The interrelationship among bank profitability, bank stability, and loan growth: Evidence from Vietnam

Figures & data

Table 1. The results of the Breusch-Pagan test

	ROE	ZSCORE	LOGR
Chi-square (χ^2)	2035.57	10.28	25.42
P-value	0.000	0.246	0.003

Table 2. The descriptive statistics of variables used in the simultaneous equations model

	Obs	Mean	STD	Max	Min
ZSCORE	395	2.793	0.670	5.474	−0.602
LOGR	395	0.479	1.017	11.317	−0.407
ROE	395	0.113	0.093	0.567	−0.820
NIETA	395	0.018	0.009	0.080	0.0001
LLRTA	395	0.007	0.012	0.221	0.0001
LASTF	395	0.440	0.188	1.093	0.080
LNTA	395	17.728	1.454	20.907	13.012
FATA	395	0.015	0.013	0.080	0.001
DEPOGR	395	0.561	1.233	12.743	−0.809
TDTL	395	1.163	0.352	2.689	0.260
INF	395	0.088	0.062	0.231	0.009
GDPGR	395	0.061	0.006	0.071	0.052
RF	395	0.423	0.495	1.000	0.000
HHID	395	0.096	0.024	0.156	0.075

ZSCORE, a standard deviation of ROA over the sample period, combined with current period values of ROA and EQUITY; LOGR, the annual percentage change in total outstanding loans; ROE, the ratio of the returns (profits before tax) on equity; NIETA, the ratio of non-interest expenses to total assets; LLRTA, the ratio of loan loss reserves to total assets; LASTF, the ratio of liquid assets to short-term funding; LNTA, the natural logarithm of total assets; FATA, the ratio of fixed assets to total assets; DEPOGR, the annual percentage change in total deposits; TDTL, the ratio of total deposits to total loans; INF, the inflation rate; GDPGR, the economic growth rate; REFORM, a dummy variable that takes a value of 1 for the period of 2011–2015, and 0 otherwise; HHID, Herfindahl-Hirsch Index in terms of total deposits.

Table 3. Correlation matrix

	A	B	C	D	E	F	G	H	I	J	K	L	M	N
A.ZSCORE	1
B.LOGR	0.039	1
	(0.775)
C.ROE	0.133***	0.072	1
	(2.666)	(1.428)
D.NIETA	−0.022	−0.201***	−0.161***	1
	(−0.436)	(−4.061)	(−3.226)
E.LLRTA	−0.025	−0.062	0.094*	0.011	1
	(−0.488)	(−1.224)	(1.865)	(0.222)
F.LASTF	0.151***	0.134***	0.056	0.027	−0.144***	1
	(3.018)	(2.689)	(1.107)	(0.529)	(−2.876)
G LNTA	−0.232***	−0.259***	0.232***	−0.054	0.177***	−0.157***	1
	(−4.718)	(−5.326)	(4.727)	(−1.066)	(3.567)	(−3.143)
H.FATA	0.056	−0.047	−0.168***	0.144***	−0.058	−0.259***	−0.3***	1
	(1.120)	(−0.927)	(−3.378)	(2.889)	(−1.155)	(−5.307)	(−6.231)
I.DEPOGR	0.105**	0.689***	0.009	−0.216***	−0.067	0.170***	−0.310***	−0.020	1
	(2.095)	(18.84)	(0.178)	(−4.382)	(−1.327)	(3.416)	(−6.462)	(−0.391)
J.TDTL	−0.189***	−0.087*	−0.133***	−0.136***	−0.018	0.203***	0.295***	−0.152***	0.082	1
	(−3.825)	(−1.737)	(−2.661)	(−2.73)	(−0.361)	(4.115)	(6.115)	(−3.047)	(1.641)
K.INF	0.159***	−0.037	0.078	−0.017	−0.026	0.231***	−0.263***	0.114**	0.045	−0.151***	1
	(3.188)	(−0.734)	(1.543)	(−0.345)	(−0.52)	(4.7)	(−5.41)	(2.28)	(0.903)	(−3.027)
L.GDPGR	−0.052	0.178***	0.134***	−0.186***	0.013	−0.021	−0.039	−0.152***	0.137***	−0.105**	−0.245***	1
	(−1.022)	(3.581)	(2.673)	(−3.746)	(0.256)	(−0.409)	(−0.767)	(−3.053)	(2.744)	(−2.084)	(−5.011)
M.RF	−0.077	−0.239***	−0.247***	0.269***	0.040	−0.002	0.247***	0.074	−0.212***	0.223***	−0.047	−0.34***	1
	(−1.534)	(−4.888)	(−5.048)	(5.545)	(0.798)	(−0.043)	(5.046)	(1.467)	(−4.293)	(4.545)	(−0.924)	(−7.179)
N.HHID	0.171***	0.292***	0.254***	−0.189***	−0.014	0.073	−0.467***	−0.037	0.291***	−0.226***	0.243***	0.454***	−0.588***	1
	(3.442)	(6.059)	(5.208)	(−3.812)	(−0.280)	(1.453)	(−10.464)	(−0.728)	(6.025)	(−4.608)	(4.962)	(10.114)	(−14.405)

