INTRODUCTION
Research Background
Vietnam's market economy, which is state-governed, relies on a robust system of essential elements for strong economic development The financial intermediation system, particularly the commercial banking sector, is crucial for the overall functioning of the economy Acting as a bridge among various economic agents, commercial banks enhance interdependence and dynamism within the system The significance of the commercial banking system is undeniable from any perspective.
In a market economy, banks represent a unique type of business offering intangible products that differ from traditional physical goods Competition drives businesses to strive for customer satisfaction, ultimately aiming to achieve economic goals such as profit, market share, and a strong business position The primary objective of competition is to maximize benefits for both the business and consumers, fulfilling consumer demand through effective product offerings.
As science and technology advance, the diversification of products enhances consumer choice while intensifying competition among businesses To thrive, companies must focus on improving product quality to meet the highest customer expectations For banking products, customers define quality based on their needs for convenience and efficiency, emphasizing a low and straightforward level of participation in processes and the rapidity of transactions.
2 processing, high precision, bring great effect to customers, great service attitude, modern technology level
Despite recent advancements, Vietnamese commercial banks still face significant gaps compared to their global counterparts The ongoing process of international economic integration intensifies competitive pressures on these banks, favoring foreign institutions While competition exists both internationally and domestically, Vietnamese banks possess unique advantages that, if leveraged effectively, can enhance their market position To capitalize on these opportunities and boost competitiveness, it is crucial for Vietnamese banks to assess their current standing and evaluate their competitive edge This requires a thorough understanding of the factors influencing their performance, enabling them to strengthen internal capabilities and improve overall competitiveness.
The author has selected the topic "Factors Affecting the Performance of Commercial Banks in Vietnam" for their graduation thesis, recognizing its significant theoretical and practical implications This research aims to identify the key reasons influencing the performance of commercial banks in Vietnam, providing a foundation for proposing solutions to enhance management policies within the banking system.
Objective of the study
Firstly, this study organizes the theoretical of commercial banks' performance measurement and the model for analyzing the factors affecting the performance of commercial banks
Secondly, this study goes into the analysis of the actual performance of commercial banks, clarifying the reasons affecting the performance of
3 commercial banks in Vietnam in the past few years based on quantitative analysis models
This study suggests solutions aimed at enhancing the operational efficiency and competitiveness of Vietnamese commercial banks, thereby contributing to the overall development of the banking industry.
Questions of the study
The study objectives can be achieved through answering these questions:
What are factors influencing the operational efficiency of commercial banks in Vietnam?
To what extent do the identified factors influence the operational efficiency of commercial banks in Vietnam?
The subject and scopes of the study
This study examines the performance of commercial banks in Vietnam, specifically focusing on effectiveness as measured by profitability indicators such as Return on Assets (ROA) and Return on Equity (ROE) Additionally, it conducts a quantitative analysis of the factors influencing the performance of these banks.
As regard to the content, this dissertation focuses to research the influences of different factors on the operational efficiency of 23 commercial banks in Vietnam
As regard to the space, this dissertation studies the operational efficiency of 23 commercial banks in Vietnam
As regard to the time, the database is collected in 2006 - 2017 because this period of time marked the strong development of Vietnamese banking system shortly
4 after the difficult period due to the world financial crisis and Vietnam officially joined the WTO in 2011.
The research methods
The regression model of this dissertation is built based on the secondary data collected from the annual financial reports of commercial banks
This study employs analytical, computational, comparative, and quantitative methods to analyze panel data, focusing on profitability metrics such as Return on Assets (ROA) and Return on Equity (ROE) Additionally, it utilizes econometric models, specifically Tobit, to evaluate the performance of commercial banks in Vietnam and identify the factors influencing their performance.
Contributions of research
The scientific contribution: This study systematically reviews the relevant theoretical background as well as empirical studies about the different factors affecting the operational efficiency of commercial banks
The author presents empirical evidence from conducted research on Vietnamese commercial banks, offering valuable insights for researchers focused on bank operational efficiency The anticipated findings aim to provide recommendations that can enhance the operational efficiency of these banks.
Structure of the study
Chapter 1 generally introduces about the importance and the necessity of the dissertation, point out the general objective, specific objectives, accompanied with the research methodology approaches and the content of the dissertation
Chapter 2 provides the background theoretical of factors influencing on the operational efficiency of commercial banks in Vietnam and lists empirical evidences through previous studies
Chapter 3 gives the detail information about the research method as well as the research design for the author‟s dissertation with the target to examine the studies
This chapter presents an analysis of 23 commercial banks in Vietnam, highlighting the regression models developed by the author to assess the impact of various factors on the operational efficiency of these banks.
