of examination.
The research utilizes a quantitative approach guided by positivism, employing deductive reasoning to formulate theories before validating them with real-world data, thus following a top-down methodology To enhance understanding, qualitative analysis will also be incorporated to corroborate the quantitative findings This mixed-method approach aims to present a comprehensive overview of the Vietnamese banking sector while offering detailed insights into BIDV.
Data collection & sample selection strategies
This research will primarily utilize secondary data due to the objective nature of the information available Previous studies have also depended on secondary data to explore the relationship between profitability and its influencing factors, making it simpler to compare and contrast findings using a consistent data collection approach.
To analyze the impact of various bank-specific factors on BIDV's profitability, this research will extract raw data from the bank's financial reports Utilizing longitudinal data collection, the study will examine data over a specific period to identify changes and relationships among variables According to Zeng (2015), this approach allows researchers to focus on variations within a single research subject over time, making it particularly effective for detailed case studies Consequently, this methodology is well-suited for understanding how different factors have influenced BIDV's profitability in response to various events throughout its timeline, with data sourced from the bank's annual reports.
Sampling strategy
The selection of sample size is crucial to produce research quality in general
According to Scheurich (2014), the selection of sampling techniques and determination of sample size significantly impact the reliability and feasibility of research studies This quantitative research focuses on BIDV, analyzing data from 2006 to 2015, and includes a comprehensive dataset from seven competing commercial banks in Vietnam—Vietinbank, Vietcombank, Eximbank, Saigon-Hanoi Bank, AChaubank, Sacombank, and Militarybank—over a span of more than ten years to establish a robust sample size.
80 observations, which is consistent to the assumption of Central Limit Theorem For qualitative part, the study will take account into comparative analysis of BIDV and Vietinbank.
Data analysis methods
To analyze quantitative data for hypothesis testing, this research employs three key approaches: descriptive statistics, correlation analysis, and regression study The subsequent section will provide a rationale for the selection of each of these methods.
Descriptive statistics, as defined by Jaggi (2006), is a straightforward method for analyzing data patterns This technique offers the advantage of quickly providing researchers with an initial understanding of their data set Additionally, descriptive statistics not only give a comprehensive overview of the collected data but also serve as a foundational tool for referencing other analytical techniques.
Correlation analysis, as defined by Sharma (2005), is a technique that provides researchers with insights into the relationships between variables, emphasizing both the strength and direction of their interactions The strength of this relationship is quantified using the absolute value of the Pearson correlation coefficient, where a value of 0.5 or higher indicates a significant relationship The sign of the value reveals whether the correlation is positive or negative Overall, correlation values range from -1 to +1, leading to four distinct scenarios: significantly negative correlation, insignificantly negative correlation, significantly positive correlation, and insignificantly positive correlation.
This research will utilize both the Fixed Effect Method and Random Effect Method to systematically analyze the relationship between dependent and independent variables By combining these two approaches, the study aims to achieve fair and accurate results, capitalizing on the strengths of each method while mitigating their weaknesses In cases of inconsistency between the methods, the Hausman test will be employed to identify the more appropriate model The Random Effect Method is theoretically favored for its ability to predict shrunken residuals and accommodate varying effectiveness through random coefficients models (Borrego, Douglas & Amelink, 2009).
Descriptive statistics
CAR NPL LDR LLPR LNTA DR ROA ROE
Overall, the descriptive analysis on 80 observations (data of 8 banks in over
Over the past decade, the capital adequacy ratio of Vietnamese banks has shown significant fluctuations, with a minimum value of 5% and a maximum of 35% The data reveals a mean of 12% and a standard deviation of only 4%, indicating a left-skewed distribution Notably, the average capital adequacy ratio of 12% exceeds the minimum regulatory requirement of 8%, highlighting the strong compliance of Vietnamese banks with risk management policies.
Non-Performance Loan or NPL is also the variable varying significantly in a large range of data as the minimum and maximum was recorded at 0.2% and
The average non-performing loan ratio in Vietnam's banking sector is notably low at 1.7%, with a controlled standard deviation of 1%, indicating stable operations during the analyzed period However, predictions suggest the presence of some outliers within the higher range of bad debt.
