STATE BANK OF VIETNAM BANKING ACADEMY BANKING FACULTY ------------o0o----------- GRADUATION THESIS THE IMPACT OF CAPITAL STRUCTURE ON THE PROFITABILITY OF COMMERCIAL BANKS IN VIETNAM Supervisor: BUI HUY TRUNG Student name: TRAN PHUONG DUNG Class: K19CLC-NHB Faculty: BANKING Student code: 19A4000099 Hanoi, 2020 STATE BANK OF VIETNAM BANKING ACADEMY BANKING FACULTY ------------o0o----------- GRADUATION THESIS THE IMPACT OF CAPITAL STRUCTURE ON THE PROFITABILITY OF COMMERCIAL BANKS IN VIETNAM Supervisor: BUI HUY TRUNG Student name: TRAN PHUONG DUNG Class: K19CLC-NHB Faculty: BANKING Student code: 19A4000099 Hanoi, 2020 CERTIFICATE OF ORIGINALITY I can guarantee that I am the author of the submitted thesis:” The impact of capital structure on the profitability of Vietnamese commercial banks”. Apart from the references in the thesis, other information and analysis has not been used in any other papers and is the result of my own work. Additionally, I can ensure the reliability and the accuracy of the thesis and the thesis or any part of it has been yielded in any universities or institutions. Signature Date: / / i ACKNOWLEDGEMENT First and foremost, I would like to express my sincere gratitude to my advisor Dr.
Bui Huy Trung for the continuous support of my thesis, for his patience, motivation, enthusiasm, and immense knowledge. His guidance helped me in all the time of research and writing of this thesis could not have imagined having a better advisor and mentor for my thesis. Besides my advisor, I would like to express gratitude to all the professors and lecturers in Banking Academy for insightful lessons, invaluable assistance and useful guidance throughout the years. I am also grateful for the valuable materials provided with easy access by all the library staffs in Banking Academy.
My sincere thank went to all commercial banks in Vietnam for the useful information and the international organizations for tremendous data sources. Last but not least, I wish to extend my thanks to all of my supporters such as my family, my friends for inspiration and energy during my thesis completion. Signature Date: / / ii CONTENTS INTRODUCTION .7 CHAPTER 1: OVERVIEW OF CAPITAL STRUCTURE AND PROFITABILITY. Overview of capital structure:.
Overview of the profitability:.16 CHAPTER 2: THE CURRENT STATE OF CAPITAL STRUCTURE AND PROFITABILITY OF COMMERCIAL BANKS IN VIETNAM. The background of Vietnamese banking system:. The capital structure of commercial banks in Vietnam from 2014 to 2019:. The profitability of commercial banks in Vietnam from 2014 to 2019:.
The empirical findings: .61 CHAPTER 3: RECOMMENDATIONS FOR CAPITAL STRUCTURE OPTIMIZATION AND PROFITABILITY IMPROVEMENT:. Opportunities and Challenges for Vietnamese Commercial Banks:. Recommendations for SBV:. Recommendations for commercial banks:.79 iii LIST OF TABLES AND FIGURES Table Name Page Table 2.1 The banking system of Vietnam until 31/12/2018 25 Table 2.2 The chartered capital of Vietnamese commercial banks 32 Table 2.3 The variables of regression model 55 Table 2.4 Data description 56 Table 2.5 Variance inflation factor test 57 Table 2.6 The regression result 58 Figure Name Page Figure 2.1 The size of commercial banks in Vietnam 27 Figure 2.2 The increase in size of commercial banks in Vietnam 28 Figure 2.3 The debt structure of commercial banks in Vietnam 29 Figure 2.4 The shareholders ‘equity of commercial banks in 31 Vietnam Figure 2.5 Deposits and credit growth of commercial banks in 34 Vietnam Figure 2.6 Deposits from different maturity from 2014 to 2018 36 Figure 2.7 The structure of bond market 37 iv Figure 2.8 The value of bonds issued in 2019 38 Figure 2.9 The maturity and average interest rate of bonds 39 Figure 2.10 The investors of banks'bond in 2019 39 Figure 2.11 CAR of Vietnamese Commercial banks from 2014 to 41 2019 Figure 2.12 The CAR of banks in South East Asian Countries 42 Figure 2.13 The profit of banking system from 2012 to 2017 43 Figure 2.14 The profit growth of Vietnam’s major sectors 44 Figure 2.15 ROE of Vietnamese commercial banks from 2014 to 45 2019 Figure 2.16 ROE of banks in South East Asian Countries 45 Figure 2.17 ROA of commercial banks from 2014 to III/2019 46 Figure 2.18 ROA of banks in South East Asian Countries 47 Figure 2.19 The NIM of Vietnamese banking industry 47 Figure 2.20 The profit structure of banking industry 48 Figure 2.21 The investment portfolio of commercial banks 49 Figure 2.22 The income growth of commercial banks 50 Figure 2.23 The growth of bancassurance 51 v LIST OF ABBREVIATIONS Abbreviation Full meaning ROE Return on equity ROA Return on asset SOCB State owed commercial banks JCB Joint-stock commercial banks EPS Earnings per share POLS Pooled Ordinary Least Square GMM Generalized method of moments ETA Equity to asset NIM Net interest margin DTE Debt to equity SBV State bank of Vietnam MHB Mekong Housing Bank Bank for Investment and Development of BIDV Vietnam Saigon Thuong Tin Commercial Joint STB Stock Bank SHB Saigon-Ha Noi Bank vi LVP Lienviet Post bank Vietnam Joint Stock Commercial Bank CTG for Industry and Trade Joint Stock Commercial Bank for Foreign VCB Trade of Vietnam Vietnam Technological and Commercial TCB Joint‑ stock Bank TPB Tien Phong Commercial Bank CAR Capital Adequacy Ratio M&A Merge&Acquisition Vietnam Prosperity Joint‑Stock VPB Commercial Bank MBB Military Commercial Joint Stock Bank HNX Hanoi Stock Exchange Vietnam International Commercial Joint VIB Stock Bank Vietnam Maritime Commercial Joint MSB Stock Bank ACB Asian Commercial Bank National Financial Supervisory NFSC Commission vii LDR Loan-to-Deposit Ratio CASA Current Account Savings Account NII Net interest income SME Small&Medium Enterprise FEM Fixed effect model NPL Non-performing loan COD Certificate of Deposit viii INTRODUCTION Rationale Capital structure plays an integral part in the performance of firms around the world as well-structured capital has positive influence on the soundness and efficiency of companies.