Chapter 4 demonstrates the empirical results collected from the regression analysis of model that is carried out in previous chapter In this section, the author provides other separate results such as descriptive statistics for independent and dependent variables, test of the model and the overall regression model results Some discussions are argued to clarify the empirical results
Chapter 5 proposes some relating recommendations and policies to enhance the operational efficiency of commercial banks in Vietnam
LITERATURE REVIEW
Overview of commercial banks
A commercial bank serves as a financial intermediary, facilitating payment transactions between customers, buyers, and sellers to enhance economic and trade relations It plays a crucial role in increasing the money supply in society, reducing costs, and freeing up capital Additionally, commercial banks offer a variety of banking products and services, including lending, discounting, factoring, guaranteeing, and leasing Essentially, they regulate the flow of capital, transforming temporarily idle funds into those that are in short supply, thereby supporting the overall capital circulation within the economy.
A commercial bank is a profit-driven credit institution that engages in various banking activities and related services It operates by facilitating currency trading and managing regular deposits, utilizing these funds to offer credit and payment services.
Economist Peter S Rose (1998) argues that commercial banks represent the most comprehensive source of financial products, offering a highly diversified portfolio of financial services.
Credit, savings and payment services also perform the most financial functions of any business organization in the economy."
According to the Law on Credit Institutions No 47/2010/QH12, approved by the XII National Assembly on June 16, 2010, a commercial bank in Vietnam is defined as a financial institution that engages in a range of banking and business activities aimed at generating profit, as outlined by the provisions of this law.
Commercial banks are the most versatile financial institutions, offering a wide range of services including credit, savings, and payment solutions They play a crucial role in the economy by performing various financial functions that are essential for effective financial intermediation.
Commercial banks play an important role in the economy, specifically:
Commercial banks serve as crucial financial intermediaries by facilitating various operations such as credit transactions, payment processing, foreign currency trading, and securities trading They connect depositors with borrowers, effectively bridging the gap between different customers and enhancing the overall efficiency of the financial system.
Central Bank and the public
Commercial banks play a dual role in the economy; they not only serve as financial intermediaries but also create money This process involves generating representative money, which enhances the overall money supply, facilitating circulation and supporting economic growth.
Commercial banks perform two fundamental functions: acting as financial intermediaries and creating money Recently, there has been a growing emphasis on the production function of these banks, which involves mobilizing and utilizing resources to develop banking products and services that benefit the economy (Nguyen Minh Kieu, 2012).
Commercial banks serve as a vital link in enhancing foreign economic relations between countries and play a crucial role in executing government macroeconomic policies By facilitating stable economic growth, they contribute significantly to the development of international trade and investment.
Commercial banks have a long history of evolution, adapting to various trends over the decades Their growth is evident in the increasing number of institutions, the expansion of services offered, and their reach beyond geographic limits Today, we can categorize commercial banks based on several criteria.
Commercial banks exhibit notable differences in their possessive forms and operational characteristics, largely influenced by the regulations established under the Law on Credit Institutions.
State-owned commercial banks, such as Agribank, Ocean Commercial One Member Limited Liability Bank, and Global PetroSole Member Limited Commercial Bank, are financial institutions invested in by the government These banks play a crucial role in facilitating business operations and supporting the achievement of the State's economic goals.
A Joint-stock Commercial Bank is a type of commercial bank organized as a joint-stock company, comprising state-owned enterprises, credit institutions, and individual investors who contribute capital in accordance with State Bank regulations Although these banks are smaller in scale compared to state-owned commercial banks, they are increasingly active and rapidly adopting innovative technologies for better integration Notable examples include the Vietnam Joint Stock Commercial Bank of Industry and Trade (VietinBank) and Asia Commercial Bank.
Joint Stock Bank (ACB), Vietnam Commercial Joint Stock Bank for Private Enterprise (VPBank)…
Joint-venture Bank : is a bank established by the capital contribution of the
Vietnamese and foreign entities can establish a joint venture bank in Vietnam, forming a legal entity that operates under a specific establishment license This bank must adhere to relevant laws and regulations, exemplified by institutions such as Indovina Bank Limited (IVB) and Vietnam-Russia Joint Venture Bank (VRB).
A foreign branch bank operates as a dependent unit of a foreign bank, which guarantees all obligations and commitments of its branch in Vietnam These branches must adhere to the rights and obligations outlined by Vietnamese law and are required to operate under a specific license for branch establishment, in accordance with relevant legal provisions in Vietnam.
