Retail loans and factors effecting profitability of Vietnamese listed banks

Retail loans and factors effecting profitability of Vietnamese listed banks

By: Đinh Việt Linh

Class: VNP24

Supervisor: Dr. Phạm Phú Quốc


Purpose: This study investigates the impact of retail lending section development in business structure and other determinants of profitability and on listed bank profitability between 2008 and 2018.

Design/methodology/approach: IV regress two-stage-least square is used to analyze bank profitability to control unobserved heterogeneity and the endogeneity problems. For more detail, the research use instrument variables including revenue diversification, lagged of profitability, credit risk, liquidity risk, capital size and bank size to explain operating efficiency. Otherwise, the study also run OLS estimator to have comparison.

Findings: The findings show the persistence of profits over time. More operating efficiency banks appear to be more profitable, supporting the efficient-structure. The better bank profitability is true for banks with greater loans volume and for privately owned commercial banks. Interestingly, the findings demonstrate that the development of retail loans ratio strongly improves bank profitability. Finally, Vietnamese bank profitability is also affected by GDP and inflation rate. 

Practical implications: The findings provide several implications for policy-makers and bank managers. This suggests state-owned commercial banks should be approached by more customers with caution and attracted strategy. First, the interest rate policy should be rational while continuously implementing it as a key competitive strategy. Second, banks should manage credit risks, liquidity risk, and other risks effectively with regards to costs associated. In addition to the continuing effort to fully implementing BASEL II system, banks should develop and manage an effective risk management strategy in a cost-effective way. Third, commercial banks should pay more attention for R&D activities that incorporate more technology advancement into their lending and risk assessing process for retail customers. Finally, commercial banks should diversify their market segments and services.

Originality/value: This study determines whether development of retail loans ratio in loan structure effect Vietnamese bank profitability beside the main determinants that previous studies have not researched.

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