Regression Results of Bank Profitability Model from Interest Rate and Other Profit Determinants

4.2. Regression results analysis

After testing the quantitative hypotheses, it shows that there is heteroscedasticity and autocorrelation because the p-value is both 0.0000 < α = 0.05. In addition, there are endogeneity and multicollinearity phenomena. Therefore, the GMM panel data linear regression method is an effective solution to estimate regression in the model.

Table 4.9: Regression results of bank profitability model from interest rate and other profit determinants

NIM	PROFIT	ROA	ROE
SIZE	1.151263**	1.444957***	0.1146191	2.552261**
CAP	0.5510697***	0.2339403**	0.0123085	0.7341606
LOANTA	7.86231***	6.71707***	0.2079012	15.4409
NITA	47.19349	97.19079***	30.11619**	685.7593***
GDP	51.15637	-101.9064*	14.68915*	-109.7745
IRS	99.70543*	-102.0581*	0.5948811	19.32669
IRS2	-641.7228**	650.4078**	49.4701 4	109,996
IRL	-3.724802	650.4078	0.0316518	-51.65197

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(Source: Synthesized from Stata Software)

(*, **, *** represent significance levels of 10%, 5% and 1% respectively)

Table 4.10: Regression results of bank risk model from interest rates and other determinants

PCL
SIZE	-0.0037302
CAP	-0.0002795
LOANTA	-0.0794638
NITA	0.3030282
GDP	-0.2781891

IRS

1.099274*
IRS2	-5.346907*
IRL	-.3730253

(Source: Synthesized from Stata Software)

(*, **, *** represent significance levels of 10%, 5% and 1% respectively)

4.2.1. Analysis of model results

The author found empirical evidence in Vietnam during the research period indicating a positive relationship between internal and macro factors affecting net profit of credit activities (NIM) such as SIZE, CAP, LOANTA, IRS. When these factors increase, net profit increases, but IRS 2 has an opposite effect. While the factors have not found empirical evidence affecting

NIM is NITA, GDP, IRL.

Overall bank profit (PROFIT), the experiment in Vietnam shows that the factors with positive impact are SIZE, CAP, LOANTA, NITA, ISR 2 , the factors with negative impact are GDP, IRS, but IRL has not found any relationship.

Return on assets (ROA), experiments in Vietnam show that the factors that have the same influence are NITA, GDP, the factors that have not found a relationship are SIZE, CAP, LOANTA, IRS, IRS 2 , IRL.

Return on equity (ROE), the experiment in Vietnam shows that the factors that have the same impact direction are SIZE, NITA, the factors that have not found significance are CAP, LOANTA, GDP, IRS, IRS 2 , IRL.

According to table 4.9, the relationship between interest rates and bank profits is measured through the factors of net profit margin of credit activities (NIM), profit margin of

bank's overall profit (PROFIT), asset utilization efficiency (ROA), capital utilization efficiency (ROE).

Experimental results in Vietnam show that the positive relationship between bank interest rates and net profit of credit activities (NIM) increases. This relationship increases in the same direction when interest rates increase, net profit of credit activities increases. Then, when interest rates increase too much, the direction changes, the interest rate increases, causing the profit of credit activities to decrease (because IRS 2 has a negative sign), as shown in the graph

The inverted U-shape is statistically significant. This result is consistent with the view of the original paper by Jacob A. Bikker and Tobias M. Vervliet in 2017, studying the US region.

The results of PROFIT in short-term interest rate have negative impact on overall bank profitability. For ROA and ROE, the author found empirical evidence in Vietnam in the research area has not found evidence between short-term interest rate affecting ROA and ROE.

When considering the return on assets and return on equity (ROA & ROE), the results found evidence that is different from the empirical results of the original paper with no impact. While the profit from commercial activities (NIM) has statistical significance similar to the original paper, it has a positive impact. Therefore, this result leads to the fact that non-interest income in Vietnam, that is, the remaining profit in ROA and ROE, has not found evidence of statistical significance.

Table 4.10 presents the relationship between interest rates and banks' risk tolerance measured through the credit risk provisioning factor on total outstanding debt (PCL).