The operational efficiency and factors affecting the operational efficiency of
2.2.1 Operational efficiency of commercial banks
Efficiency measures the relationship between the achievement of objectives and the costs incurred to attain those results under specific conditions.
In the finance and banking sector, operational efficiency is viewed through various lenses Antonio, Ludger, and Vito (2006) define efficiency as the relationship between inputs and outputs, stating that any activity yielding a greater output from the same input is deemed more efficient Similarly, Nguyen Khac Minh (2004) emphasizes the importance of this comparison in assessing overall efficiency.
20 considered to be the level of success that firms or banks achieve in allocating available inputs and the outputs they produce in order to meet an objective.”
Therefore, the performance of commercial banks can be understood in three ways:
(i) Minimizing costs, means using the least inputs such as capital, facilities, labor
(ii) Same inputs but produce more outputs,
To enhance operational efficiency, banks must ensure that their outputs grow at a faster rate than the increase in inputs Given the banking system's crucial role in the economy, improving operational efficiency is essential for maintaining financial and operational security in today’s economic landscape.
The stability and development of the economy are intricately tied to the health of the commercial banking system, as these banks serve as crucial financial intermediaries linking savings to investments Consequently, any volatility within the banking sector can significantly affect various other national economic sectors.
Peter S Rose, a professor of economics and finance at Yale University, describes a commercial bank as a business entity focused on maximizing profitability within acceptable risk levels Profitability is paramount for banks, as it enables them to maintain capital, enhance market share, and attract investment capital.
Manufacturers aim to minimize waste by maximizing output from limited inputs or reducing input usage during production This focus on efficiency aligns with the concept of Technical Efficiency, which involves either minimizing inputs to achieve a specific output or maximizing outputs from available inputs.
21 of avoiding waste by manufacturers becomes a goal of achieving high levels of technical efficiency
Producers at advanced levels aim to achieve economic efficiency by minimizing production costs, maximizing sales, or optimizing input allocation for higher profits This focus on economic efficiency is measured through various indicators, including cost, revenue, and profit, guiding manufacturers towards their financial objectives.
Assessing the performance of commercial banks can be divided into two groups that are Absolute Efficiency and Relative Effectiveness:
The absolute efficiency indicator, calculated as Economic Performance minus Cost, enables a comprehensive assessment of performance; however, it can be challenging to compare across different scales For instance, while large-scale banks may generate higher profits than their smaller counterparts, this does not necessarily indicate greater effectiveness Therefore, absolute efficiency does not accurately reflect the ability to optimize resources or minimize waste.
Relative Effectiveness indicators can be expressed in both static and dynamic forms, where efficiency is calculated as Economic Performance divided by Cost for static analysis, and Economic Growth divided by Cost Increase for dynamic analysis These indicators are particularly useful for comparing the efficiency of banks of varying sizes and across different time periods (Peter S Rose, 1998)
Efficiency is a multifaceted concept that varies based on the specific objectives of each study This research evaluates the performance of commercial banks through the lens of Economic Efficiency, which highlights the optimal relationship between economic outcomes and the associated costs.
In other words, effectiveness that this study focuses on researching the
22 performance of commercial bank are understood as the ability to turn inputs into outputs in business operations of commercial banks
2.2.2 Factors affecting the operational efficiency of commercial banks
Efficiency is essential for the survival and growth of banks, as enhancing operational efficiency directly strengthens financial capacity and boosts business performance, ultimately elevating the brand of commercial banks To achieve greater efficiency, it is crucial to identify the factors influencing bank performance, which helps mitigate risky activities, preserve capital, and increase income and profits from banking operations.
Factors influencing the performance of commercial banks can be categorized into two groups: objective factors and subjective factors Each bank's specific conditions determine how these factors uniquely affect their overall performance.
The economic, political and social environment at in the country and abroad
Commercial banks serve as vital financial intermediaries that connect the savings and investment sectors of the economy The stability of the economic, political, and social environment significantly influences their operations A stable environment fosters favorable conditions for commercial banks, supporting normal economic production and enhancing the capacity of enterprises to absorb and repay capital In times of robust and stable economic growth, the demand for loans rises as businesses seek to expand production and operations, allowing commercial banks to grow and thrive.
Expanding credit activities can enhance the financial capacity of enterprises and reduce the risk of bad debts However, an unstable economic, political, and social environment can negatively impact commercial banks, leading to decreased loan demand, higher overdue debts, and increased bad practices, ultimately diminishing their performance.