Vietnamese banks maintain a loan-to-debt ratio averaging 85%, reflecting a cautious approach to risk management and capital reserves This figure suggests a prudent lending strategy, while a mean ratio just above 50% highlights effective lending operations However, instances of loan-to-debt ratios exceeding this average raise concerns about low liquidity, as banks may be lending more than their available capital.
With a low level of bad debt, the average loan loss provision ratio (LLPR) stands at just 2%, effectively covering potential losses Notably, the highest LLPR recorded is 5.3%, which is significantly higher, being ten times the minimum ratio.
The total assets of the banks analyzed in this research generally exhibited an upward trend, largely driven by favorable economic conditions during the examined period Notably, there is a significant disparity between the minimum and maximum asset values, reflecting the varying sizes of the banks, independent of their individual annual growth rates.
Dividend payment ratio of the firm ranges between 1% and 16%, with the average achieved at 7% The values of dividend payment ratio however varied insignificantly within a small standard deviation of only 3%
The dataset for Return on Assets (ROA) closely mirrors dividend payments, exhibiting minimal fluctuation of only 0.6% around an average of approximately 1.3% Additionally, the range of ROA remains narrow, indicating a limited difference between its maximum and minimum values.
The average Return on Equity (ROE) is 16.7%, with an acceptable fluctuation of 7% around this average Within this range, the highest recorded ROE is 38%, while the lowest stands at just 1%.
Correlation analysis
CAR NPL LDR LLPR TA DR ROA ROE
Correlation analysis revealed a negative relationship between Capital Adequacy, Non-performing Loans, Loan Loss Reserve Provision, and Total Assets with profitability indicators such as Return on Assets (ROA) and Return on Equity (ROE) This consistent negative correlation highlights the impact of these factors on financial performance.
Research indicates that a positive relationship exists between a bank's loan-to-deposit ratio and dividend payout ratio with its profitability Consequently, it is suggested that highly profitable banks should sustain lower levels of capital adequacy, non-performing loans, and loan loss reserves Notably, banks with fewer assets tend to achieve higher profits compared to their larger counterparts Furthermore, a higher loan-to-deposit ratio and dividend payout ratio are associated with increased profitability.
The analysis reveals a significant correlation between non-performing loans and loan loss provisions with profitability, as indicated by Pearson Correlation coefficients averaging above 0.5 Furthermore, these two dependent variables exhibit a notably positive relationship.
Regression analysis
Obs per group: min = 10 avg = 10.0 max = 10
Obs per group: min = 10 avg = 10.0 max = 10
Table 3.5 - Hausman Test - ROE Hausman Test : ROE
(b) (B) (b-B) sqrt(diag(V_b-V_B)) fe re Difference S.E
DR -.0534235 -.0534235 0 0 b = consistent under Ho and Ha; obtained from xtreg
B = inconsistent under Ha, efficient under Ho; obtained from xtreg
Test: Ho: difference in coefficients not systematic chi2(0) = (b-B)'[(V_bV_B)^(-1)](b-B) = 0.00
Obs per group: min = 10 avg = 10.0 max = 10
Obs per group: min = 10 avg = 10.0 overall = 0.5452 max = 10
Table 3.8 - Hausman Test - ROA Hausman Test: ROA
(b) (B) (b-B) sqrt(diag(V_b-V_B)) fe re Difference S.E
DR -.0203757 -.0107971 -.0095786 0054994 b = consistent under Ho and Ha; obtained from xtreg
B = inconsistent under Ha, efficient under Ho; obtained from xtreg
Test: Ho: difference in coefficients not systematic chi2(0) = (b-B)'[(V_bV_B)^(-1)](b-B) = 12.79
The R-squared index provides insight into the model's validity, with values for both ROE and ROA consistently high, ranging from 0.6 to 0.7, regardless of the data analysis method used This indicates a strong goodness of fit, as the model can explain up to 70% of the total variance in the regression While the selected predictors demonstrate solid performance, there is still potential for improvement in relevance Previous studies by Sufian & Habibullah (2010) and Menicucci Paolucci (2016) achieved an average R-squared of 0.8, suggesting that certain variables may be more pertinent in a European context than in Vietnam Identifying and filtering out weakly correlated variables could enhance the accuracy of future research.
