UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS DETERMINANTS OF BANK CAPITAL STRUCTURE: THE CASE OF VIETNAMESE COMMERCIAL BANK SYSTEM BY PHAM TUAN ANH MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CIII MINH CITY, JANUARY 2013 UNIVERSITY OF INSTITUTE OF SOCIAL STUDIES ECONOMICS HO CHI MINH THE HAGUE CITY THE NETHERLANDS VIETNAM VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS DETEILMINANTS OF BANK CAPITAL STRUCTURE: THE CASE OF VIETNAMESE COMMERCIAL BANK SYSTEM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By: PHAM TUAN ANH Academic Supervisor: DR. CAO HAO THI HO CHI MINH CITY, JANUARY 2013 ACKNOWLEDGEMENT I am grateful to all those who help me to complete the thesis. I would like to thank the Vietnam-the Netherlands Programme for giving me permission to carry out the thesis after Thesis Research Design (TRD) defense and providing many precious researches through an account of EUR library website and others. Especially, I am deeply thankful to my supervisor Dr.
Cao Hao Thi from Industrial Management Department of Ho Chi Minh City University of Technology for his instructions, suggestions and encouragements during the implementation of the thesis. Moreover, I would like to express my deep gratitude to my family, friends and colleagues for all their support and valuable hints in order to help me to complete the thesis. ABSTRACT The study aims to identify determinants of Vietnamese banking capital structure. Using panel data analysis like Fixed Effects Method (FEM) and Random Effects Method (REM), the study investigates the effect of size, growth, collateral value, profitability, dividend policy and business risk determinants to capital structure of commercial banks in Vietnam from 2007 to 2011.
The main findings of the study are that Fixed Effects Model (FEM) is the most appropriate model in explaining the banking capital structure; furthermore, size, growth, collateral and profitability variables are statistically significant and have the expected sign with the book leverage variable. However, risk and dividend variables are not statistically significant. Based on reality situations, it is widely believed that the capital structure of Vietnamese banking system is not really good and does not meet the international standard at present. The system does not have enough equity so as to prevent risks from the negative externalities and unexpected change of business environment.
Therefore, the study is going to recommend some policy implications to improve the capital structure situation by adjusting the determinants. Moreover, the study also makes valuable instructions to banking managers of each commercial bank. According to specific reality situation of each commercial bank, they will have right decisions to increase or decrease book leverage so as to not only maximize the own commercial bank’s value but also avoid facing up bankruptcy events. Keywords: capital structure, book leverage, commercial bank, Fixed Effects Method (FEM), Random Effects Method (REM).
TABLE OF CONTENTS Acknowledgement. ii Table of Cont Abbreviation.vi List of Tabl List of Figure. Justifications of the study. Scope of the study.
Organization of the study. Modigliani and Miller (M&M theory, 1958). The pecking — order theory. The static trade-off theory.
Foreign empirical literature. Vietnamese empirical literature. DATA AND RESEARCH METHODOLOGY. FINDINGS AND DISCUSSION.
Panel regressions results. Comparison with previous studies. CONCLUSIONS AND POLICY IMPLICATIONS. Policy implications for total Vietnamese banking system.
Policy implications for specific Vietnamese commercial banks. Policy implications for high leverage commercial banks. Policy implications for low leverage commercial banks. Limitations and Further Studies.63 ABBREVIATION - BCBS: Basel Committee on Banking Supervision BL: Book Leverage CAR: Capital Adequacy Ratio FEM: Fixed Effects Method GDP: Gross Domestic Product GMM: Generalized Method of Moments REM: Random Effects Method LIST OF TABLE • Table 1.
Quantity of commercial banks in Vietnam. Definition of Variables. Foreign empirical studies in researching the bank capital structure. Empirical studies in researching the Vietnamese capital structure.
Definition of Variables. Classifying banks in the sample by certain asset level on December 31, 2011. Financial items of the sample and total Vletnamese banking system on December 31, 2011. Summary statistics of each variable.
FEM and REM regression results. Likelihood ratio test. Summary of research results.50 LIST OF FIGURE - Figure 1. Capital Adequacy Ratio (CAR) of developing countries.
The determinants of bank capital structure. Research process of the study. Total asset in the sample from 2006 to 2011. Total charter capital in the sample from 2006 to 2011.
Problem Statement Based on Ross, Westerfield and Jaffe (2010), capital structure is the combination of debt and equity. Each company should choose the suitable debt-equity ratio (capital structure) in order to maximize the value of its company. When the capital structure problems are mentioned in any researches, it is certainly that the famous theory Modigliani and Miller (M&M theory, 1958) are applied in these researches. According to M&M theory, in the perfect capital markets (case 1 of M&M proposition 1), choosing any capital structure do not affect the value of specific company.
However, if all assumptions in M&M proposition 1 are held except taxes and costs of financial distress, the value of the specific company will be affected by choosing the capital structure because of the tax shield benefits and costs of financial distress. After the capital structure theory of Modigliani and Miller, many theories about capital structure are in turn released; in particular, agency theory was created by Jensen and Meckling (1976); pecking — order theory and static trade-off - theory was developed by Myers (1984). These theories have indicated that capital structure affects not only the value of each enterprise but also the stability in business. Therefore, there have many authors who research about the capital structure.