Empirical results in Vietnam show that the positive relationship between bank interest rates affects the provision for credit risk on total outstanding debt (PCL), this relationship increases and then reverses (IRS 2 has a negative sign) in a U-shape.

statistically significant. This result is consistent with the view of the original paper by Jacob A. Bikker and Tobias M. Vervliet in 2017, studying the US region.

4.2.2. Discussion of research results

- The relationship between short-term interest rates and net credit profitability is statistically significant at the 10% level, but when interest rates increase too much, the direction changes. This result is consistent with the views of Jacob A. Bikker and Tobias M. Vervliet in 2017, studying in the United States.

The author explains that the increase in IRS causes the increase in NIM because the increase in market interest rates causes the increase in lending rates which will increase interest income because the bank operates to earn profit based on the traditional banking activity of lending. Short-term interest rates have a significant positive effect on net interest margin.

This finding is consistent with the related literature of Alessandri and Nelson (2015). The study of bank profitability with economic activity during deep recessions finds that there is an impact. The paper also finds that long-term interest rates in previous years are important determinants of bank profitability during periods of high economic growth.

According to Borio, C., Gambacorta, L., & Hofmann, B. (2015). “The paper finds a positive relationship between short-term interest rates and the slope of the yield curve, on the one hand, and on bank profitability, on the other. This suggests a positive impact of interest rate structure on earnings and a negative impact on risk provisions”.

According to Genay and Podjasek (2014). One of the core activities of traditional banks is maturity transformation, where a bank borrows funds for short periods and makes long-term loans and investments. Typically banks benefit from steep yield curves, due to the large spread

between short- and long-term interest rates. When the yield curve slopes upward, banks’ net interest margins (NIMs) increase. Conversely, when the yield curve flattens, banks’ NIMs decrease. In addition, low short-term interest rates can compress NIMs if banks’ assets and liabilities roll over or roll back at different times. All else being equal, any change in banks’ net interest income will pass through to their bottom line. That said, if interest rate changes also significantly alter other sources of income or if banks hedge their interest rate risk or change their operations in other ways, then interest rate changes can have a more or less negative impact on banks’ overall profitability. From these results, it can be concluded that a persistently low interest rate environment leads to a reduction in net interest margins, which are the main source of bank profits, as banks struggle to generate profits from their traditional lending and financing.

Vietnam from 2005 - 2010, the net interest margin (NIM) and short-term market interest rates tended to fluctuate in opposite directions. However, from 2010 to now, short-term interest rates have a positive relationship with the net interest margin (NIM) and are on a downward trend. Currently, to ensure the capital safety ratio requirements of credit institutions as prescribed by the State Bank. This is the reason why commercial banks are trying to develop medium- and long-term capital mobilization activities. This causes interest rates in the mobilization and lending market to increase slightly due to competition to attract deposits among banks, along with changes in the capital use ratio regulations of the State Bank. In addition, the lending capacity of some banks is also progressing well with lending interest rates also increasing because they increase according to the mobilization interest rate to have interest to pay expenses as well as set up risk provisions. Thus, this policy will significantly affect the income of banks in the coming period.

- The result of short-term interest rate affecting profit has an opposite effect on the overall profit of the bank at the significance level of 10%. Initially when interest rate is low, when interest rate increases, the overall profit decreases but at the stage of interest rate increase, the overall profit decreases.

When interest rates reach a threshold level, overall profits increase (due to positive IRS 2 ), the graph is U-shaped. Overall profits are not harmed by low interest rates.

This result is somewhat surprising but is consistent with the suggestion of Genay and Podjasek (2014). Apparently, banks can compensate for the reduction in NIM in a way that does not weaken their overall profitability, banks have done this by taking on more risk and thus increasing their non-interest income, which will be discussed in the next section. Genay and Podjasek (2014) suggest that banks maintain their overall profitability through higher fee income or through deregulation. The latter effect will also be addressed in the next section. Furthermore, the net impact on profitability can be positive when a low interest rate environment leads to better economic outcomes through lower unemployment, higher house prices and faster GDP growth. The effect of bank size is found to be positive. The very strong positive effect of capitalization is mainly due to the definition of variable profitability including capital and reserves, further evidence is provided that better capitalized banks make higher profits.

