Factors affecting the profitability of joint stock commercial banks in Vietnam

INTRODUCTION

Reason for choosing topic:

The banking industry is considered the lifeblood of the economy. Banks play an intermediary role in the redistribution of capital, helping capital to be used more effectively, contributing to increased investment and economic development. Banks also play a role in payment, guarantee and implementation of the government's economic policies. The activities of the Vietnamese banking system contribute significantly to the annual GDP growth. In recent times, the banking system has increasingly affirmed its importance in the economy.

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The Vietnamese banking system has had a period of explosive growth with a series of banks being established. The banking industry has always been an industry that achieves high profits compared to other industries. This is an attractive investment channel, banking stocks are always in the leading group in terms of market price.

However, in recent years, the performance of the banking industry has been declining, the growth rate has slowed down and the profits are no longer as high as in previous years. In 2013, very few banks achieved their profit targets. This is an alarm bell for banks to review their operations to ensure stable development and high profits.

The profitability of a bank is not only a concern of the bank itself but also of investors in particular and of the Vietnamese economy in general. Therefore, it is necessary and important to study the factors affecting the profitability of a bank. By finding out the factors affecting the profitability of a bank, we can make better decisions in managing the bank to operate effectively. This is the reason why the author chose the topic "Factors affecting the profitability of joint stock commercial banks in Vietnam".

Topic objectives, research questions

The main objective of the topic is to find out the factors affecting the profitability of

Joint Stock Commercial Banks (JSC) of Vietnam.

Therefore, the topic will focus on finding out the following specific objectives:

 Learn an overview of the theory of profitability.

 Find out related studies that have been done by other authors before.

 Find out the factors affecting the profitability of commercial banks in Vietnam.

 Determine the level of influence of the factors. Thereby, propose solutions to improve the profitability of Vietnamese commercial banks.

The research questions raised are:

 What factors affect the profitability of commercial banks in Vietnam?

 Based on the built model, what measures can be proposed to help the Bank?

improve your profitability?

Research scope:

Research scope: The research topic is based on published data of 35 Vietnamese Joint Stock Commercial Banks from 2007-2013.

Research method:

The implementation process includes the following steps:

 Synthesize theory and previous related studies. From there, propose a model

Factors affecting bank profitability

 Use Stata 11 software to perform multivariate regression with panel data. First, we examine the correlation coefficient between variables to see if there is multicollinearity, and correct it if there is. Next, we perform regression according to three methods commonly applied to panel data: POOL, FEM, and REM. Then, we conduct the Hausman test to select the appropriate regression model. Next, we check whether the model has autocorrelation and heteroscedasticity. If so, we will correct it using the generalized least squares (GLS) method.

Contribution of the topic:

The topic contributes to finding out some factors affecting the operational efficiency of commercial banks in Vietnam. Through that, it helps bank managers to propose some solutions to improve the profitability of banks.

Topic structure

In addition to the introduction, conclusion, table of contents, list of writings, appendices and references; the topic is divided into the following 4 chapters:

Chapter 1: Overview of profit, profitability, variables in the model of factors affecting profitability and previous studies

Chapter 2: Current status of banking industry and profitability of Vietnamese banking industry in recent times.

Chapter 3: Model of factors affecting the profitability of commercial banks in Vietnam.

Chapter 4: Some solutions proposed based on the model to improve the ability to generate

Benefits of Vietnamese commercial banks

CHAPTER 1: OVERVIEW OF PROFIT, PROFITABILITY, VARIABLES IN THE MODEL FACTORS AFFECTING PROFITABILITY AND PREVIOUS STUDIES

1.1 What are profit, profitability, dependent variables representing profit?

1.1.1 Definition of profit

In the definition of economics, profit is the additional wealth that an investor receives from an investment after deducting the costs related to the investment, including opportunity costs; it is the difference between total revenue and total costs. Profit, in accounting, is the difference between the selling price and the cost of production. The difference between the definitions in the two fields is the concept of cost. In accounting, people are only interested in monetary costs, without taking into account opportunity costs as in economics. In economics, in a state of perfect competition, profit will be 0. This difference leads to two concepts: economic profit and accounting profit (According to the open encyclopedia Wikipedia).

The bank profit referred to in the study is accounting profit, which is the difference between the bank's revenue and the total cash costs incurred by the bank. This profit is shown in the annual business performance report that the bank reports.

1.1.2 Profitability

The profitability of a bank is expressed by the rate of profit it earns. The rate of profit is the percentage between the surplus value (profit) and the capital advanced for production and business. Normally, the rate of profit is calculated annually to compare the performance with previous years. The rate of profit is often used as a measure of the performance of that business.