The findings indicate a strong consistency between Fixed Effects Model (FEM) and Random Effects Model (REM) in analyzing the relationship between dependent and independent variables, particularly highlighting the correlation between the Non-Performing Loan (NPL) ratio and Loan Loss Provision ratio with firm performance, as measured by Return on Equity (ROE) and Return on Assets (ROA) Both models agree that a lower NPL is associated with higher profitability, emphasizing the critical role of effective credit management in safeguarding banks against bad debt Additionally, a significant negative relationship is confirmed between Loan Loss Provision and the two profitability indicators, suggesting that Loan Loss Provision acts as a barrier to firm profitability The consistent correlation between NPL and Loan Loss Provision indicates that NPL not only directly impacts firm profits but also indirectly reduces profitability by increasing Loan Loss Provision, underscoring the heightened importance of controlling NPL.
The Loan Loss Provision has a significant negative impact on a firm's profitability, as indicated by a P-value below the critical threshold of 0.05 across various testing methods This inverse relationship suggests that banks maintaining high reserves to cover potential loan losses are likely to experience reduced profits Given the substantial nature of this effect, Loan Loss Provision emerges as a critical concern for banks with low profit margins Consequently, this finding leads to the rejection of the null hypothesis H0 regarding Loan Loss Provision.
The Loan to Deposit ratio emerged as a significant factor in the model, with P-values ranging from 0.01 to 0.02 in both the Random Effects Model (REM) and Fixed Effects Model (FEM) These values, well below the 0.05 threshold, confirm its substantial impact on the dependent variables Additionally, there was no conflict when assessing its relationship with Return on Equity (ROE) and Return on Assets (ROA), underscoring the Loan to Deposit ratio's crucial role in influencing bank profitability, unlike Non-Performing Loans (NPL) and Loan Loss provisions.
The positive coefficients in this relationship indicate that banks are likely to achieve higher profits when they increase lending rates compared to deposit rates.
The analysis reveals that while capital adequacy ratio negatively affects bank profit, its P-value of 0.3 exceeds the critical threshold of 0.05, indicating a statistically insignificant relationship Similarly, although asset size appears to negatively influence profitability in Vietnamese banks, the large P-value fails to establish a valid connection, leading to the acceptance of the null hypothesis Additionally, there is a discrepancy between the two analytical techniques regarding the relationship between dividend ratio and profit; Fixed Effect Regression dismisses a significant relationship, whereas Random Effect analysis supports it.
The initial test yielded a P-value exceeding 0.05, indicating a lack of statistical significance, whereas the subsequent test showed a P-value just below the threshold To address this discrepancy, it is essential to consult the Hausman test for accurate validation.
The analysis utilized both Fixed Effect and Random Effect models, followed by a Hausman test to determine any discrepancies between the two approaches and to assess which model is more reliable.
In hypothesis testing, the null hypothesis suggests that there is no systematic difference between the measures, allowing both to be accepted However, if a significant Hausman statistic is observed, it supports the alternative hypothesis, indicating that only the Fixed Effect model is valid while the Random Effect Model should be rejected.
The regression test results for Return on Equity (ROE) showed nearly identical outcomes between the two measures used However, a notable difference emerged between the Fixed Effects Model (FEM) and the Random Effects Model (REM), primarily attributed to the varying impact of the dividend payout ratio on profitability.
The Hausman test results indicate a rejection of the null hypothesis, showing a significant Chi-square value of 12.97 and a p-value of 0.02, which is below the 0.05 threshold Consequently, the Random Effect Analysis for Return on Assets (ROA) is deemed inconsistent, leading to the acceptance of the Fixed Effect Analysis This implies that the dividend pay-out ratio does not significantly affect the bank's profitability.
Multicollinearity can significantly disrupt regression analysis when predictors are correlated, limiting research conclusions However, the collinearity statistics indicate that multicollinearity is not present in the dataset, with tolerance values ranging from 0.525 to 0.849 Additionally, the Variance Inflation Factor (VIF) for all predictors is below 2, well under the critical threshold of 10.
