Bank size, credit risk and bank profitability in Vietnam

• Published in: Malaysian journal of economic studies Vol. 57; no. 2; pp. 233 - 251
• Main Authors: Thanh Tran, Dieu Thi, Thu Phan, Ha Thi
• Format: Journal Article
• Language: English
• Published: Kuala Lumpur Malaysian Economic Association 01.12.2020
• Subjects: Accounting; Adverse selection; Balance sheets; Bank profits; Banking industry; Banks; Banks and banking; Costs; Credit risk; Data processing; Financial risk management; Hypotheses; Interest rates; Loans; Moral hazard; Nonperforming loans; Profitability; Profits; Return on assets; Vietnam
• ISSN: 1511-4554
• DOI: 10.22452/MJES.VOL57NO2.4

This paper empirically examines the relationship between bank size, credit risk and profitability of Vietnam's commercial banks during the period from 2009 to 2018. By employing off-balance sheet items in the denominator when calculating return on assets, this paper highlights the role of off-balance sheet items in generating non-interest income as well as contributes to the literature on profitability measurement. By utilising the two-step system GMM, the outcomes show that credit risk has adverse impact on profitability and this impact tends to be slighter in large size banks. The negative correlation between bank size and profitability indicates that large banks tend to perform inefficiently rather than small banks. Also, we found evidence of a non-linear relationship between bank size and profitability, suggesting that bank size has improved bank profitability until it reaches the optimal threshold, which then decreases profitability.