The ongoing international economic integration is significantly impacting global economies, leading to increased interdependence among nations This trend has resulted in substantial capital inflows into Asia, presenting Vietnam and its banking sector with new opportunities to leverage capital, technology, and management expertise from developed countries However, this integration also poses challenges, as Vietnamese commercial banks face stiff competition from financially robust foreign corporations that excel in technology and management capabilities Currently, many Vietnamese banks struggle with weaknesses in financial strength, technological management, and human resources.
Methods to assess the performance of commercial banks
Financial ratios are the most commonly used tool in assessing, analyzing and reflecting the performance of commercial banks at sector level and governmental level
Financial coefficients reveal the relationship between various financial variables, enabling the analysis and comparison of different banks and branches, as well as tracking fluctuations over time Various financial ratios are utilized to assess distinct aspects of a bank's performance, including those that measure profitability, operational efficiency, and financial risk.
Key indicators of profitability that demonstrate the effectiveness of venture capital in international practice include Net Interest Income (NII), Net Interest Margin (NIM), Return on Assets (ROA), and Return on Equity (ROE).
NII = (Interest payments on assets) − (Interest payments on liabilities) (2.1)
NIM = Investment Return - Interest Expenses
Net Interest Margin (NIM) is a critical indicator of a bank's ability to generate revenue, highlighting the effectiveness of its board of directors and staff in ensuring that income from loans, investments, and service charges exceeds the growth of costs such as interest payments and employee salaries The NIM ratio quantifies the difference between interest income and interest expenses, reflecting the bank's proficiency in managing assets and securing low-cost capital.
Return on Assets (ROA) is a crucial measure of management effectiveness, indicating how well a bank's board converts assets into net income It is commonly utilized for performance analysis and evaluating a bank's financial health A low ROA may suggest issues such as unproductive investments or excessive lending, while a high ROA typically signifies effective operations, a balanced asset structure, and adaptability to economic fluctuations.
Return on Equity (ROE) is a key metric that measures the rate of return for shareholders in a bank, reflecting the income generated from their investments It serves as an important indicator of the effectiveness of owner's equity and is frequently used in performance analysis Investors closely monitor ROE to evaluate a business's profitability, which plays a crucial role in their investment decision-making process.
Bank executives assess performance by analyzing the relationship between Return on Assets (ROA) and Return on Equity (ROE), as these metrics highlight a crucial tradeoff between risk and income A bank may exhibit a low ROA while still attaining a high ROE due to significant financial leverage.
The indicator group reflects income and expenses
Commercial banks enhance their operational efficiency and maximize profits by implementing strategies that reduce operating costs, boost employee productivity through automation, and optimize staffing levels Key measures reflecting the effectiveness of a bank's performance and employee productivity include various performance metrics and efficiency indicators.
The ratio of Total Operating Expense to Total Operating Revenue serves as a key indicator of a bank's efficiency, illustrating its capacity to cover operating costs through generated revenue.
Labor productivity (operating income / number of full time employees): reflects the efficiency of labor use of the bank
Total operating income / total assets: reflecting asset efficiency If this factor is large, the bank appropriately allocates its assets (portfolio) to improve its profitability
In today's volatile economy, commercial banks prioritize risk management alongside enhancing share value and profitability Bank executives are increasingly focused on controlling and measuring various operational risks, including credit risk, liquidity risk, interest rate risk, bankruptcy risk, and income risk.
NPL ratio (bad debt / total loans and rentals): indicators reflect the quality of credit, the smaller the indicator, the better the quality of credit
The Loan Ratio, calculated as Net Loan divided by Total Assets, indicates the proportion of assets tied up in illiquid investments A rising loan ratio may heighten liquidity risk, particularly if there is an increased demand for public funds and a decline in loan quality.
The financial leverage ratio, calculated as Total Assets divided by Total Equity, indicates the extent to which a bank's assets are financed through equity Typically averaging over 15 times, a higher ratio signifies greater reliance on loans, which increases the risk of bankruptcy due to the equity's role in absorbing losses.
To enhance profitability in their operations, commercial banks must focus on key factors including bank size, effective cost control (operating costs relative to total operating revenue), deposit structure, financial leverage, the expansion of fee collection services, and overall growth.
While growth in assets, deposits, and loans is often pursued, it should not be viewed as a reliable measure of profitability Excessive growth can result in a loss of control, as operational costs may escalate more quickly than overall revenue.
