MINISTRY OF EDUCATION AND TRAINING THE STATE BANK OF VIETNAM BANKING UNIVERSITY OF HO CHI MINH CITY ********************* PHAM QUANG HUY THE IMPACT OF CREDIT GROWTH ON PROFITABILITY OF VIETNAMESE COMMERCIAL BANKS GRADUATE THESIS MAJOR: BANKING AND FINANCE CODE: 7340201 HO CHI MINH CITY, 2022 MINISTRY OF EDUCATION AND TRAINING THE STATE BANK OF VIETNAM BANKING UNIVERSITY OF HO CHI MINH CITY ********************* PHAM QUANG HUY THE IMPACT OF CREDIT GROWTH ON PROFITABILITY OF VIETNAMESE COMMERCIAL BANKS GRADUATE THESIS MAJOR: BANKING AND FINANCE CODE: 7340201 SUPERVISOR Assoc. DANG VAN DAN HO CHI MINH CITY, 2022 i EXECUTIVE SUMMARY The thesis studies the impact of credit growth on profit of Commercial banks in Vietnam. Data is collected on 17 banks in the period from 2011 to 2020 using panel data analysis methods such as OLS regression, fixed effects model (FEM) and random effects model (REM). I have drawn some important conclusions.
Firstly, credit growth has a statistically significant positive relationship with current year profits measured by the ROA of banks. Second, when considering lagging into the model, the author finds that a lag of up to 2 years in credit growth is still positively correlated with bank profit. Third, a lag of up to 3 years of reverse credit growth is correlated with bank profit but is not statistically significant. From the analysis of the results from the random-effects model, the author draws some important conclusions and from that makes suggestions and recommendations for the operation of commercial banks in Vietnam.
ii DECLARATION I hereby declare that this is my research work, and the research results presented in the thesis are honest and objective. The sources of information cited in this thesis are clearly indicated. I am responsible for my thesis. Signature Pham Quang Huy iii ACKNOWLEDGEMENT First of all, I am grateful and would like to send my sincerest and special thanks to my supervisor, Assoc.
Dang Van Dan for helping me to finish this challenging thesis. Despite my defects throughout the process of performing the thesis, he always showed his carings and enthusiasm to support me to overcome. Dang Van Dan conscientious guidance and support, this thesis cannot be successfully accomplished. Next, I would like to express my deepest gratitude to the teachers who are teaching at the Banking University of Ho Chi Minh City, who have spread the fire, passion and knowledge about economics from the most basic subjects, helping me to have a background in finance - banking.
Finally, I would like to thank to my family, friends, and colleagues who have always encouraged and helped me in the process of studying and researching the topic. Although I have tried a lot, the thesis is not free of shortcomings. I hope to receive the sympathy, guidance, help, and support of my colleagues. iv TABLE OF CONTENTS EXECUTIVE SUMMARY.
iii TABLE OF CONTENTS. iv LIST OF INITIALISMS. vi LIST OF TABLES. vii LIST OF FIGURES.
viii CHAPTER 1 INTRODUCTION. The urgency of the thesis. Research objectives and questions. Object and scope of the research.
Contribution of the thesis. Structure of the thesis .7 CHAPTER 2 LITERATURE REVIEW. Credit growth of commercial banks. Credit growth of commercial banks.
Profits of commercial banks. Theoretical framework for the impact of credit growth on profitability of commercial banks. Empirical study on the impact of credit growth on profitability of commercial banks.25 v CHAPTER 3 RESEARCH METHODS. Research model design.
A measure of a bank's profit. Variables measuring bank credit growth. Data sources and research samples. Data regression methods.
Introduction to panel data. Some estimation models in panel data regression. Pooled least-squares model (Pooled OLS). Fixed Effects Model – FEM.
Random Effects Model – REM. Selecting a regression model. Check the fit of the regression model.36 CHAPTER 4 RESEARCH RESULTS. Correlations matrix analysis.
Estimation of regression model and model selection. Check the model's defects. Discuss regression results.53 CHAPTER 5 CONCLUSIONS, RECOMMENDATIONS AND DISCUSSION. Limitations of the thesis .4 vi LIST OF INITIALISMS INITIALISM MEANING SBV State Bank of Vietnam OLS Ordinary Least Square FEM Fixed effects model REM Random - effects model LM - test Breusch and pagan Lagrangian Multiplier test VIF Variance Inflation Factor ROA Return On Equity GLS Feasible Generalized Least Squares vii LIST OF TABLES Table 4.1 Descriptive statistics of variables .2 The correlation coefficient between the independent variables.3 Variance inflation factor – VIF .4 Regression results according to Pooled OLS, FEM and REM models .7 Breusch & Pagan Lagrangian test .8 Results after testing the model .10 LM – Breusch and pagan Lagrangian Multiplier Test (REM) .11 Regression results according to REM model by GLS method .50 viii LIST OF FIGURES Figure 4.1 ROA average of Vietnamese commercial banks in the period 2011- 2020 .2 Average credit growth of Vietnamese commercial banks in the period 2011 – 2020.
