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This research explored factors influencing bank stability in Vietnam from 2010 to 2018, using data from listed commercial banks. Employing the Generalized Method of Moments (GMM) regression to address endogeneity, findings revealed positive impacts from indicators such as equity-to-asset ratio, bank size, and revenue diversification on bank stability. Additionally, macroeconomic factors, continuity in stability from the previous year, and positive correlations with foreign investment were identified. Conversely, market share of mobilized capital, loan loss provisions, and market structure exhibited negative effects on bank stability.
The banking sector in emerging economies has undergone significant changes in response to the 2007/2008 global financial crisis, leading to economic structural shifts. The focus has been on maintaining operational activities, addressing losses, and ensuring liquidity. Financial stability and sustainable development have become crucial for global economic progress. Empirical studies have explored factors influencing bank stability in both advanced and emerging economies, with theoretical models emphasizing the pivotal role of the banking system in societal and economic development.
This study contributes to understanding the determinants of banking stability, particularly in emerging countries like Vietnam. It considers the impact of bank-specific factors, foreign investment, and macroeconomic indicators on banking stability since 2010. In Vietnam, the banking sector has been a key driver of financial system development, contributing to economic growth. However, challenges such as bad debts and economic downturns have affected profitability. Recent developments indicate positive trends, but issues related to collateral handling and debt collection persist.
The study aims to address concerns about stabilizing the banking sector in Vietnam by examining the influence of factors like bank size, funding risk, and macroeconomic indicators. Three main groups of determinants are considered: bank-specific factors, competitive environment factors related to foreign investment, and macroeconomic factors such as GDP growth and inflation. Various statistical models, including pooled OLS, fixed effects model, random effects model, and generalized least squares, are employed for analysis, with the possibility of using generalized method of moments to address endogeneity.
The remainder of the study is organized into sections covering literature review, research methodology, results, and discussion. The objective is to provide insights for policymakers, central banks, and researchers to enhance stability in the banking and financial sector in the context of Vietnam’s evolving economy.
The results indicate a positive and significant coefficient for Zscore_1, suggesting that a stable bank in the previous year positively influences its performance in the current year. Notably, Vietnamese commercial banks experienced a high on-balance sheet bad debt ratio of 17.2%, surpassing the acceptable level of below 2% for the entire banking system. Challenges in collateral handling and bad debt collection from 2012 to 2015 impacted the stability of banks in subsequent years. The period of 2012–2017 also saw challenges related to cross-ownership in Vietnam’s banking system, restricting lending to major shareholders and their relatives.
The variable ETA represents the shareholder’s equity ratio, indicating the proportion of equity financing to a bank’s assets. A higher shareholder equity ratio signifies increased equity financing rather than debt, contributing to greater stability. This finding aligns with Juabin’s (2019) research on Ghana’s commercial banks, emphasizing the vital role of banking stability in the country’s economy. Meanwhile, in Vietnam, the State Bank mandates commercial banks to augment charter capital, prompting them to seek funding from foreign investors or domestic sources while also retaining profits and refraining from dividend payouts (State Bank of Vietnam, 2020).
The positive and significant coefficient of SIZE indicates that a larger bank size contributes to enhanced stability, aligning with Nguyen’s (2020) findings. Larger banks often benefit from economies of scale, resulting in increased efficiency and lower bankruptcy costs, supporting a higher growth rate and overall stability, consistent with Adusei’s (2015) research in Ghana. This contrasts with the findings of Ali & Puah (2018) in Pakistan, suggesting the importance of size in navigating global financial crises and adhering to Basel III requirements for increased capital and liquidity.
The Level of Bank Loans to Total Assets (LTA) serves as an indicator for bank liquidity, with a positive and significant impact on bank stability, suggesting that an increase in loans positively influences short-term stability. In the context of Vietnam, a rise in the Non-Performing Loan (NPL) ratio from 3% in 2012 to over 8% in 2013, and up to 17.2% according to Moody’s evaluation, highlights the importance of managing NPLs for sustained credit growth, as supported by prior research in East Asian economies and Pakistan.
