In France: according to the French banking law of 1941, Commercial banks are enterprises or establishments that regularly receive from the public in the form of deposits, or other forms of money that they use for themselves in discount, credit or financial services.
In Vietnam, according to Article 4 of the Law on Credit Institutions, dated June 16, 2010, "A commercial bank is a type of bank that is allowed to carry out all banking activities and other business activities as prescribed by the Law on Credit Institutions for the purpose of profit" (Ministry of Justice Information Portal, 2015).
Those are the concepts of Banks from a legal perspective, and from a banking and finance perspective, Banks are the type of financial institutions that provide the most diverse portfolio of financial services - especially credit, savings and payment services - and perform the most financial functions of any business organization in the economy (Rose, 2008).
Although there are many different concepts of Commercial Banks, they are generally consistent with each other: Commercial Banks are financial intermediaries that act as a bridge between the savings sector and the investment sector of the economy. More specifically, Commercial Banks are monetary trading organizations that receive deposits from individuals and organizations in the economy, then carry out lending and investment operations in other profitable assets, and at the same time provide diverse financial, credit, and payment services to individuals and organizations in the economy.
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Factors Affecting Commercial Bank Profitability -
Factors affecting profitability at Vietnamese joint stock commercial banks - 1 -
Profitability of Vietnamese Commercial Banks -
Factors affecting the profitability of joint stock commercial banks in Vietnam - 2 -
Measuring Individual Customer Satisfaction on Service Quality of Joint Stock Commercial Bank for Foreign Trade of Vietnam - Ho Chi Minh Branch Through Survey
For non-financial businesses, profitability is the ability to generate profits from the activities of a business. It shows the ability of the management of the business to generate income by using the resources of the business. There are many different concepts of profitability such as according to Hermanson (1983), profitability is the relationship between income and accounting measures that show the ability to generate income on assets used. Meanwhile, Gibson and Boyer (1979) defined that profitability is the ability of the company to generate income.
For the banking sector, profitability is the result of using the set of physical and financial assets that the bank is holding. In fact, the profitability of a bank reflects the quality of management and ownership behavior as well as the competitive strategy, efficiency and risk management ability of the bank (García- Herrero et al., 2009). Besides, Brigham et al. (1999) argued that profitability is the final result of different policies and management decisions such as liquidity management, asset management, and debt management.
Thus, profitability ratio can be understood as a measure of the efficiency of banking operations over a certain period of time.
2.2.2 Measuring the profitability of commercial banks
Previous studies have used various indicators to measure profitability. Specifically, Kosmidou et al. (2007), Horen (2007) argued that return on assets (ROA) is the best measure of profitability because assets have a direct impact on both revenue and costs. In addition, return on equity (ROE) can also be an important measure of profitability.
According to Ćuraka et al. (2012), ROA reflects the broadest aspects of banking business as it reflects the ability of bank management to generate profits from total assets. Moreover, it is considered as a core profitability ratio used in most of the empirical studies.
According to Dietrich and Wanzenried (2014), the most common variables to measure profitability in banking operations are ROA, ROE and net interest margin (NIM). ROA reflects the bank's ability to generate profits from its assets. It shows the profit earned on each dollar of assets and shows how effectively the assets are used to generate revenue. Meanwhile, ROE does not care about financial leverage and related risks, if ROA is considered an important ratio in assessing the profitability of a bank and the results of ROE are considered as evidence.
additional evidence. In addition, while ROA and ROE reflect efficiency in the use of bank assets, NIM focuses only on the profit earned on interest income and expenses.
