Determine the optimal capital structure for banks in Vietnam
Empirical research on the factors affecting the capital structure in the world and Vietnam. The factors that played an important role in the capital structure of Vietnamese banks, based on which determined the optimal capital structure for these banks.
| Рубрика | Банковское, биржевое дело и страхование |
| Вид | статья |
| Язык | английский |
| Дата добавления | 18.02.2021 |
| Размер файла | 41,5 K |
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FINANCE DEPARTMENT, PLEKHANOV RUSSIAN UNIVERSITY OF ECONOMICS
DETERMINE THE OPTIMAL CAPITAL STRUCTURE FOR BANKS IN VIETNAM
Mai Minh Thien - Master in Economics
MOSCOW
Abstract
bank capital vietnam optimal
on the foundation of traditional theories of capital structure (M&M theory, tradeoff theory, classification order theory, and market timing theory), and on the basis of empirical research on the factors affecting the capital structure in the world and Vietnam, the article examined the factors that played an important role in the capital structure of Vietnamese banks, based on which determined the optimal capital structure for these banks. On that basis, the study gives some recommendations. The article uses EVIEWS 10 software for verification and regression.
Keywords: optimal capital structure, banking system, banks, Vietnam, оптимальная структура капитала, банки, Вьетнаме.
Аннотация
ОПРЕДЕЛЕНИЕ ОПТИМАЛЬНОЙ СТРУКТУРЫ КАПИТАЛА ДЛЯ БАНКОВ ВЬЕТНАМА Май М.Т. (Российская Федерация)
Май Минь Тхиен - магистр экономики, финансовый факультет,
Российский экономический университет им. Г.В. Плеханова, г. Москва
на основе традиционных теорий структуры капитала (теория M&M, теория компромиссов, теория порядка классификации и теория времени рынка) и на основе эмпирических исследований факторов, влияющих на структуру капитала в мире и Вьетнаме, статья изучили факторы, которые сыграли важную роль в структуре капитала вьетнамских банков, на основании чего определили оптимальную структуру капитала для этих банков. Исходя из этого, в исследовании даются некоторые рекомендации. В статье используется программное обеспечение EVIEWS 10 для проверки и регрессии.
Ключевые слова: оптимальная структура капитала, банковская система, банки, Вьетнам.
The main text
Some theories about capital structure
The Modigliani-Miller Theorem (M&M theory)
This is the opening theory for the research on modern capital structures by Franco Modigliani and Merton Miller in 1958. With the assumptions are: Perfect market (complete and adequate information, no taxes, no transaction costs, equal access to capital); No financial exhaustion costs; Investors and businesses can borrow at the same interest rate; Businesses with similar business risks operating in the same environment; and All profits are divisible by the owners (no reinvestment, no growth).
In the two studied cases, the enterprise operated in a taxed environment and in a taxed- free environment. Franco Modigliani and Merton Miller have reached important conclusions about corporate capital structure. It is: in the absence of tax, the unlevered and indebted firms are the same, or in other words, the capital structure does not affect firm value and no capital structure is optimal. In the case of tax, the value of the levered firm is higher than the value of the non-levered firm due to the benefits of the tax shield.
In fact, it can be seen that the assumptions of the M&M theory are completely unconfirmed. Because the current market is an imperfect one and for businesses the growth target is top.
The Trade-off Theory (TOT)
While the M&M theory stated that the greater the enterprise value when using debt, the trade-off theory (Alan Kraus and Robert H. Litzenberger, 1973) explained the phenomenon in practice that many businesses only used debt within a certain limit. This difference can be explained when the M&M theory was based on the unrealistic hypothesis, not to mention the high cost of financial exhaustion when the more debt is used.
Financial exhaustion is the situation in which enterprises are unable to meet their creditors' promises or respond in a very difficult way. The cost of financial exhaustion arises from both direct and indirect costs of bankruptcy caused by insolvency.
The trade-off theory held that the firm's capital structure was determined by the trade-off between the benefits of the tax shield (since interest is tax-deductible) and the cost of financial exhaustion.
Altman (1984) also compared the present value of financial exhaustion with the present value of benefits from the tax shield on leverage and concluded that the effect of financial exhaustion costs on the value of the business and capital structure was very important. Accordingly, the formula for determining enterprise value is as follows:
The value of the business = Enterprise value if fully financed by equity + Present value of tax shield - Present value of financial exhaustion expense
Thus, the trade-off theory stated that each firm had an optimal capital structure corresponding to a certain debt ratio, and firms must weigh the tax shield benefit from interest and exhaustion costs to decide the level of using debt so that the enterprise value could reach the maximum.