IMPLICATIONS AND RECOMMENDATIONS FOR BIDV
Development strategy of BIDV in the near future
In 2017, the Vietnamese economy experienced significant success, achieving and surpassing key socio-economic targets Economic growth reached 6.81%, with per capita income increasing by USD 170 from 2016 Foreign direct investment hit a decade-high, and import-export turnover recorded a trade surplus of USD 2.67 billion The finance and banking sector also made notable progress, including effective inflation control, reduced interest rates amidst rising loan totals, and robust foreign currency reserves These developments positioned the State Bank of Vietnam to manage exchange rates more effectively and laid the groundwork for an improved credit rating while enhancing credit flow and addressing bad debts within the economy.
BIDV has demonstrated strong business performance, reinforcing its status as a leading financial institution in Vietnam Looking ahead, the bank has outlined key objectives for the 2016-2020 period to guide its development strategy.
The Joint Stock Commercial Bank, with significant State ownership, plays a crucial role in Vietnam's banking sector by maintaining its leadership in scale, quality, efficiency, and prestige As a major financial institution with national responsibility, it actively contributes to macroeconomic stability and fosters the country's economic growth.
Our goal is to become the leading modern commercial bank in Vietnam, excelling in market share for fund mobilization, loans, and retail services We also aim to rank among the top three market leaders in customer satisfaction, as assessed by a credible independent organization.
BIDV is focusing on enhancing its insurance business, encompassing both life and non-life products, as a secondary key activity alongside its banking operations By integrating insurance offerings with banking products, the aim is to boost the contribution of the insurance sector to BIDV's overall income.
To enhance market competitiveness, it is essential to develop and diversify the product and service portfolio by maximizing cross-selling opportunities for banking and insurance products Additionally, creating and refining exclusive insurance services, along with developing high-technology products that stand out from competitors, will further establish a strong market preference.
We are committed to a proactive and aggressive integration into the regional banking and financial market, adhering to international standards and practices in modern banking Our focus is on maintaining the Capital Adequacy Ratio (CAR) in compliance with the regulations set by the State Bank of Vietnam We prioritize enhancing our risk management capabilities and fully implementing the Basel 2 provisions as mandated by the State Bank of Vietnam in 2018.
- Becoming the leading bank in both Vietnam and Southeast Asia in application of information technology to bring convenience, the best service and satisfaction to domestic and international customers
To enhance governance, it is essential to establish a legal framework that emphasizes routine activities, transparency, openness, and efficiency Transitioning to a centralized management model at the Head Office will facilitate the implementation of a modern and advanced banking approach across all business operations This strategic shift aims to significantly improve business efficiency and productivity.
-Improving the quality, efficiency of traditional distribution channels including branches, transaction offices, subsidiaries, affiliated companies, and promoting the development of modern distribution channels such as Internet
Banking, Mobile Banking, Contact Center, ATM, POS Actively developing and expanding distribution channels as well as commercial presence in the regional and international markets
To enhance banking operations in the context of integration and globalization, it is essential to train and develop high-quality human resources that meet international standards By fostering a professional and friendly work environment, organizations can provide development opportunities and benefits that ensure employee satisfaction and a per capita income that exceeds market averages.
- Spreading BIDV‟s brand awareness extensively throughout domestic and international markets as the leading bank in Vietnam, whose banking and financial services are chosen by individuals and economic organizations
Key targets for the Period from 2016 to 2020
Total assets increase 17%/per year
Fund mobilization increase 20%/ per year
Outstanding loans increase 20%/ per year
Profit before tax increase 19%/ per year
Recommendations for BIDV to improve the profitability in the future
Effective debt management is essential for maximizing profits and minimizing losses in the banking sector Given the significant impact of non-performing loans on profitability, BIDV must implement stringent debt management policies, particularly in areas such as collateral and loan appraisal, to maintain bad debt levels at a minimum.