However, the significant negative effect results from the fact that, in accounting terms, bank provisions are deducted directly from profits (see Bikker & Hu, 2002). Again, the negative effect of real GDP growth on bank profits is consistent with Bolt et al.’s (2012) finding that bank profits across the business cycle are stronger for deeper recessions than for mild ones. They find evidence that each percentage point contraction in real GDP during severe recessions leads to a 0.24% decline in bank returns on assets. Diversification, lending and capital ratios are also found to be positively related.

From 2014 to 2016, interest rates on the interbank market decreased sharply, showing that banks had excess liquidity because from February to June 2018, the State Bank continuously bought 10 billion USD, bringing a large amount of money to the market.

However, interest rates in the deposit market increased slightly due to competition to attract deposits among banks, pressure from exchange rate changes and other investment channels, along with changes in regulations on capital use ratios of the State Bank. Meanwhile, lending interest rates are unlikely to increase but must decrease to attract customers, causing banks' profits to narrow due to the difference between deposit and lending interest rates.

When the average interest rate gap in the market is higher, the profitability decreases. To explain this result, to explain this case as follows: when the interest rate gap increases, banks often prioritize focusing capital on lending more than investing in liquid securities. And the increase in lending to seek profits in the short term will cause banks to face very high credit risks. At that time, although lending more in the situation of large lending-mobilization interest rate gap, the quality of new loans is not high, leading to a decrease in profitability.

In 2017, the US economy experienced interest rate fluctuations due to the FED's move to increase the basic interest rate. This situation caused the general interest rate to increase, affecting not only the world economy but also the Vietnamese economy. In addition, the agreement of oil exporting countries on cutting production from January 2017 could also push oil prices up again. Although this is beneficial for the budget balance, the increase in crude oil and energy prices could create pressure on domestic inflation. Although this is only a forecast, experts recommend that the Government and administrators pay attention and be cautious in issuing policies.

- The results of this study have not found empirical evidence between interest rates affecting return on total assets (ROA) and return on total equity (ROE). This result is not the same as the original paper Jacob A. Bikker and Tobias

M. Vervliet 2017, research in the US region. While the relationship between short-term interest rates positively affects the net profit of credit activities

(NIM) in the same direction as the original paper of the author. The residual profit in ROA and ROE, which is the profit outside of interest, is the reason why this relationship is not meaningful, affecting the relationship between short-term interest rates and ROA and ROE.

The reality from 2010-2017, in Vietnam compared to the United States, the problem with non-interest income is that it does not participate in investment activities as much as foreign banks. Due to the specific and unique nature of Vietnamese banks, they have not been able to deploy non-interest services. Vietnamese banks only focus on credit activities, which are closely related to traditional banking activities, and do not participate in investment activities much, so non-interest activities are few, so net interest income is the main income of banks.

However, by 2018, the proportion of income has changed, although income from credit activities is still the main source of income, but the proportion has decreased. To compensate for that shortfall, banks have sought many ways to increase the proportion of non-interest income, mainly from card services, e-banking service fees, insurance sales fees, international payments, and interest from investment securities.

In particular, joint stock commercial banks, which are under pressure to compete on credit with big players such as Vietcombank, BIDV, Vietinbank, etc., have made a change in increasing non-interest activities, typically: HDBank's net service profit increased by 172% compared to the same period of income, investment securities trading doubled, other income tripled. VIB made progress in other higher profit segments, which is increasing insurance revenue. Techcombank increased non-interest income from investment securities and income from divestment, insurance commissions were also boosted.

- The second column in Table 4.10 describes the attitude of banks towards credit risk. The empirical results in Vietnam show a positive relationship between bank interest rates and credit risk, this relationship increases and then reverses (IRS 2 has a negative sign) in an inverted U shape with a statistical significance of 10%. This result is consistent with

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