The determinants of profit efficiency of banks in Vietnam

This paper examines the factors that affect profit efficiency of banks in Vietnam over the period from 2000 to 2006. The effects of four groups of variables, including bank-specific characteristics, ownership, transitional environment and macroeconomic conditions on the profitability of banks, are analysed using a Tobit model to account for the censored nature of the efficiency scores. The model is estimated using a two-step instrumental-variable method as a regressor is endogenous. The findings show that the profit efficiency of a bank is enhanced by a larger size and better management ability, while it is hampered by low quality of assets and a too high level of capitalisation. High growth in per-capita GDP and a low-inflation rate provide a favourable environment for banks to improve their profitability. The study also finds that among the foreign banks operating in Vietnam, those headquartered in Australia, Japan, the US and Europe perform better than those headquartered in Asia as well as the domestic banks. Finally, the study suggests that in order to optimise their performance while remaining secure, banks should maintain the ratio of equity over total assets between 4% and 14%.