In analyzing the current operations of commercial banks, financial ratios remain popular due to their simplicity and ease of understanding However, this simplicity can complicate matters when managers attempt to create a comprehensive overview by combining various aspects of the bank's performance Each ratio evaluates specific relationships between two variables, meaning no single ratio can provide a complete picture of a bank's status Therefore, to accurately assess the current situation, banks must consider a range of indicators A simultaneous review of different ratios can lead to confusion in performance evaluation, as these indicators are primarily basic analytical tools.
To address the limitations in analyzing financial coefficients, economists have recently adopted marginal efficiency analysis to evaluate bank performance This modern approach provides a comprehensive view of banks' operations, enabling a clearer understanding of their overall effectiveness.
Censored regression model
Most researchers in prior studies have utilized Return on Assets (ROA) and Return on Equity (ROE) as key metrics to evaluate the efficiency of business operations and the overall effectiveness of banking activities.
Business performance in commercial banks is affected by various factors, and OLS regression models often fall short in accurately estimating these effects due to the bounded nature of the dependent variable Instead, the Tobit regression model is more suitable for analyzing the impact of these factors on business performance, as it effectively accommodates the limitations of the data.
Introduced in 1958, Tobit's first regression model, also known as the Tobin Probit model, is a linear regression approach designed for situations where the dependent variable is binary This model addresses the issue of incomplete data by accounting for instances where some observations of the underlying variable are missing.
The Tobit model is a statistical approach used to analyze variables that are censored above or below a specific threshold, often referred to as shear variable amputation In this context, amputation regression is applied to a sample of banks, where the outcome variable is defined as yi = {y i * = x i + u i if y i * > 0 This model effectively captures the relationships between the independent variables and the outcomes while accounting for the limitations of censored data.
In which: u i : Error x i : Vectors of explanatory variables
: Unknown parameters to look for y i : Implicit variables y i : Effectiveness of the bank, limited in [0;1]
On the experimental side, the Tobit regression model is written as:
TEt: Performance of the bank in year t
The previous empirical studies
Performance studies of banks have employed diverse evaluation methods and data sets, primarily focusing on developed countries This section will examine research findings from Vietnam alongside results from studies conducted in other countries using traditional approaches.
2.5.1 Empirical studies in the international context
Ongore and Kusa (2013) investigated the factors affecting bank performance in Kenya by analyzing secondary data from the financial statements of 37 commercial banks between 2001 and 2010 Utilizing a regression analysis model, the study assessed the influence of independent variables such as capital adequacy, asset quality, management efficiency, and liquidity on key performance indicators, including Return on Assets (ROA), Return on Equity (ROE), and Net Interest Margin (NIM) The findings revealed the extent to which these independent variables impact the performance of commercial banks in Kenya.
Meero (2015) investigates the impact of capital structure on the performance of banks in the Persian Gulf, analyzing data from 16 banks between 2005 and 2014 The study uses Return on Equity (ROE) and Return on Assets (ROA) as indicators of bank performance, while examining variables such as total debt to total assets, equity to total assets, and payables ratio to equity The findings reveal that Islamic banks share similarities in capital structure with their counterparts in Gulf countries Notably, the research indicates a significant negative correlation between ROA and financial leverage, while ROE shows a positive relationship with financial leverage.
A study analyzing data from 15 European countries between 2002 and 2012 employed FEM and REM methods to assess the banking sector The findings indicate that larger banks with stronger capital positions are able to leverage market power, ultimately leading to increased profitability.
Almazari (2012) employed the Dupont model to evaluate the financial performance of Jordanian commercial banks from 2000 to 2009, focusing on the impact of net profit margin (NPM), total asset turnover (TAT), and equity multiplier on return on equity (ROE) The findings indicated that between 2001 and 2008, Arab commercial banks experienced stable operations characterized by high profit margins and consistent total asset turnover, which resulted in a slight decline in ROE during this period.
33 commercial banks affected by the economic crisis, the maintenance of ROE at 11.47% as the Arab commercial banks are a good result
Miller and Noulas (1996) conducted a parametric analysis using Data Envelopment Analysis (DEA) to evaluate the performance of 201 major US banks, each with assets exceeding $1 billion from 1984 to 1990 They utilized four inputs—total payment deposits, total term deposits, total interest payments, and total interest expenses—and measured six outputs, including industrial loans, commercial loans, and consumer loans The authors found that the average nonperforming loans were influenced by factors such as net inefficiency and inefficient economies of scale.
