Research on the impact of loan portfolios on profitability of joint stock commercial banks

MINISTRY OF EDUCATION AND TRAINING

UNIVERSITY OF ECONOMY HCMC. Ho Chi Minh City

———-

TA THI NHI NHI

RESEARCH IMPACT OF LOANS ON PROFIT OF VIETNAM JOINT STOCK COMMERCIAL BANKS

Specialization: Finance-Banking

Code: 60340201

MASTER THESIS OF ECONOMY

Scientific instructor: Assoc.Prof.Dr. Tram Thi Xuan Huong

Maybe you are interested!

City. Ho Chi Minh, Year 2015

GUARANTEE

First of all, I hereby declare that the thesis “Research on the impact of loan portfolio on profitability of Vietnamese joint stock commercial banks” is my own research.

Except for the references cited in this thesis, I hereby certify that all the detailed contents of the thesis are presented according to the structure and outline of the author with painstaking research, collection and analysis. analyzed relevant documents, and at the same time received the advice and guidance of Assoc. Prof. Dr. Tram Thi Xuan Huong to complete the thesis.

HCMC, December 8, 2015

Author

Ta Thi Nha Vi

GUARANTEE

First of all, I hereby declare that the thesis “Research on the impact of loan portfolio on profitability of Vietnamese joint stock commercial banks” is my own research.

