The Effect of Credit Risk on the Financial Performance of Commercial Banks in Vietnam

Date Received: Dec 15, 2023

Date Published: Jun 28, 2024

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Issue: Vol. 7 No. 2 (2024): Vietnam Journal of Agricultural Sciences

Section:

ECONOMICS, SOCIETY AND RURAL DEVELOPMENT

How to Cite:

Yen, D., Trang, P., Huong, N., & Anh, D. (2024). The Effect of Credit Risk on the Financial Performance of Commercial Banks in Vietnam. Vietnam Journal of Agricultural Sciences, 7(2), 2160–2172. Retrieved from http://testvjas.vnua.edu.vn/index.php/vjas/article/view/478

The Effect of Credit Risk on the Financial Performance of Commercial Banks in Vietnam

Dang Thi Hai Yen (*) 1 , Pham Le Thao Trang 2 , Nguyen Thi Huong 1   , Dao Thi Hoang Anh 1

  • Corresponding author: yendang@vnua.edu.vn
  • 1 Faculty of Accounting and Business Management, Vietnam National University of Agriculture, Hanoi 131000, Vietnam
  • 2 Hanoi - Amsterdam Highschool for the Gifted, Hanoi 122000, Vietnam

    • Keywords

    Credit risk, commercial bank, non-performing loan, FEM, Covid-19, financial performance

    Abstract


    Creating credit is the main income-generating activity for banks. However, granting credit always comes with risks. Credit risk is the risk of losing part or all of a debt due to failure to pay on time or default. Credit risk is considered the most important risk affecting banking performance. Therefore, this study measured the effect of credit risk on the financial performance of Vietnamese commercial banks. The research sample was made up of 30 commercial banks in Vietnam during the period from 2017 to 2022. There were a total of 180 observations in the balanced data panel. To control for unobserved individual effects, this study used a fixed effects model (FEM) with adjusted standard errors. Return on equity (ROE), return on asset (ROA), and net interest margin (NIM) were the indicators for bank financial performance. The non-performing loan (NPL) rate variable represented credit risk. The control variables were cost to income ratio (CIR), equity to asset (ETA), total loans to total assets (LTA), GDP growth (GDP), and Covid. The research results showed that credit risk had a negative and statistically significant effect on the banks' financial performance. This can be explained by the increase in the NPL ratio, causing banks to increase provisions for loan losses, thereby reducing profits. Reduced profits were also because of poor risk management, information asymmetry, and moral hazards. The study also provided a number of solutions and recommendations to improve bank financial performance.

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