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
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: 60.31.12
Supervisor
Assoc. Prof. Dr. Bui Thi Kim Yen
Ho Chi Minh City 2010
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:
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. Prof. Dr. 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.
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
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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
1.2
1.3
1.4
1.5
1.6
Introduction
Research Background
Research problems
Research questions
Research objectives
Research Methodology
1.6.1 Secondary Data and Limitations
1.6.2 Questionnaires
1.7 Significance and scope of the Research
1.8 Structure of the Research
1.9 Conclusion
Chapter 2
LITERATURE REVIEW
2.1
2.2
2.3
Introduction
Bank’s risk
Characteristics of bank’s risks
2.3.1 Credit risk
2.3.2 Liquidity Risk
2.3.3 Market Risk
2.3.4 Interest Rate Risk
2.3.5 Operational risk
2.3.6 Capital risk
2.4 Analyzing bank performance with financial ratios
2.4.1 Rate of return on equity (ROE)
2.4.2 Rate of return on asset (ROA)
1
2
3
4
4
4
4
5
5
5
7
9
9
10
13
13
15
18
20
21
24
26
27
28
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2.5
2.6
Relationship between financial risk factors and profitability
Previous study
2.6.1 Factors affect to bank’s risks exposure
2.6.2 Effects of financial risks on profitability
2.7 Conclusion
Chapter 3
OVERVIEW OF BANKING INDUSTRY
3.1 Introduction
3.2 Overview of banking industry
3.3 Banking industry in Vietnam
3.4 The bank regulatory environment
3.4.1 Law on credit institutions
3.4.2 Deposit insurance
3.4.3 Reserve requirement
3.4.4 Some other regulations
3.5 Conclusion
Chapter 4
RESEARCH METHODOLOGY
28
29
29
30
33
34
34
35
36
38
38
38
39
41
46
47
4.1 Introduction
4.2 Research design
4.3 Variable definition
4.3.1 Dependable variables
4.3.2 Independent variables
4.4 Model development for the study
4.5 Hypothesis statement
4.6 Data collection method
4.7 Data transformation
4.8 Conclusion
Chapter 5
DATA ANALYSIS AND FINDINGS
47
48
49
49
49
50
50
51
52
52
53
5.1 Introduction
5.2 Links between data analysis and research objectives and research questions
5.3 Descriptive findings of the research study
5.3.1 Sample descriptions
5.3.2 Descriptive findings
5.4 Associate analysis and findings of the research study
5.4.1 Analysis of findings on factors affecting banks’ risk exposure
5.4.2 Testing research model and hypotheses
53
54
55
55
65
70
70
71
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5.5 Conclusion
Chapter 6
75
76
CONCLUSION AND IMPLICATIONS
76
6.1 Introduction
76
6.2 Conclusions related to research questions
77
6.2.1 Summary of all hypothesis
77
6.2.2 Conclusion related to research questions
78
6.3 Implications for the commercial banks in Vietnam
79
6.3.1 Implication 1. Implication for the State Bank of Vietnam
79
6.3.2 Implication 2. Viewpoint of risk management role
81
6.3.3 Implication 3. Developing and updating the risk management strategy in
more details
82
6.3.4 Implication 4. 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
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 4.2 Hypothesis
Figure 5.1 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
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 5.10 ROA
Table 5.11 Summary of ROA
Table 5.12 ROE
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 5.20 Credit
Table 5.21 Factors affecting banks’ risk exposure
Table 5.22 Correlation Matrix of the Explanatory Variables
Table 6.1 Summary of all hypotheses
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
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 1.1.
2
Figure 1.1: Structure of chapter 1
1.1 Introduction
1.2 Research Background
1.3 Research Problem
1.4 Research question
1.5 Methodology
1.6 Justification for the study
1.7 Significance and scope of the study
1.8 Structure of the study
1.9 Conclusions
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
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.
1.3
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
4
environment. 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.
1.4
Research questions
The research study will answer for the following research questions:
1. What factors affect banks’ risk exposure in Vietnam?
2. What is relationship between financial risks (liquidity risk, interest rate risk,
capital risk, credit risk) and profitability of the commercial banks in Vietnam?
1.5
Research objectives
In solving the research problem and answering the research questions mentioned
above, the research study has the following objectives:
•
To investigate and describe factors affecting banks’ risk exposure in Vietnam
•
To develop models the impacts of
financial risks on commercial banks’
profitability
•
To contribute to knowledge of factors affecting banks’ risk exposure and the
relationships of financial risks and commercial banks’ profitability
1.6
Research Methodology
In this research, casual and descriptive are used in combination research
1.6.1 Secondary Data and Limitations
The study uses secondary data from official publications of State Bank of Vietnam
(SBV), World Bank (WB). Moreover, data from other publications such as journals,
magazines, newspaper, banks’ annual reports and foreign banks’ researches are also
used in this study.