The trade-off theory also has some limitations, because: (1) It is difficult to determine the indirect cost of the financial exhaustion cost (prestige, reputation, loss of customers...), and (2) The fact that many enterprises still perform well and succeed in unexplained while the debt utilization ratio is much lower than the optimal debt ratio determined by theory.
The Pecking Order Theory (POT)
The pecking order theory (Stewart C. Myers, Nicholas S. Majluf, 1984), explained corporate finance decisions on the basis of asymmetric information (assuming that management is aware of the future performance of a firm more than outside investors) and corporate administrators acting in the interests of existing owners.
The pecking order theory did not mention whether an optimal capital structure have existed or not, but emphasized the choice of funding sources for the operation of the business. In which, businesses prefer to use internal funding sources such as retained earnings or high liquidity assets being in excess. In case the internal funding source is not enough to finance investment opportunities, enterprises will seek external funding in the direction of minimizing costs due to asymmetric information. In theory, the firm will have the next priority to use debt first compared to mobilizing from owners, because the cost of debt is lower than the cost of using preferred equity and ordinary shares. And more, the use of debt also does not distract the firm's control, and, due to asymmetric information, investment opportunities do not have to be disclosed to the market.
The order of priority to use corporate funding sources according to the pecking order theory is:
- Internal capital source.
- In debt.
- Capital contributed directly from the owner.
However, this theory also has limitations such as not mentioning the impact of income tax, financial exhaustion, and ignoring the negative problems that can arise if managers hold cash too much.
Market-timing Theory
The market-timing theory refers to the fact that equities issue shares at a high price and repurchase stocks at a low price. The purpose of this is to explore the transient fluctuations in the cost of equity in relation to the cost of the use of other funding sources, which is mainly relative to the external debt of the enterprise.
This theory predicts the opposite direction of the trade-off theory. In fact, firms tend to issue shares instead of issuing debt, which means increasing equity and reducing debt when the market price of the stock is high relative to its book value and market price of that stock in the past. And vice versa, the enterprise will buy back shares if the market price of the shares is lower than the price in the past to ensure capital structure balance for its financial safety.
Empirical evidence on factors influencing capital structure
Up to now, there have been many domestic and foreign studies on factors affecting the capital structure, these studies mention and study capital structure under many effects that can be listed such as liquidity, business size, rate of return on equity, etc. to provide research models and results that are highly practical and are the basis for building capital structure policies in businesses in several countries and groups of countries around the world. In the framework of this article, the author introduces some important studies as a basis for reference.
According to research by Milton Harris and Artur Raviv (1991), capital structure theories was mentioned clearly, from the earliest theories like M&M to modern theories.
Ngan Nguyen Thi (2011), studying the factors affecting the financial structure of commercial banks in Vietnam, the range of research data in the period from 2006 to 2010. The research pointed out the factors that influence on the financial structure of Vietnam commercial banks in this period are FA (proportion of fixed assets in total assets), COLL (proportion of tangible assets in total assets), ROA (rate of return on total assets), ROE (rate of return on equity), SIZE (bank size), ATR (turnover of assets), GRO (growth rate of revenue) and FSS (dummy variable, with the participation of strategic shareholders). The research results also showed that the level of a positive correlation between ROE and the dependent variable (the ratio of total liabilities to total assets) is high. This is consistent with the trade-off theory of capital structure and M&M. It means that the higher the profitability of the business enterprises tend to use larger debt to increase business value.
Nhung Nguyen Thi, Huy Tran Quang, Nhi Do Thi Yen and The Hoang Bui (2014), testing the factors affecting the capital structure of non-financial enterprises, the study period from 2007 to 2013 and data sources from the State Securities Commission of Vietnam (SSC). The research pointed out the importance of building a capital structure for the development of the business, helping to maximize the value of the business, enhancing competitiveness, and growing stronger with adverse fluctuations from the economy. The study also outlined the capital structure theories of major economists, outlined the current state of capital structure in non-financial firms in Vietnam, and at the same time examined the influence of factors, namely ROA (rate of return on total assets), SIZE (bank size), TANG (fixed asset rate), LIQUIDITY (liquidity calculation) and TAX (corporate income tax), in that, variable LIQUIDITY has a strong impact on DE (debt to equity ratio) over the studied years.