HCMC, December 8, 2015

Author

Ta Thi Nha Vi

TABLE OF CONTENTS

GUARANTEE

TABLE OF CONTENTS

LIST OF Abbreviations

LIST OF TABLES

LIST OF PICTURES AND Graphs

CHAPTER 1: INTRODUCTION …………………………………………………………………. …………………………………..first

1.1 Urgency of the topic: ……………………………………………………….. …………………………….first

1.2 Overview of previous studies …………………………………………………………….. ……………2

1.2.1 Foreign studies …………………………………………………………….. ……………………………..2

1.2.2 Domestic research …………………………………………………………………….. …………………………6

1.3 Objectives, objectives and research tasks of the topic ……………………………………………………………………………………6

1.4 Subjects and scope of the study …………………………………………………………….. …………7

1.5 Research Methods: ……………………………………………………………………… …………………………8

1.6 Scientific and practical significance …………………………………………………………….. …………………….8

1.7 Structure of the thesis: …………………………………………………………….. ………….9

CONCLUSION CHAPTER 1……………………………………………………………………… ……………………………………ten

CHAPTER 2: THEORETICAL BASIS ON THE IMPACT OF LOANS ON PROFIT OF COMMERCIAL BANKS …………………………………………………… ……11

2.1 Overview of the commercial bank’s loan portfolio …………………11

2.1.1 Concepts …………………………………………………………….. …………………………… ..11

2.1.2 Loan portfolio classification …………………………………………………………………. ………………………twelfth

2.1.2.1 Classification by loan term …………………………………………………. …………15

2.1.2.2 Classification by loan collateral ………………………………………………………. ………….16

2.1.2.3 Classification by field of investment …………………………………………………………………………. …………16

2.1.2.5 Loan portfolio by type of customer …………………………………………………………… .17

2.1.2.6 Loan portfolio by geographical area …………………………………………………………………………. ………….17

2.1.2.7 Loan portfolio by economic sector ………………………………………………………… ………….17

2.1.3 Measures of concentration …………………………………………………………………………. …………18

2.1.3.1 Distance measure …………………………………………………………….. ……………………………18

2.1.3.2 Measure of SE (Shannon Entropy)……………………………………………………………………… …………18

2.1.3.3 Hirschman-Herfindahl Index (HHI) …………………………………………………………… ……19

2.2 Theoretical basis of commercial bank profitability …………………………………………19

2.2.1 Concepts …………………………………………………………….. …………………………… ..19

2.2.2 Indicators for assessing the bank’s net profit …………………………………………20

2.2.2.1 Absolute profit level ……………………………………………………………….. ……………………………20

2.2.2.2 Return on equity (ROE) …….20

2.2.2.2 Return on assets (ROA: Return on asset) ratio……………..20

2.3.1 Intrinsic risks …………………………………………………………….. ………….21

2.3.2 Concentration risk …………………………………………………………….. ………….22

2.4 Impact of loan portfolio on bank profitability ……….23

2.5 Impact of loan portfolio on risk …………………………………………………………… ……24

2.6 Model of the impact of loan portfolio on profitability …………26

2.6.1 Regression model of Acharya et al. (2004)………………………………………….26

2.6.2 Regression model of Benjamin M. Tabak, Dimas M.Fazio and Daniel

O.Cajueiro (2010) ………………………………………………………… …………………………… …….27

CONCLUSION CHAPTER 2 ……………………………………………………………………… ………….30

CHAPTER 3: SITUATION OF LOANS LIST AT VIETNAM JOINT-STOCK COMMERCIAL BANKS……………………….31

3.1 Overview of the operation of the Vietnamese banking system …….31

3.1.1 The strong development in terms of increasing the number of banks and the asset size of the banking system ………………….. ………………………………………thirty first

3.1.2 Scale of total assets increased rapidly ………………………….. ……….32

3.1.3 Money supply growth, credit and inflation ………………………………………………………. ..33

3.1.4 The competitiveness and provision of banking services are increasingly improved to better meet the needs of the economy ………………………………………….. ………….37

3.1.5 Strengthening market opening and international integration in the banking sector ………………………………………………………… …………………………… …………38