Thus, the indicators to measure the profitability of commercial banks include:
o Return on total assets:
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ROA helps us determine the business efficiency of an asset. High ROA affirms good business efficiency, the bank has a reasonable asset structure, and there is flexible mobilization between items on the asset before the fluctuations of the economy.
o Return on equity:
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If ROE is too large compared to ROA, it shows that equity capital accounts for a very small proportion of total capital, the bank has mobilized a lot of capital for lending. In that case, an adjustment of equity capital to a reasonable ratio with mobilized capital will be necessary to ensure the serious operation of the bank.
o Marginal interest income ratio:
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The thesis uses ROE to measure the profitability of joint stock commercial banks. ROE shows the ability of commercial banks to generate profits and added value for shareholders. ROE is considered one of the most comprehensive indicators, evaluating the profitability of commercial banks, because after all, maximizing the value of the bank thereby creating added value for shareholders is the most important goal of each bank. Thus, to measure the impact of the form of state ownership on the profitability of commercial banks
For commercial banks, ROE is appropriate (Goddard et al., 2004, Rokwaro, 2013).
2.3 Factors affecting the profitability of commercial banks
There are many studies on the factors affecting the profitability of a bank. Dietrich and Wanzenried (2014) examined the impact of factors on the profitability of banks in regions with different income levels. Athanasoglou et al. (2006) pointed out the factors affecting the profitability of Western European banks. The studies that have been conducted focus on analyzing the profitability of the cross-border banking system or the banking system of a single country. Some studies on the scale of many countries can be mentioned as Short (1979), Bourke (1989), Molyneux and Thornton (1992), Demirguc-Kunt and Huizinga (2000). Another study in this group is Bikker and Hu (2002). Meanwhile, some studies are conducted in one country such as the US banks of Berger et al. (1987), or in emerging market economies such as Barajas et al. (1999). All of the above studies combine both internal and external factors affecting bank profitability. The empirical results differ significantly because of the differences in data and environment.
In general, factors affecting bank profitability can be divided into two basic groups: internal factors and external factors. Internal factors include factors that reflect the specific characteristics of each bank and the general characteristics of the banking industry, while external factors are macroeconomic factors.
2.3.1 Internal factors affecting the profitability of commercial banks
Some common factors can be classified into the group of internal factors affecting the profitability of commercial banks such as size, capital structure, credit risk, operating costs, ownership form, customer deposits, outstanding loans, and non-interest income.
One of the most important questions in banking management is what is the optimal size of a bank. Economic theories suggest that large organizations are more efficient.
more effective. However, there are also many opinions that the unreasonable expansion of the Bank's scale will cause many difficulties in management and reduce the Bank's profitability. Emery (1971), Smirlock (1985) Akhavein et al. (1997), Bourke (1989), Molyneux and Thornton (1992), Bikker and Hu (2002), found a positive and statistically significant correlation between the size of the Bank and the profitability. The research results are explained that large-scale banks will have the advantage of mobilizing, so they will have cheaper capital sources, reducing costs in business operations. Demirguc-Kunt and Huizinga (2000) argued that different levels of financial, legal and other factors (such as corruption) affecting bank profits are closely related to bank size. In addition, as Short (1979) argued, size is closely related to the capital adequacy of a bank because larger banks can raise capital at lower costs and thus generate higher profits. Using similar arguments to Bikker and Hu (2002), Goddard et al. (2004), linked bank size to capital size – the study results showed that profitability is positively related to bank size, which means that as bank size increases, profitability increases, especially for small and medium sized banks. In contrast, Stiroh and Rumble (2006) found a negative correlation, meaning that larger banks are more difficult to manage, administrative costs and other costs also increase, reducing the profitability of banks. Some other studies also have similar results such as Berger et al. (1987), Pasiouras and Kosmidou (2007) indicating that size has a negative impact on bank profitability due to bureaucracy in the management of large banks.
The need for risk management in banking is inherent in the nature of banking business. Poor asset quality and low liquidity are the two main causes of bank failures. Risks to commercial banking operations can be divided into credit risk and liquidity risk.
Molyneux and Thornton (1992) found a negative and statistically significant relationship between liquidity and bank profitability.
Bourke (1989) reported that the effect of credit risk on profitability is negative (Miller and Noulas, 1997). This result can be explained by taking into account the fact that as banks lend riskier loans, the probability of non-repayment of loans is higher, implying that these loans will lose their profitability.