Profitability in the study is measured by the following three ratios: profit margin

return on total assets, return on equity and net interest margin.

1.1.3 Dependent variables representing profitability

In this study, the profitability of a bank is measured by: return on assets (ROA), return on equity (ROE) and net interest margin (NIM).

Return on Assets (ROA):

Calculation formula:

This is an index that shows the correlation between profitability and assets. ROA is a financial index used to measure the profitability of each dong of assets of a business, it shows how much profit can be generated when investing in 1 dong of assets. If this ratio is greater than 0, it means that the business is profitable. The higher the ratio, the more efficient the business is. If this ratio is less than 0, the business is losing money. However, whether this ratio is high or low depends not only on the business orientation of the business, but also on the season and industry, the economic situation and government policies.

Return on Equity (ROE):

Calculation formula:

ROE =

ROE is a financial ratio to measure the profit achieved on each dong of owner's capital. Owner's capital, in addition to shareholders' capital in the form of shares, also includes profits for funds such as business development, issuance difference... ROE is an indicator that investors are often interested in because it shows the ability to generate profit from 1 dong of capital invested in the company. The higher this ratio, the more the company uses

The more effective use of shareholders' capital, the higher the ability to recover capital.

Net Interest Margin (NIM)

Calculation formula:

NIM =

To evaluate the efficiency of banking operations, people divide the bank's assets into the following types: Profitable assets (such as loans, financial investments, etc.), Liabilities (customer deposits, loans from other banks, etc.) and ordinary assets (offices, machinery and equipment, etc.). Income generated from profitable assets is accounted for under the net interest income item.

A high NIM is an important sign that a bank is successful in managing its assets and liabilities. Conversely, a low NIM indicates that the bank is having difficulty generating profits. NIM is calculated as a percentage.

1.2 Factors affecting profitability at Vietnamese Joint Stock Commercial Banks

Factors affecting bank profitability can be divided into internal factors and external factors.

1.2.1 Internal factors:

Internal factors affecting the profitability of the banking industry can be defined as factors that are affected by the decisions of bank managers. In this study, the author will use internal factors as financial decisions made by bank managers. These financial decisions are reflected in financial indicators on the balance sheet and income statement.

Equity to Total Assets Ratio (EQTA)

Calculation formula:

EQTA =

This ratio reflects the bank's ability to finance from its own capital. A high ratio demonstrates the bank's financial autonomy, but it also shows that the bank has not taken advantage of financial leverage. According to research by Antonina Davydenko (2010), the stronger the bank's capital, the more profit it will generate. In the current volatile economic situation, a bank with strong equity will be more able to cope with economic crises and create peace of mind for depositors when the economy is unstable.

The hypothesis is that the ratio of equity to total assets has an impact on the ability to

bank profitability, and this effect is positive.

Loan to Total Assets Ratio (LOTA)

Calculation formula:

LOTA =

In banking activities, credit activities bring the largest source of income, accounting for the majority of the total income of the bank. Most people believe that this index has a positive relationship with the profit earned by the bank. If other issues remain unchanged, when all mobilized funds are transferred to lending, the bank may achieve a higher profit. However, it may happen that when banks try to accelerate lending, they have to pay a higher cost for capital mobilization, and this may lead to a negative impact on profits (according to research by Antonina Davydenko (2010) and Adem Anbar (2011)).

The hypothesis put forward in the study is that the loan to total asset ratio has an impact on bank profitability, and this relationship is positive.

Debt to Total Assets Ratio (DETA)

Calculation formula:

DETA =

Capital from mobilization is considered the main and cheapest source of capital for banks. Therefore, most people believe that customer deposits have a positive impact on banking activities, as long as there is always a demand for loans in the market. If banks mobilize more, they will be able to increase lending. However, if the demand for loans is not large while banks mobilize too much, it can reduce the bank's income (according to research by Antonina Davydenko (2010)).

The hypothesis put forward in the study is that the ratio of mobilization to total assets has an impact on bank profitability, and this relationship is inverse.

Provision for credit losses ratio (PRTO):

Calculation formula:

PRTO =

General provisions are the amount set aside to cover losses that are not yet determined during the process of debt classification and specific provisioning and in cases of financial difficulties when the quality of debts declines. This indicator shows what percentage of outstanding loans are set aside for provisions. This is a measure of capital risk as well as credit quality at the bank.

If a bank operates in a high credit risk environment and lacks experience in managing its loans, then the bank will certainly have a high PRTO (according to Anna PI Vong (2009)). The higher this index, the more negative the quality of the bank's loans is and the ability to recover debts is low. On the contrary, if this index is low, it shows that the bank's business situation is good, most of the loans

Factors affecting the profitability of joint stock commercial banks in Vietnam - 2

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