It should be noted that the quality of Vietnam’s data is poor and short in term of time
series. More especially, obtaining the data related to Vietnam‘s banking sector is a
very difficult task because of non-transparency in this sector. It is also widely known
5
that the validity of the published information by Vietnamese journals, newspapers,
annual reports and Government documents varies greatly, thus, resulting in the
difficulty of obtaining internal validity.
1.6.2 Questionnaires
Questionnaires were constructed based on the objectives of the research and after
exploring bank executive opinions about different aspects of the current risk
management in Vietnam‘s banking system. Based on the relationship with the author,
respondents were selected as bank’s executives, officers in risk management
department at different local banks as well as foreign banks doing business in
Vietnam. The number of respondents was 150 and most of them were willing to reply
the questionnaires. The questionnaire is in Appendix.
1.7
Significance and scope of the Research
Identifying the factors that may affect these risks are of importance and the impact of
financial risks has had an effect on profitability of the commercial banks. This study
highlights that these indicators are implied for banks to formulate appropriate
strategies for better bank management. This study is to bring some applications in
developing risk management strategy in commercial banks in Vietnam. It will help
banks in constructing effective risk management strategies in the banks and to
minimize a loss in income.
1.8
Structure of the Research
In term of research structure, the thesis has six chapters (Figure 1.2). The thesis
begins by defining the research problem and questions, and providing a justification
for the research study. Chapter one also reviews the research background,
significance and scope of the study. Chapter two reviews banks’ risk in theory, ratios
to evaluate profitability of the commercial banks. Objectives of this chapter are to
review the theories related to banks’ risk and profitability of the commercial banks,
to review previous research related to the areas of banks’ risk and profitability of the
6
commercial banks and to build a model of the impact of financial risks (liquidity risk,
interest rate risk, market risk and capital risk) on profitability.
Chapter three examines the overview of banking industry. The objective of this
chapter is to review overview of banking industry and banking regulatory
environment which affect management strategy of the commercial banks in Vietnam,
Chapter four discusses aspects of the research methodology including research
design, data collection and data analysis methods, and hypothesis testing to support
the model. Objectives of this chapter are: (1) to justify the research methodology of
this study, (2) to explain research methodology used in the study, and (3) to
demonstrate how research design, and data collection and analysis can be utilized in
this study to answer the research questions outlined in the chapter 1.
Data analysis and findings are presented in chapter five. This chapter presents
descriptive findings of factors and findings of the research study related to testing the
model of profitability. Objectives of this chapter are (1) to systematically present the
descriptive findings of the research study, (2) to interpret significance of these
findings based on data analysis, (3) to present the results of testing the model of
commercial banks’ profitability, and (4) to explain how the model, developed from a
literature review, was supported by data analysis. Finally, the thesis ends with
chapter six. This chapter will give some conclusions and implications for banks in
Vietnam to avoid bank failure.
7
Figure 1.2: Structure of the Research
Chapter 1: Introduction to the Study
Chapter 2: Literature Review
Chapter 3: Overview of banking Industry
Chapter 4: Research Methodology
Chapter 5: Data Analysis and Findings
Chapter 6: Conclusions and Implications
1.9
Conclusion
This research examines the factors affecting banks’ risk exposure and the relationship
between financial risks and profitability of the commercial banks in Vietnam. To
date, there is no significant research related to factors affecting banks’ risk exposure
and impacts of financial risks on profitability in Vietnam. This research is designed
as a combination of descriptive and casual research in which a sample of 150 banks’
executives, officers in risk management department at different local banks as well as
8
foreign banks doing business in Ho Chi Minh City for personal interview and a
sample of 10 banks in Vietnam for analyzing impacts of financial risks on
profitability.
Gathered data will be processed by Excel, the Statistical Package for Social Science
(SPSS) and EView 7.0 are the main computer software utilized in data analysis.
Findings of this study will be applied to increase efficiency of risk management of
commercial banks in Vietnam. To provide an in-depth picture of business
environment in which commercial banks operate, chapter 3 will present information
on background of banking industry, the bank regulatory environment in Vietnam
whereas chapter 2 reviews the literature of bank’ risks.
9
CHAPTER 2
LITERATURE REVIEW
2.1
Introduction
This chapter is a review of the literature on banks risk in theory. The objectives of
this chapter are to review previous research related to the area of banks’ risk.
This chapter is structured into 5 sections (Figure 2.1)
Figure 2.1: Structure of chapter 2
2.1 Introduction
2.2 Bank’s Risks
2.3 Characteristics of Bank’s Risks
2.4 Analyzing Bank Performance with
Financial Ratios
2.5 Relationship between financial risk
factors and profitability
2.6 Previous studies
2.7 Conclusions
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