Deposit growth rate is used to measure the growth rate of a bank. A bank with a fast growth rate will expand its business scope, thereby increasing its profits Dietrich and Wanzenried (2009). Deposit growth rate may not have a positive impact on the profitability of a bank if the bank's assets also increase. High growth is often achieved by reducing the credit quality of loans. Furthermore, when a bank has a high deposit growth rate, the competition among competitors in the industry increases, causing interest rates to fall. This reduces the overall profitability of all banks in the market. Since the growth rate variable has many opposite effects, we do not have a theoretical basis to consider the trend of its impact on the profitability of a bank.
Banking costs are also a very important determinant of profitability, closely related to management efficiency. For example, Bourke (1989) and Molyneux and Thornton (1992) found a positive relationship between good cost management and higher profitability.
Commercial banks typically focus on both traditional banking (taking deposits and lending) and modern banking (managing non-interest-earning assets). Dietrich and Wanzenried (2014) found that in banks in low-income countries, a high ratio of interest income to total income leads to higher profitability.
high profitability. However, in middle- and high-income countries, banks with a high level of product diversification and a low ratio of this ratio will have higher profitability.
Regarding the capital structure of commercial banks, studies such as Allen et al. (2011) or Bourke (1989) show that the equity ratio is positively correlated with the profitability of commercial banks in Europe, Australia, and North America because banks with large equity capital can easily access cheap capital and have less risk. Meanwhile, Berger et al. (1995) found a positive relationship between the equity ratio and the profitability of US banks in the 1980s, but the result was reversed in the 1990s. Barth et al. (2004) found that high equity ratio means less bad debt ratio. According to Berger (1995) with a one-stage model in a perfect capital market and symmetric information, there is a negative relationship between the equity ratio and the profitability of banks. Athanasoglou (2008) developed the above research results by extending the basic hypotheses. First, extending the perfect capital market hypothesis allows an increase in capital to increase expected earnings. This positive effect may be due to the fact that equity is the available source of funds to support the bank's business activities, so equity acts as a safety net in case the bank's development situation is unfavorable. The positive expected relationship between equity and bank profitability can be confirmed by the fact that M&A activities in banks have occurred and a large amount of capital has been raised by banks from the stock market. Second, extending the hypothesis to the one-period model gives rise to another aspect, because an increase in income in this period will increase the equity ratio in the next period. Finally, an extension of the hypothesis that market information is symmetric allows banks with good profitability to transmit that reliable information to the outside through higher capital. Through all the above arguments, the equity ratio factor is endogenous.
The influence of ownership form on bank profitability has also been found by many authors with empirical evidence such as the research results of Claessens and Djankov (2000) showing that ownership by foreign strategic investors has a strong influence on profitability. Or the research of Kobeissi (2014) suggests that foreign banks in the Middle East and North Africa (MENA) region seem to have a large influence on bank profitability.
In summary, based on the results of previous studies, according to the author, the main internal factors affecting the profitability of commercial banks are: bank size, equity ratio, cost management, credit risk, asset structure, customer deposit ratio on outstanding loans and ownership form. In which, equity ratio is an endogenous variable.
2.3.2 External factors affecting the profitability of commercial banks
External factors that characterize the macroeconomic environment affect bank profitability such as inflation, GDP, interest rates, etc.
According to Bashir (2003), GDP per capita is expected to influence many factors related to the supply of loans and the demand for deposits. At higher income levels, people tend to save more and banks will be able to mobilize more resources. Therefore, they finance more investment projects and are able to generate more profits. GDP per capita is therefore expected to have a positive impact on bank profitability. GDP per capita is used by taking the natural logarithm Dietrich and Wanzenried (2014).
The growth and profitability of banking operations are also affected by the growth rate of the economy (Bashir, 2003). Accordingly, if the economy grows well, banks with solid management will increase profits from lending activities, securities trading and increase the demand for other financial transactions. On the contrary, most banks have decreased profits during economic recession.