3.2 Current status of loan portfolio at Vietnam Joint Stock Commercial Banks …….38

3.2.1 Structure of loan portfolio by economic sector ………………………………………………………… ….38

3.2.2 Structure of loan portfolio by term ………………………………………….. …………43

3.2.3 Structure of loan portfolio by customer type…………………………………………44

3.3 Profits of Joint Stock Commercial Banks in Vietnam ……………………………………………………….45

3.4 Impact of loan portfolio on joint-stock commercial bank’s risk…….53

3.5 Assessment of the current situation of the loan portfolio …………………………………………………………….. ……….sixty four

3.5.1 Accomplishment results ……………………………………………………….. …………………………………….sixty four

3.5.2 Existence …………………………………………………………………. …………………………… …….65

3.6 Causes of problems ……………………………………………………………………………………….. …………..66

CONCLUSION CHAPTER 3……………………………………………………………………… ……………………….71

CHAPTER 4: RESEARCH METHODS – RESEARCH RESULTS 72

4.1 Model of the thesis …………………………………………………………………………… ………….72

4.1.1 Variables and variable descriptions ………………………………………………………… ………….72

4.1.1.1 Ratio of return on total assets ………………………………………………………… …………72

4.1.1.2 Ratio of owner’s equity to total assets …………………………………………………… …………….72

4.1.1.3 Bank size …………………………………………………………….. ………………………………….seventy three

4.1.1.4 Traditional Concentration of Hirshmann-Herfindahl Index …………75

4.1.2 Data collection and data processing …………………………………………………… …………76

4.1.3 Research methods …………………………………………………………………….. …………76

4.1.4 Correlation survey between independent variables …………………………………………………………… …….77

4.1.5 Constructing the empirical equation and selecting the model …….77

4.1.5.1 Pool regression model …………………………………………………………….. ………….78

4.1.5.2 Fixed-effects regression model …………………………………………………… …………78

4.1.5.3 Random effects regression model …………………………………………………………………………. ……….79

4.1.5.4 Model selection …………………………………………………………….. ………….80

4.1.5.5 Checking the suitability of the selected regression model……………………….81

4.2 Interpretation of research results: ……………………………………………………………………… …………82

4.3 Measurement of variables in the research model ………………………………………………………… .82

4.3.1 Equity-to-total assets ratio ……………………………………………………….. …………….82

4.3.2 Bank size …………………………………………………………….. …………82

4.3.3 Concentration of the loan portfolio ……………………………………………………….. ………..83

4.4 Research results …………………………………………………………………………… ……………………………84

4.4.1 Descriptive statistics …………………………………………………………….. ……………………….84

4.4.2 Correlation analysis ……………………………………………………………….. ………………………………eighty six

4.4.3 Autocorrelation test …………………………………………………… …………………………….eighty seven

4.4.4 Model selection test ……………………………………………………………….. …………88

4.4.4.1 F-test to choose Pooled OLS or FEM …………………………………………………………… …..88

4.4.4.2 Hauman Test to choose FEM or REM …………………………………………89

4.4.5 Verification of variance …………………………………………………………………………. …………90

4.4.6 Results of regression model according to FEM ………………………………………………………… ..92

4.5 Interpretation of the results of the study ……………………………………………………………………… …………………..ninety three

4.5.1 Variable Owner’s Equity to Total Assets ………………………………………………………… ………ninety three

4.5.2 Bank size variable ……………………………………………………………….. ……………………………ninety three

4.5.3 The concentration variable of the loan portfolio ………………………………………………………… …ninety four

CONCLUSION CHAPTER 4……………………………………………………………………… ……………………………96

CHAPTER 5: CONCLUSIONS-RECOMMENDATIONS……………………………………………………………………… …………97

5.1 Conclusion ……………………………………………………………………………………. …………………………… …97

5.2 Operational orientation of the banking industry …………………………………………………………………………. .98

5.2.1 Orientation of banking industry to 2020 …………………………………………98

5.2.2 Orientation to build loan portfolio until 2020 …………………………………………99

5.2.2.1 Target industry orientation …………………………………………………………………. ……….99

5.2.2.2 Targeting customers …………………………………………………………………………. ……………..100

5.2.2.3 Orientation to improve loan portfolio management activities at Vietnamese joint stock commercial banks……………………………………………………….. …………………………… ……100

5.3 Solutions to complete the loan portfolio …………………………………………………… …102

5.3.1 Solutions for commercial banks ………………………………………………. …….102

5.3.1.1 Increase the financial capacity and competitiveness of the bank …………103

5.3.1.2 Fully aware of the need to change the loan portfolio management method to suit the upcoming development trend…………………………. …………………..103

5.3.1.3 Strategic orientations for the management of the bank’s loan portfolio …………………………………………….. ……………………….104

5.3.1.4 Building a risk measurement model for loan portfolio ……………………….105

5.3.1.5 Ensuring the independence and centralization of the risk management department in each bank …………………………………………………… …………………………… ……………………………106

5.3.1.6 Building an effective management information system …………………..107

5.3.1.7 Completing and developing human resources at the bank…………………………………………109

5.3.1.8 Building an accounting system suitable to the international accounting system …….109

5.3.2 Other recommendations ……………………………………………………………………… ………….110

5.3.2.1 Recommendations to the Government …………………………………………………… …………110

5.3.2.2 Recommendations to businesses …………………………………………………. …………112

5.4 Limitations of the thesis …………………………………………………………….. ……………………………112

5.4 Limitations of the thesis …………………………………………………………….. ……………..111

REFERENCES

APPENDIX

LIST OF Abbreviations

ASSET : Bank size

CT : Instruction

Financial statements : Financial statements

DMCV : Loan Portfolio

EQ : The ratio of equity to total assets

FEM : Fixed Effect Result – Fixed Effects Model

FGLS : Feasible Generalized Least Squares

Credit activities: Credit activities

NH : Bank

SBV: State Bank

Commercial Bank: Commercial Bank

Joint Stock Commercial Bank: Joint Stock Commercial Bank

State management: State management

People’s Credit Fund: People’s Credit Fund

Decision : Decision

ROE : Return on equity

ROA : Return on total assets

REM : Random Effect Result: Random Effect Model

SHNN : State ownership

TMCP : Share trading

Credit institution: Credit institution

Limited : Limited Liability

TT : Circular

Equity : Equity

LIST OF TABLES

Table 2.1: Structure of loan portfolio of commercial banks

Table 3.1: Statistics of some basic indicators

Table 3.2 : Proportion of outstanding loans to 3 sectors of commerce, manufacturing and processing, and personal services of large-scale banks

Table 3.3: Proportion of outstanding loans to 3 industries of commerce, manufacturing and processing, and personal services of the group of medium-sized banks