The study reveals that an increase in the market share of mobilized capital (MOB) negatively and significantly impacts bank stability, contrary to the findings of Bouheni and Hasnaoui (2017) based on an unbalanced panel of around 722 banks in European countries from 1999 to 2013.
The study reveals that an increase in Loan Loss Provisions (LLP) negatively and significantly influences bank stability in the short run. However, no long-term relationship between LLP and bank stability is identified, aligning with Aristei and Gallo’s (2019) discussion that non-discretionary factors primarily impact LLPs. Furthermore, Aristei and Gallo (2019) suggest that regional banking sectors with higher loan concentration and lower competition exhibit elevated LLP levels, particularly in Italy, indicating a correlation with increasing risk.
The statistically significant negative association between the Herfindahl-Hirschman Index (HHI) variable and long-term bank stability suggests that an increase in revenue diversification can harm a bank’s stability over time. This finding aligns with studies by Baele et al. (2007), Sanya and Wolfe (2011), and Lepetit et al. (2008), indicating that the market entry of foreign and privately owned banks may lead to increased operating costs and decreased stability for existing banks. Conversely, Nguyen et al. (2012) found in their study on South Asian economies that a bank is more stable when it can diversify revenue across both interest and non-interest income activities.
The negative impact of market structure on bank stability is evident, with higher market share associated with decreased stability. In Vietnam, the dominance of four major banks, comprising over 50% of total assets, indicates a low level of competition and highlights the country’s banking system’s vulnerability due to limited financial capacity, as noted by T.N. Nguyen and Pham (2019).
The regression results indicate that the growth of total assets negatively and insignificantly affects a bank’s stability, with a focus on increased liquidity. Post-financial crises, banks must prioritize asset quality and liquidity to navigate market shocks. Additionally, the form of ownership, specifically state-owned banks, has a significant negative impact on stability, contrary to some prior studies. Notably, a well-designed combination of targeted macroprudential and monetary policies, led by central banks, can contribute to achieving financial stability objectives.
Foreign investment significantly and positively impacts banking stability, particularly when a higher proportion of foreign banks in terms of total assets exists in the host country. To enhance financial stability, the host country should mitigate adverse effects from foreign investment in the banking system by carefully balancing regulatory measures.
In this study, the positive impact of GDP growth and inflation on bank stability at a 1% significance level is highlighted, consistent with Phan et al.’s (2019) findings in East Asian countries. Additionally, the global financial crisis adversely affected banking sector stability, particularly due to the interconnectedness of Vietnam’s economy with foreign investment and trade openness, making it susceptible to external shocks, as emphasized by Nguyen (2020).
The study aims to explore the key factors influencing the stability of banks in Vietnam’s emerging economy using yearly data from 2010 to 2018. Utilizing panel generalized method of moments regression with data from Ho Chi Minh City Stock Exchange and Hanoi Stock Exchange, the findings reveal a positive correlation between bank stability and indicators such as equity-to-asset ratio, bank size, loans to assets ratio, and revenue diversification. Conversely, a negative relationship is identified for market share of mobilized capital, loan loss provisions, market structure, and bank stability. Additionally, the study suggests that macroeconomic factors and foreign investment in the banking sector positively impact bank stability. The implications include the need for the State Bank of Vietnam to manage non-performing loans, address cross-ownership issues, and encourage credit institutions to increase their charter capital for compliance with Basel II and Basel III standards.
Source:
Thuy Tu Pham, Le Kieu Oanh Dao & Van Chien Nguyen | McMillan David (Reviewing editor) (2021) The determinants of bank’s stability: a system GMM panel analysis, Cogent Business & Management, 8:1, DOI: 10.1080/23311975.2021.1963390