ZSCORE, a standard deviation of ROA over the sample period, combined with current period values of ROA and EQUITY; LOGR, the annual percentage change in total outstanding loans; ROE, the ratio of the returns (profits before tax) on equity; NIETA, the ratio of non-interest expenses to total assets; LLRTA, the ratio of loan loss reserves to total assets; LASTF, the ratio of liquid assets to short-term funding; LNTA, the natural logarithm of total assets; FATA, the ratio of fixed assets to total assets; DEPOGR, the annual percentage change in total deposits; TDTL, the ratio of total deposits to total loans; INF, the inflation rate; GDPGR, the economic growth rate; REFORM, a dummy variable that takes a value of 1 for the period of 2011–2015, and 0 otherwise; HHID, Herfindahl-Hirsch Index in terms of total deposits. *,**,***Significant at 10, 5, and 1 percent level.

Table 4. Pairwise Granger-causality tests

Number of lags	2		3		4
Null hypothesis	F-Statistic	Probability	F-Statistic	Probability	F-Statistic	Probability
LOGR does not Granger Cause ROE	2.351	0.097	2.397	0.069	0.890	0.471
ROE does not Granger Cause LOGR	3.751	0.025	1.999	0.115	3.4105	0.009
ZSCORE does not Granger Cause ROE	0.065	0.937	0.348	0.791	2.460	0.046
ROE does not Granger Cause ZSCORE	3.143	0.045	7.783	5.00e-05	12.688	2.00e-09
ZSCORE does not Granger Cause LOGR	0.207	0.813	0.165	0.919	0.5132	0.193
LOGR does not Granger Cause ZSCORE	13.879	2.00e-06	18.409	7.00e-11	6.279	8.00e-05

ZSCORE, a standard deviation of ROA over the sample period, combined with current period values of ROA and EQUITY; LOGR, the annual percentage change in total outstanding loans; ROE, the ratio of the returns (profits before tax) on equity.

Table 5. The determinants of bank profitability

ROE
Constant	−0.899***(−4.931)
ZSCORE	0.260*(2.044)
LOGR	0.057***(3.426)
HHID	1.271***(5.862)
NIETA	0.062(0.150)
LLRTA	1.500(0.711)
LASTF	0.062(1.546)
COV	−3.359(−0.541)
LNTA	0.030***(7.509)
ZSCORESQ	−0.042*(−1.930)
LOGRSQ	−0.005***(−3.435)
GDPGR	−1.089**(−2.544)
No. Obs	395
J-statistics	0.111

ROE, the ratio of the returns (profits before tax) on equity; ZSCORE, a standard deviation of ROA over the sample period, combined with current period values of ROA and EQUITY; LOGR, the annual percentage change in total outstanding loans of banks; HHID, the Herfindahl-Hirschman Index in terms of deposits; NIETA, the ratio of operating expenses to total assets; LLRTA, the ratio of loan loss reserves to total assets; LASTF, the ratio of liquid assets to short-term funding; COV, the product of LLRTA and LASTF; LNTA, the natural logarithm of total assets, ZSCORESQ, the squared term of ZSCORE; LOGRSQ, the squared term of loan growth, GPDGR, the annual economic growth rate. The table contains results estimated using a simultaneous equations model (SEM) with the GMM estimator and Newey-West method. ROE, ZSCORE, and LOGR represent the three endogenous variables in SEM. t-statistics are shown in parentheses, ***Significant at 1 per cent levels, respectively.