Table 3.4: Proportion of outstanding loans to 3 industries of commerce, manufacturing and processing, and personal services of small-sized banks

Table 3.5 : Income from lending activities by weight

Table 3.6: Return on Equity ROE

Table 3.7: Return on Total Ownership ROA

Table 3.8: Proportion of outstanding loans of an industry to total outstanding loans

Table 3.9 : Ratio of provision for bad debts to total outstanding loans

Table 3.10 : Customer loan growth

Table 3.11: Growth in provision for bad debts

Table 4.1: Expectations about the sign between the independent variable and the dependent variable

Table 4.2: Descriptive statistics of research variables

Table 4.3: Matrix of correlation coefficients between variables

Table 4.4: Autocorrelation test by Durbin-Watson coefficient

Table 4.5: F-test to select the Pooled hat FEM . model

Table 4.6: Hauman Test to choose FEM or REM

Table 4.7 : Variance test

Table 4.8: Results of regression model according to FEM

LIST OF PICTURES AND Graphs

Picture:

Figure 2.1: Structure of risks in commercial banks’ lending activities

Figure 3.1: Structure of loan portfolio by industry

Graph

Graph 3.1: Growth in money supply, credit and inflation

CHAPTER 1: INTRODUCTION

1.1 Urgency of the topic:

Banking is a type of business activity to provide convenient services to serve the essential needs of organizations and individuals in terms of buying, selling, trading and credit activities related to financial assets. . This activity brings economic benefits to individuals in particular, contributing to the economic development of the country in general. Banks are considered as the capital circulation system of the national and global economy. Especially in today’s economy, banking is an indispensable part with the main activities of currency, credit and payment, in which payment plays a particularly important role. Although not directly creating material wealth for the economy, but with its own operating characteristics, the banking industry plays an important role in promoting the development of the economy.

In the current economic conditions, effective business is a matter of concern to economic organizations and competition is an inevitable factor. One of the criteria to determine that position is the business efficiency of the bank and the most important in the output of the bank is the profit. It is necessary to ensure the stability and development of the bank, to ensure the life of its employees as well as to encourage them to be dedicated to their work in particular and to economic development in general. On the other hand, profit shows the financial ability and reputation of that bank with customers. Moreover, profit not only reflects production and business results but also serves as the basis for calculating other quality indicators in order to more fully assess the bank’s business performance in each operating period. Thus, profit is the primary concern of the bank.

In recent years, the Vietnamese banking system has faced many difficulties and challenges, especially in capital mobilization. The economic crisis has led to many difficulties, making it difficult for businesses and individuals to access loans. In addition, banks have focused their loan portfolio to a number of customers. This has put many banks at risk due to the high concentration of loans beyond the capacity of banks. Therefore, it is necessary to analyze and evaluate the bank’s loan portfolio, and consider how the choice of loan portfolio affects the bank’s profitability and risk. Maximizing loan portfolio efficiency has become an important issue.

With the desire to learn about the status of the loan portfolio of joint stock commercial banks in Vietnam and how it affects the bank’s profit, the author has chosen the topic “RESEARCH IMPACT IMPACT LIVING LIST TO THE PROFIT OF VIETNAM JOINT STOCK COMMERCIAL BANKS” for research thesis.

1.2 Review of previous studies

1.2.1 Foreign studies

1.2.1.1 Research paper “German Banks’ Loan Portfolio Composition:

Market-orientation vs. Specialisation?” by Pfingsten and Rudolph (2002)

The main content of the study is to find out about the degree of diversification of the loan portfolio of banks in Germany and the trend of the market to diversify or specialize in loans. The paper analyzes the aggregate data of 7 banking groups in Germany from 1970 to 2001, and analyzes 16 industries. The authors measure diversification using a distance measure, which quantifies the gap between the portfolios that lend to a group of banks and the market lending portfolio.

Pfingsten and Rudolph (2002) were among the first to use distance measures to measure concentration. They argue that distance measurement methods have many advantages over traditional measurement methods, one of which is the difference in size of each industry. We can easily calculate and do not need to collect additional data.