They also try to find out the independent variables that affect the enterprises capital structure; from that point, each enterprise have ability to choose the appropriate capital structure in order to maximize the value of the firm and stabilize the business operations. Capital structure of each company is usually measured by the book leverage. It is the basic formulation. It is calculated by debt-to-equity or debt-to-asset, with asset is equity plus debt.
Commercial banks access the primary debts by attracting the money from depositors. The specific characteristic of commercial bank business is to trade in money; thus, equity of commercial banks always accounts for small proportion of total asset. Moreover, in the banking industry, they also use Capital Adequacy Ratio (CAR), which is the other proxy to measure the capital structure of each commercial bank (Basel Committee on Banking Supervision, 2006). CAR has been mentioned in Basel Accords, which are issued by Basel Committee on Banking Supervision (BCBS).
Basel Accords have been built and developed in - order to control the risk from the banking system and prevent the collapse of commercial banks in reality. CAR is calculated by equity over asset; however, unlike book leverage, CAR emphasizes the different risk level of each asset. In general, if commercial banks have low book leverage or high CAR, then they have not ability to take full advantage of tax shield benefit. Conversely, if commercial banks have high book leverage or low CAR, then they have to face up the high financial distress cost such as the bankruptcy cost.
Vietnam is still a developing country. Since Doi Moi (economic reforms in 1986), Vietnamese economy has changed from planned-economy into socialism-oriented market economy. The financial sector, especially commercial bank system still have a rapid development both quality and quantity. The quantity of Vietnamese commercial bank system increases from 9 in 1991 to 94 in 2009.
This leads to the - increase in competitive level of Vietnamese banking system. With the high competitive level in Vietnamese commercial bank system at present, each bank has to perform the right policy to maximize the value and reduce the business risk. Among them, they need to choose the appropriate capital structure in order to carry out the purpose.1 presents quantity of commercial banks in Vietnam from 1991 to 2009.1: Quantity of commercial banks in Vietnam Year 1991 1995 1999 2003 2007 2008 2009 SOCBs 4 4 5 4 3 JSCBs 4 48 48 37 34 39 40 JVCBs 4 4 4 5 5 FCBs 0 18 26 27 41 44 46 Total 9 74 83 73 85 92 94 Source. State Bank of Vietnam — SBV (Note.
State — Owned Commercial Banks, JSCBs. Joint — Stock Commercial Banks, JVCBs. Joint — Venture Commercial Banks,’ FCBs. 100ºX» Foreign-Owned Commercial Banks and Branch ofForeign Commercial Banks) • The Vietnamese banking system has a rapid development; in addition, it contributes to economic growth and living standard improvement.
However, it has been exposed many weaknesses and shortcomings; from that point, they have caused the unsafe banking operations and unstable macroeconomic situation. Therefore, the Government and State Bank of Vietnam have advocated restructuring the Vietnamese commercial bank system by approving the project, which is namely “Orientations and Policies to Restructure Vietnamese Banking System in 2011- 2015”. Based on the project, the State Bank of Vietnam has recognized weaknesses and shortcomings of Vietnamese banking system. Among them, the financial capacity of Vietnamese banking system is still limited.
According to the 141/2006/ND-CP decree that was signed by Vietnamese Prime Minister on November 22, 2006, each commercial bank has to meet the legal capital requirement, minimum 3.000 billion VND in the end of 2010. However, based on the information from the project, there have 3 commercial banks that do not meet the requirement to 2011 yet; moreover, there are 30 commercial banks whose. charter capital are smaller than 5.000 billion VND (equivalent 240 million USD) in the end of 2011. Moreover, Vietnamese commercial bank system is collapsed easily from the negative externalities and unexpected change of business environment such as global financial crisis in 2009 and unstable macroeconomic situation of Vietnam in 2011 because the capital structure of Vietnamese banking system does not meet the international standard.
Based on the information from the project, the average CAR of Vietnamese commercial bank system was 11.85% at September 30, 2011, especially the average CAR of State-Owned Commercial Banks was only 8. Meanwhile, the average CAR of Foreign-Owned Commercial Banks is very high (28. If the Foreign-Owned Commercial Banks was excluded from the Vietnamese commercial bank system, then the real average CAR of domestic commercial banks was only 11. The Financial Management and Analysis of Projects, issued by Asian Development Bank (ADB) in 2005, has recommended • that the minimum CAR of Asian Development Bank’s Developing Member Countries (ADB DMCs) should be 12% because of loose banking regulations and supervisions, the expansion of directed lending.
It is realized that the CAR of many commercial banks does not meet the ADB standard, especially State-Owned Commercial Banks. Besides, in reality, CAR of Vietnamese banking system is much lower than many other developing countries. Other countries which are in the Southeast Asia with Vietnam such as Indonesia, Philippines, Malaysia and Thailand have the safe commercial bank system, with the CAR are very high and meet the international standard well.1 compares the CAR of Vietnam in 2011 with the one of other developing countries.1: Capital Adequacy Ratio (CAR) of developing countries Source. State Bank of Vietnam-SBV In short, the capital structure of Vietnamese banking system is not really good at present.
The system does not have enough equity in order to prevent risks from the negative externalities and unexpected change of business environment. Therefore, the capital structure problem needs to be solved seriously. The study desires to find determinants of bank capital structure in Vietnam; thus, they will be controlled logically in order to improve the Vietnamese banking capital structure. Moreover, according to the static trade-off (Myers, 1984), each Vietnamese commercial bank need to choose the own appropriate capital structure by considering the trade-off between the benefit of debts and cost of debts.