MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY Ta Thi Xuan Hoa FACTORS AFFECTING RISK EXPOSURE AND PROFITABILITY OF THE COMMERCIAL BANKS OPERATING IN VIETNAM MASTER’S THESIS Ho Chi Minh City 2010 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY Ta Thi Xuan Hoa FACTORS AFFECTING RISK EXPOSURE AND PROFITABILITY OF THE COMMERCIAL BANKS OPERATING IN VIETNAM MASTER’S THESIS In Banking Code: 60. Bui Thi Kim Yen Ho Chi Minh City 2010 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com i DECLARATION This is to certify that: • the thesis contains no material which has been accepted for the award to the candidate of any other degree or diploma except where due reference is made in the text of the thesis. • to the best of candidate’s knowledge contains no material previously published or written by another person except where due reference is made in the text of the thesis. Ta Thi Xuan Hoa Signature: Date: LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ii ACKNOWLEDGEMENT I would like to express my attitude to many individuals who helped me to complete this thesis.
First of all I would like to express my deepest acknowledgement to my supervisor, Assoc. Bui Kim Yen for her valuable advice and recommendation. I would like to express my gratitude to my English teacher, Mr. John William Hall who helped me in improving English speaking skills.
I would like to express my gratitude to Ms. Ly Thi Minh Chau, who helped me a lot in providing reference materials, giving me valuable time, invaluable advice, assistance, support and recommendation. I would like to express my gratitude to Dr. Vo Xuan Vinh, who helped me a lot in data analysis, giving me valuable time, support and recommendation.
In the process of data collection for this research, many individuals contributed to the task and I am particularly grateful for their contributions. I am greatly indebted to Mr. Nguyen Huu Nhan, Mr. Nguyen Ngoc Tan for their support during the time of this thesis.
I would also like to thank Mr. Ngo Tran Kien Quoc and Mr. Ho Phi Diep who helped me to collect data, and to conduct personal interview. I would like to thank the people who have been working in The State bank of Vietnam, Ho Chi Minh City Branch for providing secondary data relating activities of commercial banks in Vietnam in general and supporting my study leave to enable me to complete the thesis.
It allowed me to concentrate on the completion of my thesis. Finally I wholeheartedly thank and acknowledge the most important people in my life, my parents and my husband, for their total support, encouragement and patience in my completing the thesis. LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com iii ABSTRACT The basic principles of bank management have highlighted the need to balance between liquidity, asset, liability, capital adequacy, credit and interest rates risks in order to mitigate the loss in earnings. Thus, the factors that may affect these risks are important indicators to formulate appropriate strategies for better bank management.
It is therefore the purpose of this study to identify the factors that contribute to the risks that are faced by banks. The factor analysis conducted indicated that liquidity and interest rate, market, business operation, credit are the factors affecting banks’ risk exposure. Hence, banks have to seriously consider these factors in formulating an effective risk management strategy to minimize any possibility of loss in income and to avoid bank failure. This thesis is to examine factors affecting banks’ risk and the relationship between financial risks and profitability of the commercial banks in Vietnam.
The objectives of the thesis are to investigate and analyze factors affecting banks’ risk exposure and relationship between financial risks on profitability of commercial banks in Vietnam to contribute some implications for management strategy of banks in Vietnam. From that, the recommendations are given to not only commercial banks but also SBV. These recommendations are both “situated” recommendations and “strategic” recommendations. This creates the important and necessary perquisites for the business of commercial banks in Vietnam safer, more stabilized and more efficiency.
Key words: bank risk, financial risk, profitability LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com iv TABLE OF CONTENTS Chapter Title Page Declaration i Acknowledgement ii Abstract iii TABLE OF CONTENTS iv LIST OF TABLES AND FIGURES vii LIST OF ABBREVIATIONS ix Chapter 1 INTRODUCTION 1 1.1 Secondary Data and Limitations 4 1.7 Significance and scope of the Research 5 1.8 Structure of the Research 5 1.9 Conclusion 7 Chapter 2 LITERATURE REVIEW 9 2.3 Characteristics of bank’s risks 13 2.4 Interest Rate Risk 20 2.4 Analyzing bank performance with financial ratios 26 2.1 Rate of return on equity (ROE) 27 2.2 Rate of return on asset (ROA) 28 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.5 Relationship between financial risk factors and profitability 28 2.1 Factors affect to bank’s risks exposure 29 2.2 Effects of financial risks on profitability 30 2.7 Conclusion 33 Chapter 3 OVERVIEW OF BANKING INDUSTRY 34 3.2 Overview of banking industry 35 3.3 Banking industry in Vietnam 36 3.4 The bank regulatory environment 38 3.1 Law on credit institutions 38 3.4 Some other regulations 41 3.5 Conclusion 46 Chapter 4 RESEARCH METHODOLOGY 47 4.4 Model development for the study 50 4.6 Data collection method 51 4.8 Conclusion 52 Chapter 5 DATA ANALYSIS AND FINDINGS 53 5.2 Links between data analysis and research objectives and research questions 54 5.3 Descriptive findings of the research study 55 5.4 Associate analysis and findings of the research study 70 5.1 Analysis of findings on factors affecting banks’ risk exposure 70 5.2 Testing research model and hypotheses 71 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.5 Conclusion 75 Chapter 6 76 CONCLUSION AND IMPLICATIONS 76 6.2 Conclusions related to research questions 77 6.1 Summary of all hypothesis 77 6.2 Conclusion related to research questions 78 6.3 Implications for the commercial banks in Vietnam 79 6. Implication for the State Bank of Vietnam 79 6. Viewpoint of risk management role 81 6. Developing and updating the risk management strategy in more details 82 6.