The urgency of the thesis The commercial banking system plays an important role in the financial system and economic of countries. Along with the integration and development of the economy, the banking industry's activities also develop constantly and receive great attention from society. However, this is an industry with many distinct characteristics compared to other industries because the specific business activity is "currency trading". The traditional role of banks is to connect the relationship between those who have excess capital and those who lack capital, loans and loans that account for the majority of the bank's assets.
The basic income of commercial banks comes from four main activities: income from credit activities, income from customer service activities, income from financial investment activities and income from business foreign exchange. In which, income from credit activities accounts for the largest proportion of total income and is considered the main source of income for banks. In recent years, bank credit has been making a very important contribution to economic growth, addressing the investment needs of a large department which develops resources for Vietnamese society. In general, the economy in this period still maintains high credit leverage rate, a level that many international organizations have warned about the potential risk to inflation and macro stability.
Therefore, credit channels are considered important in operating monetary policy, and credit growth has long been considered an important indicator to measure the overall economy. Experiencing a period of rapid credit growth and exposing many risks, since 2012 The State Bank has begun to tightly control credit growth targets to be proactive in management. Since then, every year The State Bank has considered the financial situation and operation of each commercial bank in the system, assigning each specific target to better suitable for the reality situation. On the side of 2 commercial banks, in recent years, the direction of business transformation has also been formed more clearly, not only completely dependent on traditional credit as before.
Switching to project credit is mainly, for example: lending and debt collection methods according to the project implementation progress. This regulation is a legal framework that provides general regulations for all types and methods of credit granting in both Vietnamese Dong and foreign currencies, including clearly stipulating the mechanism for managing and operating capital sources. However, with the particularity of banking business, which is mobilizing capital and on-lending, if you look at the financial statements of banks, the proportion of income from lending will stand out. Credit growth at an appropriate level will greatly support for the economic growth of the country.
On the bank's side, it will help them achieve good profits from this dominant business. Credit growth in the context of increasingly fierce competition between banks, in addition, the neglect of supervision or pouring capital into high-risk industries easily affects the business problems of banks, indicating through annual bank profits. Besides, in the context of business competition between banks, expanding lending and accelerating credit growth is almost anything any bank must do to achieve profit high. However, this credit growth issue is assessed from two sides, is it true to say that loan expansion has brought real and stable efficiency to banks, expressed through high-profit rates? From these facts, it is necessary to understand the actual impact of credit growth on profit of Vietnamese commercial banks.
Through actual data collected at Vietnam's commercial banking system to find out the impact results in the research period and shape the direction for the future. From analysis mentioned above, I have chosen the thesis "The impact of credit growth on profitability of Vietnamese Commercial banks" to do my graduation thesis, giving the necessary research. The necessity of the thesis and hope to achieve the research objectives set out. Research objectives and questions Research objectives of the thesis " The impact of credit growth on profitability of Vietnamese commercial banks" Overall objectives The overall objective of the thesis is to identify and explain the impact of credit growth on profitability of Vietnamese commercial banks over the research period.
From the research results, the thesis will propose and recommend appropriate solutions for commercial banks when planning operational strategies. Detail objectives - Measure and appreciate credit growth, as well as the profit of Vietnamese Commercial banks during the research period. - Finding a suitable model to evaluate the impact of credit growth on profitability of Commercial banks. - Testing the impact of credit growth on profitability of Vietnamese commercial banks, making appropriate assessments.
- Proposing and giving appropriate solutions to help Vietnamese commercial banks operate credit more effectively. Based on the research objectives mentioned above, the thesis will in turn answer the following questions: - Firstly, what is the reality of credit growth and operating profit of Vietnamese commercial banks in the period from 2011 to 2020? - Second, how does credit growth affect the operating profit of Vietnamese commercial banks? - Third, what are the suggestions for Vietnamese commercial banks in developing effective credit policies? 4 1. Object and scope of the research - Research object: the impact of credit growth on bank profit. - Research scope: samples were collected from financial statements of 17 Vietnamese commercial banks, in the period 2011 - 2020.
The targets needed for the study are shown in the financial statements of the banks. Methodology Qualitative method: synthesize, analyze and evaluate the situation of domestic and foreign research related to the research thesis and synthesize the necessary theoretical bases, test the research's hypothesis. After the testing process is completed and the final regression model is determined, the author uses comparison, evaluation and inference methods to analyze research results and make recommendations. Quantitative method: performed based on data collected from annual financial statements of banks.
The thesis uses commonly used estimation models for panel data: fixed effects regression model (FEM), random effects regression model (REM), and pooled ordinary least-squares model (Pooled OLS). In addition, there are tests and remedies for defects to establish the optimal regression model and evaluate data on the status of the bank's operations to conduct research. The study analyzes and evaluates the credit growth and profitability of Vietnamese commercial banks in the period 2011 - 2020. From that, examines the impact of credit growth on profitability of Vietnamese Commercial banks using econometric models to test the impact and the meaning level of this impact.
The assessment and explanation of the impact of credit growth on profitability of Vietnamese commercial banks based on the actual operation of the industry in the research period will be carried out, and finally proposed solutions to improve and promote the efficiency of Vietnamese commercial banks. Contribution of the thesis Theoretically, the thesis contributes to systematizing the theoretical bases and experimental studies on the impact of credit growth on profitability of Vietnamese commercial banks. A suitable test model will be developed for the Vietnamese banking market.