Table 6. The determinants of bank stability

ZSCORE
Constant	5.248***(8.019)
ROE	4.470***(4.132)
LOGR	−0.279**(−2.107)
FATA	2.309(0.871)
LASTF	0.224(1.075)
LNTA	−0.159***(−4.039)
TDTL	−0.084(−0.707)
ROESQ	−2.027(−1.582)
LOGRSQ	0.021*(1.665)
No. Obs	395
J-statistics	0.111

ZSCORE, a standard deviation of ROA over the sample period, combined with current period values of ROA and EQUITY; ROE, the ratio of the returns (profits before tax) on equity; LOGR, the annual percentage change in total outstanding loans of banks; FATA, the ratio of fixed assets to total assets; LASTF, the ratio of liquid assets to short-term funding; LNTA, the natural logarithm of total assets; TDTL, the ratio of total deposits to total loans; ROESQ, the squared term of ROE; LOGRSQ, the squared term of LOGR. The table contains results estimated using a simultaneous equations model (SEM) with the GMM estimator and Newey-West method. ROE, ZSCORE, and LOGR represent the three endogenous variables in SEM. t-statistics are shown in parentheses, **,***Significant at 5, and 1 per cent levels, respectively.

Table 7. The determinants of loan growth

LOGR
CONST	8.586***(3.848)
ZSCORE	−4.025***(−2.709)
ROE	6.850***(4.544)
SIZE	−0.16***(−3.507)
DEPOGR	0.511***(7.565)
ZSCORESQ	0.661**(2.538)
ROESQ	−5.950**(−1.991)
REFORM	0.067(0.838)
INF	−1.326***(−2.656)
GDPGR	−3.777(−0.822)
No. Obs	395
J-statistics	0.111

LOGR, the annual percentage change in total outstanding loans; ZSCORE, a standard deviation of ROA over the sample period, combined with current period values of ROA and EQUITY; ROE, the ratio of the returns (profits before tax) on equity; LNTA, the natural logarithm of total assets; DEPOGR, the change in total deposits; REFORM, a dummy variable that takes a value of 1 for the period of 2001–2015, and 0 otherwise; INF, the inflation rate; GDPGR, the economic growth rate; ZSCORESQ, the squared term of ZSCOREGR, ROESQ, the squared term of ROE. The table contains results estimated using a simultaneous equations model (SEM) with the GMM estimator and Newey-West method. ROE, ZSCORE, and LOGR represent the three endogenous variables in SEM. t-statistics are shown in parentheses, *,**,***Significant at 10, 5, and 1 per cent levels, respectively.

Table A1.Regression results when bank ownership is included

	ROE	ZSCORE	LOGR
ROE		3.338***(3.250)	7.042***(4.900)
ZSCORE	0.239* (1.746)		−3.878**(−2.557)
LOGR	0.063***(3.543)	−0.142(−1.236)
ROESQ		−3.084***(−2.863)	−6.039*(−1.899)
ZSCORESQ	−0.039*(−1.666)		0.640**(2.431)
LOGRSQ	−0.006***(−3.574)	0.007(0.698)
OWNER	0.006(0.330)	0.360**(2.407)	−0.003(−0.022)
Constant	−0.860***(−4.004)	5.499***(8.750)	8.414***(3.371)
No. Obs	395	395	395
J-statistics	0.11	0.11	0.11