201 banks is over 5% Research results show that the majority of banks are too large and are falling into areas of reduced efficiency by scale
In 1993, Fukuyama utilized Data Envelopment Analysis (DEA) to assess the performance of 143 Japanese commercial banks in 1991, focusing on three inputs: labor, capital (including customer-sourced capital such as deposits and loans), and two outputs: interest income from loans and other banking income The study revealed that the primary source of overall technical inefficiencies was pure inefficiency rather than inefficient scale, indicating that most banks operated efficiently in terms of economies of scale Notably, banks with assets exceeding 8 billion yen demonstrated optimal performance.
2.5.2 Empirical studies in the Vietnamese context
In Vietnam, there are many researches on the factors affecting the performance of commercial banks, such as:
A study conducted by Trinh Quoc Trung and Nguyen Van Sang (2013) analyzed data from 39 commercial banks in Vietnam between 2005 and 2012 to identify factors influencing bank performance, measured by Return on Assets (ROA) and Return on Equity (ROE) The findings revealed that increased equity correlates with higher ROA but results in lower ROE, while operating expenses related to sales are inversely proportional to both ROA and ROE.
Ho Thi Hong Minh and Nguyen Thi Canh (2014) conducted a study examining the factors influencing the profitability of commercial banks in Vietnam, utilizing financial statements from 22 banks over the period from 2007 onwards.
2013 The results show that financial leverage (measured by ROE) is negatively correlated to profitability
Tran Huy Hoang & Nguyen Huu Huan (2016) analyzed the factors affecting the performance of the commercial banking system in Vietnam in the period 2011-
In 2015, research utilizing the Stochastic Frontier Panel (SFA) method revealed that the performance of commercial banks is influenced by two primary groups of factors Key impact factors include market share, liquidity risk, foreign ownership ratio, and bank size, while objective factors consist of gross domestic product and inflation rates Notably, foreign ownership, bank size, and market share significantly affect the overall performance of commercial banks.
A study by Lieu Thu Truc and Vo Thanh Danh (2012) examined the factors affecting the business performance of Vietnamese joint stock commercial banks from 2006 to 2009, utilizing total productivity analysis methods The findings revealed a decline in performance primarily attributed to technological inefficiency, with larger banks enjoying a cost advantage over their smaller counterparts Additionally, banks were found to waste approximately 7.7% of their resources, and the trend indicated that fewer banks were experiencing performance declines related to scale.
Chapter 2 aims to summarize the theoretical literature on the efficiency of commercial banks, establishing a solid foundation for this study Additionally, it reviews numerous empirical studies from both international and Vietnamese contexts to strengthen the author's framework.
In terms of general background provided in chapter 2, chapter 3 can give more detail information about the research framework, the measurement of variables as well as the procedure of estimation
EMPIRICAL MODEL
Model of research
In this research model, Return on Assets (ROA) and Return on Equity (ROE) serve as the dependent variables, reflecting the performance of commercial banks Drawing on prior empirical studies both internationally and within Vietnam, we summarize the factors that may positively or negatively influence performance The analysis focuses on several independent variables that are expected to impact these key financial metrics.
Table 3.1 Variables used in the model
Variable name Abbreviations Formulas Previous studies Expected influence
Return on assets ROA Net profit / Total
Assets Return on equity ROE Net Profit / Equity
X1: Equity ratio ETA Equity / Total
X 2 : Loan on total assets LTA Loan / Total Assets Maudos (2016) Negative
X 3 : Scale SIZE Natural logarithm of total assets
X 4 : Loan deposit ratio LTD Loan / Total deposit
X5: Cost income ratio CIR Cost / Income David M
Based on the research overview and current performance of commercial banks in
Vietnam, the theoretical model is:
Performance it = β 0 + β 1 ETA it + β 2 LTA it + β 3 TA it + β 4 LTD it + β 5 CIR it + β 6 DTA it + ɛ it
ROA it = 0 + 1ETAit + 2LTAit + 3TAit + 4LTDit + 5CIRit + 6DTAit + ɛit
ROE it = 0 + 1ETAit + 2LTAit + 3TAit + 4LTDit + 5CIRit + 6DTAit + ɛit
In which: i: the order of commercial banks t: year number t
37 ɛit: error of the model
Independent variables in the model are explained in Table 3.1
Research Method
This study transitions from theory to practice by applying a theoretical framework to analyze the performance of 23 commercial banks in Vietnam from 2008 to 2017, focusing on the key factors that influence their performance.