The rising non-performing loans significantly impact bank profitability, as they lead to direct losses and necessitate larger loan loss provisions This situation restricts banks' resources for pursuing profitable investment opportunities, creating a trade-off between managing credit risk and maximizing future profits Consequently, maintaining lower provisions can reduce opportunity costs and enhance profitability Research supports the critical role of effective bad debt management in commercial banking, emphasizing the significant effects of non-performing loans and loan loss provisions on financial performance.
Non-performing loans (NPLs) significantly impact bank profitability, making their management crucial for financial success To address NPLs, banks can employ several strategies, as outlined by Murthy (2017) One approach is to write off the loan, which removes it from the balance sheet but negatively affects profits, as it is recorded as a loss Another method is foreclosure, where banks consider the recovery rate based on collateral, with two scenarios: banks with recourse require additional collateral, while those without find their current collateral sufficient However, successful foreclosures are rare Banks may also collaborate with Asset Management Companies (bad banks) to offload NPLs, although these firms often serve as temporary solutions due to their limited capacity Lastly, restructuring troubled loans by altering the terms can help facilitate repayment, particularly for larger loans that are not viable for write-off Each of these strategies plays a vital role in enhancing a bank's performance and securing long-term profitability.
BIDV's impressive profit figures in recent years can be attributed to its stringent loan management practices To address non-performing loans, the bank proactively sold debts to the Vietnam Asset Management Company (VAMC), successfully maintaining its bad debt ratio below 2%, significantly lower than the average in the Vietnamese banking sector This partnership with VAMC allowed BIDV to alleviate the burden of managing non-performing loans, enabling the bank to allocate resources towards reducing credit risk at the operational level Additionally, BIDV's efficient credit management system has played a crucial role in keeping losses from non-performing loans minimal Research indicates that BIDV could further enhance its profitability by implementing an even more effective bad debt management strategy.
Selling bad debt to the Vietnam Asset Management Company (VAMC) serves as a temporary fix for banks like BIDV, enhancing short-term liquidity and performance but lacking a sustainable long-term solution Continued reliance on VAMC may lead to saturation, where the company can no longer absorb additional debt, ultimately jeopardizing the banks involved To mitigate this risk, commercial banks must proactively adjust interest rates for clients with debts transferred to VAMC, as the latter cannot make such adjustments without bank approval This ongoing exposure to high risk underscores that VAMC is not the optimal choice for managing bad debts Instead, BIDV should explore more effective credit management strategies, including debt restructuring, despite its complexity and associated costs, to better address non-performing loans and secure higher profits.
BIDV has the potential to enhance its credit management system by adopting the effective practices implemented by Vietinbank, recognized as Vietnam's leading commercial bank in credit management As noted by Nguyen (2015), Vietinbank achieved the lowest non-performing loan ratio through a significant shift to a centralized appraisal and internal rating system, developed with KPMG's guidance While BIDV's current credit appraisal system operates on a centralized model that improves loan quality, its credit rating system only adheres to domestic regulations set by the Central Bank, lacking international standards Therefore, it is recommended that BIDV collaborate with a consulting firm to establish an internationally recognized credit rating system to elevate its credit quality.
A significant finding of the study reveals that capital adequacy does not necessarily enhance bank profitability and may even reduce profits in certain instances This contradicts previous research by Olalekan & Adeyinka (2013) and Li & Zou (2014), yet aligns with the findings of Gizaw, Kebede, and Selvaraj.
In 2015, it was found that capital adequacy primarily secures bank liquidity rather than directly influencing profit levels Banks with high capital adequacy often retain more capital, limiting their ability to circulate funds in the loan market, which narrows profit maximization opportunities (Gizaw, Kebede & Selvaraj, 2015) This relationship appears particularly relevant during challenging economic periods, yet Vietnam's economy has generally experienced favorable growth conditions over the past decade, demonstrating resilience even during the 2008 global financial crisis and the brief domestic recession in 2011 Consequently, banks in Vietnam have maintained capital adequacy around the minimum regulatory requirement, leading to a weak correlation between capital adequacy and profit levels Therefore, it is recommended that Vietnamese commercial banks, especially BIDV, should not maintain excessively high capital adequacy levels, ideally keeping it around 9%, which exceeds the minimum requirement set by the central bank while ensuring sufficient liquidity.