The table contains the results estimated using a simultaneous equations model with the GMM estimator. The same set of control variables is used as indicated in Equations (1)(1) $\begin{array}{rl}& RO{E}_{i,t}={\alpha }_0+{\alpha }_{1}ZSCOR{E}_{i,t}+{\alpha }_{2}LOG{R}_{i,t}+{\alpha }_{3}HHI{D}_t+{\alpha }_{4}NIET{A}_{i,t}\\ & +{\alpha }_{5}LLRT{A}_{i,t}+{\alpha }_{6}LAST{F}_{i,t}+{\alpha }_{7}CO{V}_{i,t}+{\alpha }_{8}LNT{A}_{i,t}+\\ & {\alpha }_{9}ZSCORES{Q}_{i,t}+{\alpha }_{10}LOGRS{Q}_{i,t}+{\alpha }_{11}GDPG{R}_{i,t}+{\epsilon }_{i,t}\end{array}$(1) –(3(3) $\begin{array}{rl}& LOG{R}_{i,t}={\gamma }_0+{\gamma }_{1}ZSCOR{E}_{i,t}+{\gamma }_{2}RO{E}_{i,t}+LNT{A}_{i,t}+\\ & {\gamma }_{4}DEPOG{R}_{i,t}+{\gamma }_{5}ZSCORES{Q}_{i,t}+{\gamma }_{6}ROES{Q}_{i,t}\\ & +{\beta }_{7}REFOR{M}_t+{\beta }_{8}IN{F}_t+{\beta }_{9}GDPG{R}_t+v_{i,t}\end{array}$(3) ) and OWNER, a dummy variable that takes a value of 1 for a state-owned commercial bank, and 0 otherwise. However, the coefficients on other control variables are not presented in the table due to space constraints. t-statistics are indicated in parentheses. *, **,***Significant at 10,5 and 1 per cent levels, respectively.

Table B1.Regression results when the global financial crisis is included

	ROE	ZSCORE	LOGR
ROE		4.267***(4.253)	6.781***(4.302)
ZSCORE	0.219*(1.734)		−3.596**(−2.476)
LOGR	0.055***(3.343)	−0.246*(−1.840)
ROESQ		−2.463*(−1.919)	−5.703*(−1.890)
ZSCORESQ	−0.035(−1.623)		0.586**(2.319)
LOGRSQ	−0.005***(−3.319)	0.018(1.405)
GFC	0.01(1.050)	0.02(0.304)	0.161*(1.647)
Constant	−0.873***(−4.967)	5.109***(7.546)	7.579***(3.553)
No. Obs	395	395	395
J-statistics	0.11	0.11	0.11

The table contains the results estimated using a simultaneous equations model with the GMM estimator. The same set of control variables is used as indicated in Equations (1)(1) $\begin{array}{rl}& RO{E}_{i,t}={\alpha }_0+{\alpha }_{1}ZSCOR{E}_{i,t}+{\alpha }_{2}LOG{R}_{i,t}+{\alpha }_{3}HHI{D}_t+{\alpha }_{4}NIET{A}_{i,t}\\ & +{\alpha }_{5}LLRT{A}_{i,t}+{\alpha }_{6}LAST{F}_{i,t}+{\alpha }_{7}CO{V}_{i,t}+{\alpha }_{8}LNT{A}_{i,t}+\\ & {\alpha }_{9}ZSCORES{Q}_{i,t}+{\alpha }_{10}LOGRS{Q}_{i,t}+{\alpha }_{11}GDPG{R}_{i,t}+{\epsilon }_{i,t}\end{array}$(1) –(3(3) $\begin{array}{rl}& LOG{R}_{i,t}={\gamma }_0+{\gamma }_{1}ZSCOR{E}_{i,t}+{\gamma }_{2}RO{E}_{i,t}+LNT{A}_{i,t}+\\ & {\gamma }_{4}DEPOG{R}_{i,t}+{\gamma }_{5}ZSCORES{Q}_{i,t}+{\gamma }_{6}ROES{Q}_{i,t}\\ & +{\beta }_{7}REFOR{M}_t+{\beta }_{8}IN{F}_t+{\beta }_{9}GDPG{R}_t+v_{i,t}\end{array}$(3) ) and GFC, a dummy variable that takes a value of 1 for the period of 2008–09, and 0 otherwise. However, the coefficients on other control variables are not presented in the table due to space constraints. t-statistics are indicated in parentheses. *, **,***Significant at 10,5 and 1 per cent levels, respectively.