The source of data used for research is the secondary data source, collected through audited financial reports and disclosed by commercial banks
The Tobit regression model is used to analyze the factors affecting the performance of commercial banks Analysis is done on the software Stata14.
Research data
Data are collected from financial reports of commercial banks in the period 2008-
2017 These banks have financial reports with sufficient data and information to serve the research Data collected and processed include the following 23 commercial banks:
Table 3.2 Vietnamese commercial banks are assessed for performance
1 ACB Asia Commercial Joint Stock Bank
2 ABB An Binh Commercial Joint Stock Bank
3 BID Joint Stock Commercial Bank for Investment and
4 EIB Vietnam Export Import Commercial Joint Stock
5 HDB Ho Chi Minh city Development Joint Stock
6 KLB Kien Long Commercial Joint Stock Bank
7 LPB LienViet Commercial Joint Stock Bank – LienViet
8 MSB The Maritime Commercial Joint Stock Bank
9 MBB Military Commercial Joint Stock Bank
10 NAB Nam A Commercial Joint Stock Bank
12 OCB Orient Commercial Joint Stock Bank
13 PGB Petrolimex Group Commercial Joint Stock Bank
14 SCB Saigon Thuong Tin Commercial Joint Stock Bank
15 SEA Southeast Asia Commercial Joint Stock Bank
16 SGB Saigon Bank for Industry & Trade
17 SHB Saigon-Hanoi Commercial Joint Stock Bank
18 TCB Vietnam Technological and Commercial Joint
19 TPB Tien Phong Commercial Joint Stock Ban
20 VCB Joint Stock Commercial Bank for Foreign Trade of
21 VIB Vietnam International Commercial Joint Stock
22 CTG Vietnam Joint Stock Commercial Bank for
23 VPB Vietnam Commercial Joint Stock Bank for Private
Source: Annual reports of commercial banks in Vietnam
In Chapter 3, the author focuses on database sources, outlining the methodology for designing the model and measuring two dependent variables alongside six independent explanatory variables The subsequent chapter discusses the data analysis tools employed for estimating regression using FEM, REM, and TOBIT regression techniques.
FACTORS AFFECTING THE OPERATIONAL EFFICIENCY
Measure the effectiveness and factors affecting the performance of
4.3 Measure the effectiveness and factors affecting the performance of commercial banks in Vietnam
Variable Obs Mean Std Dev Min Max
Source: Based on Author‘s calculation by Stata14
Table 4.3 indicates that commercial banks have an average Return on Assets (ROA) of 0.864%, signifying that for every 100 dong of bank assets, a profit of 0.864 dong is generated after tax Additionally, the average Return on Equity (ROE) stands at 8.67%, which implies that for every 100 dong of equity invested, the banks earn a profit of 8.67 dong after tax.
The ratio of equity on total assets (ETA) has an average value of 0.098 = 9.8%, meaning an average of 100 dong of assets includes 9.8 dong of equity and the rest is debt
The loan on total deposits (LTD) has an average value of 0.71 = 71%, which corresponds to 100 dong of deposits will have 71 dong for interest-bearing loans
Figure 4.1 Values of ROA and ROE in 2008 – 2017
Source: Based on the author’s calculation
Between 2010 and 2015, commercial banks in Vietnam experienced a notable decline in their Return on Assets (ROA) Additionally, the Return on Equity (ROE) for these banks also saw a significant decrease during the period from 2009 to 2015.
In 2009, the average Return on Equity (ROE) for banks was approximately 16.0%, indicating strong financial performance However, due to rising competitive pressures and various factors, bank profits plummeted to a low of about -13.5% in 2011 A notable recovery occurred in 2012, with ROE rebounding to 9.9% After some fluctuations in subsequent years, the ROE rates stabilized and reached 13.6% by 2017.
Despite the consistent trend of Return on Assets (ROA) being lower than Return on Equity (ROE) across banks, statistics reveal a concerning decline in ROA, which dropped from 1.3% in 2009 to 0.5% in 2016.
Vietnam's macro economy has experienced significant transformations during the integration period, presenting numerous challenges that may adversely impact the profitability of commercial banks Many businesses are currently struggling to navigate these difficulties.
Average of ROA Average of ROE
In an unstable macroeconomic environment, businesses face increased inactive debts and heightened credit risks for commercial banks This situation, combined with rising provisions for loan losses to address bad debts, leads to elevated operating and management costs, ultimately resulting in a significant reduction in net income from business activities.