4.2.2 Maintaining other ratios that affect bank profitability
The study reveals that total assets, dividend ratios, and loan-to-deposit ratios are ineffective predictors of bank profitability in Vietnamese banks, including BIDV The findings suggest that BIDV's strategies need not focus on these factors, as total assets primarily reflect a bank's capacity rather than its profitability While the loan-to-deposit ratio has shown ineffectiveness as a profit indicator, qualitative research indicates that Vietnamese banks, including BIDV, increased lending rates during economic booms, leading to a rise in non-performing loans in subsequent years This highlights that while the loan-to-deposit ratio may not be significant, it still reflects the bank's credit market strategy and should not be disregarded in decision-making Additionally, BIDV can learn from Vietinbank's experience that individual credit objectives may pressure credit officers to overlook risk evaluation principles Thus, BIDV should evaluate credit officers based on the security of loans rather than the quantity, aligning their responsibilities with the overall non-performing loans of the bank.
BIDV must prioritize asset quality, as it significantly impacts profitability, with rising non-performing loans (NPLs) threatening financial stability Despite adherence to the Basel Accord, the Vietnamese banking sector requires substantial internal improvements, as poor asset quality often stems from risky investments in areas like real estate and gambling The competition for larger customer bases exacerbates unhealthy banking practices, and the lack of transparency in operations can lead to misleading reports on asset quality It is crucial for authorities to revise reporting standards to accurately reflect the banking sector's health and enforce stricter policies on NPL management Credit expansion should be contingent on maintaining acceptable NPL levels, and higher capitalization requirements are necessary to address the growing NPL issue, even if it results in reduced profitability Ultimately, the banking authority must balance profitability with the financial system's safety, valuing sustainable, lower returns over high-risk, volatile profits.
4.2.3 Diversify other sources of income beyond lending
Diversification, measured by the percentage of net interest income over total assets, reveals that a lower percentage indicates a higher level of diversification, which surprisingly has a negative impact on bank profitability While traditional borrowing and lending activities generate a significant portion of a bank's income, they lack stability, as previous studies have shown In contrast, non-interest income sources such as payment services, investments, and fee-based services offer more reliable and sustainable profits in the long term Therefore, similar to the importance of capitalization, bank management should consistently prioritize diversification in their business strategies, even if the outcomes are not as anticipated.
This research recommends that BIDV diversify its operations by gradually expanding into feed-based services, as over-reliance on lending and borrowing can pose significant risks during economic downturns Additionally, in a highly competitive market, enhancing service quality and diversification will be crucial for gaining a competitive edge.
BIDV acknowledges the significant role of domestic small and medium enterprises (SMEs), which represent over 97% of businesses and contribute approximately 40% of GDP, 33% of industrial production, and 30% of export value With growing government support for SMEs, BIDV faces challenges in managing outstanding loans while mitigating credit concentration risks associated with large corporate clients Consequently, shifting focus towards SMEs is essential for BIDV's sustainable growth and risk management To support this transition, BIDV offers annual credit programs and packages with capital ranging from 50,000 to 60,000 billion VND, tailored to meet the unique needs of SMEs in promising sectors.
BIDV has introduced various mechanisms and products to address asset security issues for SMEs seeking loans, including credit facilities that do not require collateral This diversification allows SMEs to leverage future debt claims from commercial contracts and commodity collateral transfers Furthermore, BIDV is committed to continuously improving and simplifying the loan access process for SMEs Additionally, BIDV collaborates with organizations such as the SME Association and the Vietnam Chamber of Commerce and Industry to conduct seminars and conferences aimed at clarifying legal regulations related to project investment and financial statement requirements.
4.2.5 Other practical solutions for BIDV
BIDV aims to enhance its customer engagement by focusing on cross-selling and up-selling strategies, as many branches currently offer only about three personal service products despite having over 30 available, including accounts, mobilization, card services, e-banking, credit, and insurance The objective is to increase the average number of products and services per customer to at least six To achieve this, up-selling should be implemented across all departments, transforming branches into preferred destinations for transactions, encompassing payment, savings, card usage, investment, and consumption.