Table C1.Regression results when bank ownership and the global financial crisis are included

	ROE	ZSCORE	LOGR
ROE		3.086***(3.291)	7.017***(4.548)
ZSCORE	0.205(1.500)		−3.664**(−2.457)
LOGR	0.060***(3.500)	−0.119(−1.024)
ROESQ		−3.319***(−3.009)	−6.075*(−1.889)
ZSCORESQ	−0.033(−1.423)		0.604**(2.352)
LOGRSQ	−0.006***(−3.513)	0.005(0.505)
GFC	0.013(1.431)	0.011(0.165)	0.176*(1.794)
OWNER	0.003(0.149)	0.401***(2.684)	−0.003(−0.022)
Constant	−0.858***(−4.102)	5.464***(8.256)	7.535***(3.119)
No. Obs	395	395	395
J-statistics	0.11	0.11	0.11

The table contains the results estimated using a simultaneous equations model with the GMM estimator. The same set of control variables is used as indicated in Equations (1)(1) $\begin{array}{rl}& RO{E}_{i,t}={\alpha }_0+{\alpha }_{1}ZSCOR{E}_{i,t}+{\alpha }_{2}LOG{R}_{i,t}+{\alpha }_{3}HHI{D}_t+{\alpha }_{4}NIET{A}_{i,t}\\ & +{\alpha }_{5}LLRT{A}_{i,t}+{\alpha }_{6}LAST{F}_{i,t}+{\alpha }_{7}CO{V}_{i,t}+{\alpha }_{8}LNT{A}_{i,t}+\\ & {\alpha }_{9}ZSCORES{Q}_{i,t}+{\alpha }_{10}LOGRS{Q}_{i,t}+{\alpha }_{11}GDPG{R}_{i,t}+{\epsilon }_{i,t}\end{array}$(1) –(3(3) $\begin{array}{rl}& LOG{R}_{i,t}={\gamma }_0+{\gamma }_{1}ZSCOR{E}_{i,t}+{\gamma }_{2}RO{E}_{i,t}+LNT{A}_{i,t}+\\ & {\gamma }_{4}DEPOG{R}_{i,t}+{\gamma }_{5}ZSCORES{Q}_{i,t}+{\gamma }_{6}ROES{Q}_{i,t}\\ & +{\beta }_{7}REFOR{M}_t+{\beta }_{8}IN{F}_t+{\beta }_{9}GDPG{R}_t+v_{i,t}\end{array}$(3) ) and GFC, a dummy variable that takes a value of 1 for the period of 2008–09, and 0 otherwise, and OWNER, a dummy variable that takes a value of 1 for a state-owned commercial bank, and 0 otherwise. However, the coefficients on other control variables are not presented in the table due to space constraints. t-statistics are indicated in parentheses. *, **,***Significant at 10,5 and 1 per cent levels, respectively.

Table D1.Regression results when an alternative measure of bank stability is used

	ROE	AZSCORE	LOGR
ROE		−3.308***(−4.260)	2.166***(4.167)
AZSCORE	0.625***(9.882)		−0.222(−1.234)
LOGR	0.220**(2.142)	1.543**(2.181)
ROESQ		−2.892***(−7.387)	0.876***(3.754)
AZSCORESQ	−0.093***(−10.289)		0.034(1.340)
LOGRSQ	−0.158*(−1.857)	−1.288**(−2.532)
Constant	−1.925***(−8.800)	2.102**(2.490)	2.559***(4.461)
No. Obs	395	395	395
J-statistics	0.125	0.125	0.125

AZSCORE, a standard deviation of ROA over the 5-year period, combined with average 5-year period values of ROA and EQUITY. The table contains the results estimated using a simultaneous equations model with the GMM estimator. The same set of control variables is used as indicated in Equations (1)(1) $\begin{array}{rl}& RO{E}_{i,t}={\alpha }_0+{\alpha }_{1}ZSCOR{E}_{i,t}+{\alpha }_{2}LOG{R}_{i,t}+{\alpha }_{3}HHI{D}_t+{\alpha }_{4}NIET{A}_{i,t}\\ & +{\alpha }_{5}LLRT{A}_{i,t}+{\alpha }_{6}LAST{F}_{i,t}+{\alpha }_{7}CO{V}_{i,t}+{\alpha }_{8}LNT{A}_{i,t}+\\ & {\alpha }_{9}ZSCORES{Q}_{i,t}+{\alpha }_{10}LOGRS{Q}_{i,t}+{\alpha }_{11}GDPG{R}_{i,t}+{\epsilon }_{i,t}\end{array}$(1) –(3(3) $\begin{array}{rl}& LOG{R}_{i,t}={\gamma }_0+{\gamma }_{1}ZSCOR{E}_{i,t}+{\gamma }_{2}RO{E}_{i,t}+LNT{A}_{i,t}+\\ & {\gamma }_{4}DEPOG{R}_{i,t}+{\gamma }_{5}ZSCORES{Q}_{i,t}+{\gamma }_{6}ROES{Q}_{i,t}\\ & +{\beta }_{7}REFOR{M}_t+{\beta }_{8}IN{F}_t+{\beta }_{9}GDPG{R}_t+v_{i,t}\end{array}$(3) ). However, the coefficients on other control variables are not presented in the table due to space constraints. t-statistics are indicated in parentheses. *, **,***Significant at 10,5 and 1 per cent levels, respectively.