While running a time series analysis, Pfingsten and Rudolph (2002) found that banking groups increased the diversification of their loan portfolios over time. However, this result can be driven by data sets. Aggregate data by banks that specialize in different industries can still lead to an increasingly diversified loan portfolio at the bank group level. As such, an individual bank analysis is needed to confirm or disprove the results that portfolio diversification is a leading strategy in the lending practices of banks in Germany.

1.2.1.2 Acharya et al. (2004) “Should Banks Be Diversified? Evidence from Individual Bank Loan Portfolios”

This paper analyzes the effects of loan portfolio diversification on risk and return. They analyzed 105 Italian banks for the period from 1993 to 1999 based on 23 industries. Acharya uses the Hirschman-Herfindahl Index (HHI), to calculate the level of diversification of the industry. The industrial HHIs (I-HHIs) are the sum of squares of the classification weights for the business sectors.

The results show that industrial diversification is associated with reduced performance, reduced profitability and even increased risk. Industry diversification has a positive effect on moderately risky banks but reduces the performance of banks characterized by a high degree of risk. Acharya et al. (2004) concludes that “diversification does not guarantee high performance or greater bank safety”.

Thus, they conclude that the problem of diversification is a very typical question of trade-offs between risk and return.

1.2.1.3 Scientific paper “Do banks vary loan portfolios? A response based on individual bank loan portfolios” by Andreas Kamp (University of Munster), Andreas Pfingsten (Unversity of Munster), Danek Prath (Deutsche Bundesbank) in 2005.

The article is based on the research paper of Pfingsten and Rudolph (2002).

The article focuses on studying the degree of diversification of the loan portfolio at German banks and its influence on the bank’s loan portfolio. In addition to the measure of diversification using the Da interval measure, this study also used the HHI (Hirschman-Herfindahl Index) index and performed a panel analysis as well as a time series analysis.

Research results show that banks in Germany tend to be highly diversified, mainly credit cooperatives and savings banks. However, some banks, especially foreign banks, focus their loans on certain areas. Note that the increase in diversification of credit cooperatives and savings banks cannot be explained with the large number of mergers in groups over the last decade. All merged banks during the observation period were adjusted as merged over the whole period.

1.2.1.4 Research paper “The effects of loan Portfolio Concentration on Brazilian bank’s return and risk” by Benjamin M. Tabak, Dimas M.Fazio and Daniel O.Cajueiro (2010)

The author used the traditional methods of HHI and SE indexes, distance measures (Da and Dr) to measure the concentration of the loan portfolio, and then considered the impact of the loan portfolio. loan portfolio to return and risk.

The study uses a panel of unbalanced high-frequency data of 96 commercial banks over a 74-month period from January 2003 to February 2009, aggregating 5175 observations. The data for each bank is provided by the Central Bank of Brazil.

This paper analyzes the impact of loan portfolio on profitability by regression analysis. In the regression analysis, with bank profitability as the dependent variable, the paper uses the Feasible Generalized Least Squares (FGLS) method.

In addition, the study is also interested in examining whether ownership control affects the results on the relationship between loan portfolio concentration and profitability. The loan portfolio of Brazilian banks is assessed to be moderately, medium and more concentrated than developed countries such as Germany, Italy, and the United States. This study evaluates that foreign banks have more concentrated loan portfolios than state-owned, private or public banks. It is explained that foreign banks are familiar with Brazil’s lower economic and financial conditions, and therefore they prefer to limit their lending activities to a few sectors, in order to enjoy benefit more from reduced monitoring costs.

Overall, loan concentration concentration seems to improve the performance of Brazilian banks in both profitability and default risk. Concentration indicators were found to be positively related to return and negatively related to risk. The reason may be that the concentration of outstanding loans increases supervisory efficiency, since banks can specialize in the areas in which they lend, as asserted by Winton [1999]. On the other hand, diversification reduces this efficiency, as it is more difficult for banks to track their credit customers and they may also face adverse selection, resulting from competition. with other banks.

When different types of bank ownership are included in the model, the paper concludes that, for a private bank, the more diversification, the higher the profitability.