In 2017, Vietnam's banking industry showed signs of recovery, with the Return on Equity (ROE) rate improving to 13.6% after addressing various operational issues This positive trend was mirrored in the Return on Assets (ROA) rate, which rebounded to 0.7% in 2017, following a steady decline from 2010 to 2015.
Equity on Total Assets (ETA)
Figure 4.2 Equity on Total Assets and indicators of efficiency in 2008 – 2017
Source: Based on the author’s calculation
Figure 4.2 shows that the percentage of ETA has gradually decreased over the years but in 2012, this ratio has increased slightly from 9.8% in 2011 to 10.7% in
Average of ROA Average of ETA Average of ROE
The ETA ratio measures the potential value shareholders may receive during liquidation by dividing the bank's equity value by its total assets.
It was because of the increase in the capital ratio, the 2012 period, ETA and ROE both increased after years of declining
Loan on Total Assets (LTA)
Figure 4.3 Loan on Total Assets and indicators of efficiency in 2008 – 2017
Source: Based on the author’s calculation
This LTA ratio points out how much of the bank's assets are from borrowing, knowing the bank's financial autonomy
The data presented in Figure 4.3 indicates a gradual increase in the rate of LTA fluctuations over the years, with the most significant rise occurring between 2011 and 2017 Notably, the lowest fluctuation rate was recorded in 2011 at 43.8%, while it reached its peak in 2017 at 59.7%.
The high LTA ratio in figure 4.3 indicates that the bank primarily relies on borrowing to fund its business capital, demonstrating effective use of financial leverage and a strong ability to mobilize capital through loans.
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Average of ROA Average of ROE Average of LTA
Figure 4.4 Bank Size and indicators of efficiency in 2008 – 2017
Source: Based on the author’s calculation
According to Figure 4.4, there appears to be an inverse relationship between average bank size, measured by the natural logarithm of total assets, and bank performance indicators such as Return on Assets (ROA) and Return on Equity (ROE), as average bank size increased from 17.1 in 2008 to 18.9 in 2017.
Between 2008 and 2017, Vietnam's banking system experienced substantial growth, with most commercial banks expanding their operations and diversifying their services to cater to a wider range of customers The recent trend of mergers and acquisitions has further increased the total assets of these banks However, this growth in size presents challenges for bank administrators in managing costs and ensuring smooth operations, which may negatively impact overall performance To better understand the influence of size on bank performance, a regression analysis is necessary.
Average of ROA Average of ROE Average of Ln(TA)
Loan on Total Deposit (LTD)
Figure 4.5 Loan on Total Deposit and indicators of efficiency in 2008 – 2017
Source: Based on the author’s calculation
In this dissertation, the author uses the ratio of total loans over total assets to define commercial banks‟ liquidity
Between 2008 and 2017, the liquidity trend of commercial banks in Vietnam, as indicated by the loans to total assets ratio, showed no significant correlation with the banks' performance trends Overall, the average liquidity of commercial banks remained stable throughout this period.
During this period, banks experienced a decline in performance ratios, specifically in Return on Assets (ROA) and Return on Equity (ROE) A higher liquidity ratio indicates lower liquidity levels, suggesting that an increased volume of loans generates more interest revenue However, this leads to a predicted negative impact on bank performance, as higher liquidity ratios correlate with diminished overall performance.
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Average of ROA Average of ROE Average of LTD
Figure 4.6 Cost income ratio and indicators of efficiency in 2008 – 2017
Source: Based on the author’s calculation
Figure 4.6 shows CIR rates is quite high The lowest point was 78.7% in 2009 and 2010, and the highest point was 89.3% in 2013
The efficiency ratio provides managers with valuable insights into a bank's operational effectiveness A high efficiency ratio may indicate low profitability or potential losses If this ratio continues to rise over the years, it suggests that costs are increasing at a faster rate than income, signaling a critical area for bank managers to monitor closely.
Average of ROA Average of ROE Average of CIR
Deposit on Total Assets (DTA)
Figure 4.7 Deposit on Total Assets and indicators of efficiency in 2008 – 2017
Source: Based on the author’s calculation
Figure 4.7 shows DTA rates is fluctuated in 2008-2017 The lowest point is 66.5% in 2012 and the highest point is 77.4% in 2016
The more deposit, the higher the DTA rates The greater amount of deposit, the more loans are created for banks, increasing interest income and opportunities for banks
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Average of ROA Average of ROE Average of DTA
Table 4.4 Result of Correlation Test
ROA ROE ETA LTA SIZE LTD CIR DTA ROA 1.0000
Source: Based on Author‘s calculation by Stata14