In fact, competent financial managers can decide the most suitable capital components to minimize the cost and maximize the profit as well as secure the liquidity position of the companies. The capital structure of firms in modern time especially in economic has drawn a lot of attention especially after economic crisis as it is believed that capital structure can help company escape or avoid financial breakdown.Since the first theory of capital structure in 1958 which proved that firm value is independent from capital structure, more and more researches and studies about the impact and the importance of structure have been conducted. There have been a lot of works about capital structure around the world. Some of the most popular topics are the determinants of capital structure or its impact on the operation aspects of firms.
The researches has been conducted in developing countries as well as in developed nations. There is no limitations when it comes to the study subjects as the capital structure of manufacturing firms, financial institution or service companies has been investigated. Researchers also have done papers about capital structure in a variety of time series providing a picture of capital components throughout the years. However the number of researches about the relationship between capital structure and banks’performance in Vietnam have been limited.
The majority of studies about in Vietnam related to manufacturing companies, oil firms or all list companies in general while no updated studies dedicated to financial institutions has been done despite its irreplaceable role in the economy of Vietnam. The performance of banks is very important to the economic development of Vietnam because most of Vietnamese companies depends on loans from banks to raise money and the capital market has yet to replace the position of financial institution. Commercial banks are known to be highly leveraged while the activities of banks are risky, which leads to the birth of Basel II, a banking supervision 1 accord about laws and regulations about capital to guard the banks from financial and operational risks. SBV started the process of executing Basel II with the Official Dispatch No 1601 in 17/3/2014 to choose the first 10 banks to apply the accord.
The Circular No 41 in 2016 forced all the commercial banks in Vietnam and branches of foreign banks in Vietnam to meet the three pillars of Basel and one of which is to ensure capital adequacy ratio (CAR) at least 8%. Until 2020, there are 18 banks that has reached the requirements of Basel II .Consequently, the capital structure of banks in Vietnam has undergone a major change in the last six years, but there is no study related to this matter. It is claimed that a higher capital requirement can deteriorate the profitabity because of the rising expense. On the other hand, debt is a cheaper source of fund for the bank so that higher proportion of debt can result in a boost in the income.
It can be seen that raising equity is a trade-off between profit and security. However, in the period from 2014 and 2019, the profit of banks in Vietnam experienced an upward trend. Banks earned more money since the implementation of Basel II as in 2019, there are 7 banks that has joined the “10000-billion- club” and VCB has reached a profit of 1 billion dollar. Unfortunately, in Vietnam, there has been no research about the impact of capital structure on the profitability in the recent scenario.
Due to the lack of papers about the association of capital structure and profitability of banks, I decide to work on” The impact of capital structure on the profitability of commercial banks in Vietnam”. By carefully analyzing important factors of banks such as: capital composition, profitability as well as macroeconomic elements, the rapports between capital structure and profitability of financial firms in Vietnam can be clearly illustrated and the contradiction to other countries can be solved. Hopefully, from this research, financial managers of banks can have a better view of the correlation between capital and profit to find the suitable capital components to enhance the stability as well as gain more money and policy-makers can come up with rules and regulations to strengthen the banking system in Vietnam. 2 Literature Review Capital structure has drawn the attention from researchers around the world since the first theory in 1952 of Durand.
Researchers for many years has tried to find out the optimal capital structure to improve profitability as well as cement stability and as a result, plenty of works about determinants of capital or the relationship between capital and other crucial factors of firms have been conducted. The result of papers about capital structure varies because of geographic location, economic development and variables in models. Additionally, there is no doubt that maximizing profit is the main goal for any companies of every sectors and consequently, financial experts has spent a lot of time on figuring out the way to help firms gain more money. Many researches in Vietnam and foreign countries has focused on the nature and the system of profitability in many aspects for decades.
In short, capital structure and profitability are promising topics with many papers having been done as well as room to study further. Siddik et al. (2016) described the influence of capital structure on the performance of 22 banks in Bangladesh which was measured by ROE, ROA and EPS in the period from 2005 to 2014. By using POLS regression model, the negative correlation between ROE and debt ratio was found, which indicated that an increase in debt could deteriorate the performance of the banks.
Control variables like growth opportunity, size are positively related to banks ‘performance in Bangladesh. Moreover, GDP negatively associated with ROA while inflation has positive association. Awunyo-Vitor and Badu (2012) investigated the relation between capital structure and performance of banks in Ghana between 2000 and 2010. Leverage was inversely connected with the efficiency of banks as there was a negative rapport between debt –to- equity ratio and ROE.
However, the paper also shown that ROA had insignificant association with leverage while Tobin q’s measurement expressed a negative effect from capital structure on banks‘ performance.