Improving the efficiency of risk management in the bank 83 6.4 Limitations for the research study 87 6.5 Implications for further research 88 REFERENCES 89 Appendix 93 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com vii LIST OF TABLES AND FIGURES Figures Figure 1.1 Structure of chapter 1 Figure 1.2 Structure of the Research Figure 2.1 Structure of chapter 2 Figure 2.2 Bank goal and risks Figure 2.3 The link between liquidity and other typical risks Figure 2.4 Two broad categories of operational risk Figure 3.1 Structure of chapter 3 Figure 3.2 Market shares of Vietnamese banks Figure 4.1 Structure of chapter 4 Figure 4.1 Structure of chapter 5 Figure 5.2 Age group of respondents Figure 5.3 Distribution of working experience Figure 5.4 Distribution of Ownership Figure 5.5 Distribution of educational level Figure 5.6 Distribution of educational background Figure 6.1 Structure of chapter 6 Tables Table 3.1 Deposits of the commercial banks in Ho Chi Minh City Table 3.2 Reserve requirement rate in 2004-2008 Table 3.3 Current Reserve Requirement Rate Table 3.4 Changes of interest rate for reserve deposit in VND at State bank of VN Table 3.5 Changes of base rate from 2008 Table 3.6 Provision rates Table 5.1 Respondents’ characteristics Tables 5.2 Interest rate risk ratio LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com viii Table 5.3 Summary of interest rate risk ratios Table 5.4 Liquidity risk ratios Table 5.5 Summary of liquidity risk ratios Table 5.6: Credit risk ratio Table 5.7 Summary of credit risk ratios Table 5.8: Capital risk ratio Table 5.9 Summary of Capital risk ratios Table 5.11 Summary of ROA Table 5.13 Summary of ROE Table 5.14 Summary Statistics of the Explanatory Variables Table 5.15 Liquidity and interest rate Table 5.16 Domestic market Table 5.17 International market Table 5.18 Internal Operation Table 5.19 External Operation Table 5.21 Factors affecting banks’ risk exposure Table 5.22 Correlation Matrix of the Explanatory Variables Table 6.1 Summary of all hypotheses LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ix LIST OF ABBREVIATIONS ACB Asia Commercial Bank ALCO Asset Liability Committee BIDV Bank for Investment and Development of Vietnam BODs Board of Directors CAR Capital Adequacy ratio CDs Certificate of deposits CEO Chief Executive Officer CIC Credit Information Center EAB Dong A Bank EFA Exploratory Factor Analysis FX Foreign Exchange ICT Information and communicative technology IT Informatics technology L/Cs Letters of Credit MLR Multiple Linear Regression MM Money Market NIM Net interest margin P&L Profit and Loss ROA Rate of return on assets ROE Rate of return on equity RP Repurchase Agreement RPs Repurchase Agreements SBV State Bank of Vietnam SMEs Small and Medium Enterprises SOE State –owned enterprise SPSS Statistical Package for Social Science VND Vietnamese dong WB World Bank LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 1 CHAPTER 1 INTRODUCTION 1.1 Introduction This chapter provides a general introduction to the research study. The purpose is to establish foundations for following chapters and the study as a whole, by providing a general picture of the study. This chapter is structured into eight sections as presented by figure 1. LUAN VAN CHAT LUONG download : add luanvanchat@agmail.1: Structure of chapter 1 1.6 Justification for the study 1.7 Significance and scope of the study 1.8 Structure of the study 1.2 Research Background In the past two decades, the banking industry has evolved from a financial intermediation between depositors and borrowers, to a “one-stop” centre for a range of financial services like insurance, investments and mutual funds.
The advancement LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 3 of information and communicative technology (ICT) is accountable for the evolution of banking services, in particular, online banking. The development in ICT has not only provided vast banking opportunities previously beyond reach, but also heightens the competition and risks faced by banks in the financial system. The banks’ primary business in lending and investment are risky business. Banks are exposed to uncertainty and instability of the financial market as interest rate fluctuations, exchange rate variation and economic volatility could all lead to insolvency, bankruptcy and financial crisis.
The present adverse effect of the sub-prime crisis in the US, for instance, has crumbled giant investment bankers like Bear Stearns and Lehman Brothers and shook the insurance company American International Group (AIG). Hence, proper understanding on the factors that constitute banks’ risks exposure will mitigate and minimize banks’ loss in earnings and capital due to risks and financial crisis. Besides, the intensified global competition and the liberalization of banking rules and regulations have also changed the current banking system by providing greater opportunities of banks’ risk diversification. Therefore, it is the purpose of this study to determine the factors that will affect the banks’ risks taking in the banking industry and impacts of financial risks on theirs profitability.
The identification of these factors would be beneficial in constructing effective risk management strategies in the banks and to minimize a loss in income. In addition, an understanding on the association of risk involved in the banking industry will also help banks formulate appropriate strategy that will escalate positive and minimize negative impact of associated risks.3 Research problems Right now, the Vietnam banking system is facing to serious difficulties in regard to uncertainty and instability of the financial market as interest rate fluctuations, exchange rate variation and economic volatility. It made many commercial banks had been chaotic and potential bankruptcy; threat the safety of whole banking system and national economy. This has put the country in difficult situation when it is on the way to modernize and industrialize the nation and integrate with international LUAN VAN CHAT LUONG download : add luanvanchat@agmail.
This research study is to investigate and identify factors affecting banks’ risk exposure and relationship between financial risks and profitability of the commercial banks in Vietnam.