Table E1.Regression results for small banks

	ROE	ZSCORE	LOGR
ROE		−2.216***(−2.940)	8.704***(3.009)
ZSCORE	0.221***(3.060)		−4.717**(−2.066)
LOGR	0.011(0.821)	0.323***(4.135)
ROESQ		−6.823***(−6.570)	−9.225(−1.434)
ZSCORESQ	−0.039***(−3.272)		0.752**(2.179)
LOGRSQ	−0.001(−0.658)	−0.036***(−4.950)
Constant	−0.291**(−2.467)	3.260***(17.971)	6.448*(1.796)
No. Obs	193	193	193
J-statistics	0.141	0.141	0.141

Small banks are defined as those with total assets below the median. The table contains the results estimated using a simultaneous equations model with the GMM estimator. The same set of control variables is used as indicated in Equations (1)(1) $\begin{array}{rl}& RO{E}_{i,t}={\alpha }_0+{\alpha }_{1}ZSCOR{E}_{i,t}+{\alpha }_{2}LOG{R}_{i,t}+{\alpha }_{3}HHI{D}_t+{\alpha }_{4}NIET{A}_{i,t}\\ & +{\alpha }_{5}LLRT{A}_{i,t}+{\alpha }_{6}LAST{F}_{i,t}+{\alpha }_{7}CO{V}_{i,t}+{\alpha }_{8}LNT{A}_{i,t}+\\ & {\alpha }_{9}ZSCORES{Q}_{i,t}+{\alpha }_{10}LOGRS{Q}_{i,t}+{\alpha }_{11}GDPG{R}_{i,t}+{\epsilon }_{i,t}\end{array}$(1) –(3(3) $\begin{array}{rl}& LOG{R}_{i,t}={\gamma }_0+{\gamma }_{1}ZSCOR{E}_{i,t}+{\gamma }_{2}RO{E}_{i,t}+LNT{A}_{i,t}+\\ & {\gamma }_{4}DEPOG{R}_{i,t}+{\gamma }_{5}ZSCORES{Q}_{i,t}+{\gamma }_{6}ROES{Q}_{i,t}\\ & +{\beta }_{7}REFOR{M}_t+{\beta }_{8}IN{F}_t+{\beta }_{9}GDPG{R}_t+v_{i,t}\end{array}$(3) ). However, the coefficients on other control variables are not presented in the table due to space constraints. t-statistics are indicated in parentheses. *, **,*** Significant at 10,5 and 1 per cent levels, respectively.

Table F1.Regression results for large banks

	ROE	ZSCORE	LOGR
ROE		17.303***(4.866)	1.688**(2.072)
ZSCORE	−2.241***(−3.036)		1.561**(2.511)
LOGR	0.445*(1.673)	−1.039(−0.879)
ROESQ		−36.542***(−4.213)	−2.925*(−1.713)
ZSCORESQ	0.448***(3.013)		−0.308**(−2.431)
LOGRSQ	−0.289(−1.307)	0.587(0.573)
Constant	2.307***(2.653)	1.191**(2.533)	−1.880***(−2.703)
No. Obs	202	202	202
J-statistics	0.134	0.134	0.134

Large banks are defined as those with total assets above the median. The table contains the results estimated using a simultaneous equations model with the GMM estimator. The same set of control variables is used as indicated in Equations (1)–(3). However, the coefficients on other control variables are not presented in the table due to space constraints. t-statistics are indicated in parentheses. *, **,***Significant at 10,5 and 1 per cent levels, respectively.