Onur Akpinar (2016)'s study had a basis to confirm that firms with more profitable projects tended to use debt rather than from internal firm sources. With 77 manufacturing companies in Turkey, 308 observations from 2010 to 2013, the study has identified factors affecting capital structure such as BANKRUPTCY RISK (bankruptcy risk), VALUE (business value), PROFITABILITY (profitability), SIZE (size of business), LIQUIDITY (liquidity), EFFICIENCY (business efficiency), GROWTH (growth rate), MATURITY (number of years in the market), DIVIDEND DUMMY (dividend value) and TANGIBILITY (ratio of tangible assets).
According to Pepur, Sandra, Marijana Curak, and Klime Poposki (2016), it was affirmed that the internal factors of the business were the decisive factors affecting the capital structure of large firms in Croatia. This means that external factors also have a positive or negative impact on capital structure, but this impact is not large compared to internal factors. Therefore, towards an optimal capital structure, managers need to pay more attention to their internal businesses.
Apply theories to determine the optimal capital structure for banks in Vietnam
Based on the classic theories of capital structure combined with empirical evidence, the study gives out the main factors that clearly affect the capital structure of commercial banks in Vietnam, which are: LIQ, TAN, ROE, SIZ, TAX, GrO, and STA. From the selected factors in the model, the author regress (using EVIEWS 10 software) collected data from the financial statements from 2010 to 2019 of 26 banks operating in Vietnam (all combined into 260 observations), after that, determine the optimal capital structure based on the following formula:
LEVi, = Pc + Pi*LIQit + p2*TANit + P3*ROEtt + P4*SIZt + Ps*TAXit + P6*GRO*t + P7*sta + Eit
In which the dependent and independent variables in the model are:
LEVit is the ratio of total liabilities to total assets of the bank i year t.
LIQit is the bank's liquidity i year t.
TANit is the bank's ratio of fixed assets i year t.
ROEit is the return to equity of the bank i year t.
SIZEit is the bank size of the bank i year t.
TAXit is the tax of the bank i year t.
GROit is the growth rate of the bank i year t.
STA is the state property of the bank i year t - dummy variables.
Eit is the error.
According to the theoretical model, ROE have two-way effects that increase or decrease the enterprise value. The remaining 6 factors LIQ, TAN, SIZE, TAX, and GRO have the same direction, while STA have opposite effects.
Table 1
Regression results by using EVIEWS 10 software Dependent Variable: LEV Method: Least Squares Date: 06/29/20 Time: 15:43 Sample: 1 260 Included observations: 260
|
Variable |
Coefficient |
Std. Error |
t-Statistic |
Prob. |
|
|
C |
0.417798 |
0.038121 |
10.95988 |
0.0000 |
|
|
LIQ |
0.017579 |
0.014256 |
1.233139 |
0.2187 |
|
|
TAN |
-1.781372 |
0.264784 |
-6.727651 |
0.0000 |
|
|
ROE |
0.090266 |
0.038245 |
2.360199 |
0.0190 |
|
|
SIZ |
0.035147 |
0.002476 |
14.19554 |
0.0000 |
|
|
TAX |
-0.013844 |
0.002071 |
-6.685663 |
0.0000 |
|
|
GRO |
0.005018 |
0.006630 |
0.756786 |
0.4499 |
|
|
STA |
-0.012358 |
0.005851 |
-2.112220 |
0.0357 |
|
|
R-squared |
0.757890 |
Mean dependent var |
0.909551 |
||
|
Adjusted R-squared |
0.745051 |
S.D. dependent var |
0.040802 |
||
|
S.E. of regression |
0.023504 |
Akaike info criterion |
-4.633025 |
||
|
Sum squared resid |
0.139212 |
Schwarz criterion |
-4.523466 |
||
|
Log likelihood |
610.2933 |
Hannan-Quinn criter. |
-4.588981 |
||
|
F-statistic |
75.50436 |
Durbin-Watson stat |
0.756388 |
||
|
Prob(F-statistic) |
0.000000 |
From the regression results, the author draws the regression equation as:
LEV = 0.418 + 0.0178*LIQ - 1.781*TAN + 0.090*ROE + 0.035*SIZ - 0.014*TAX +005*GRO - 0.012*STA
Replace the average 2019 parameters of banks, then:
LEV = 0.418 + 0.0178*0.634725 - 1.781*0.005340 + 0.090*0.122076
+ 0.035*19.22305 - 0.014*12.85804 + 0.005*0.142491 - 0.012*0.153846 = 92.245%
This indicates that, considering the industry characteristics, the debt ratio by the market value of banks should be at 92.245%. The regression results also showed that 5 statistically significant variables (with significance at 1% and 5%) impact on the ratio of total liabilities to total assets (LEV). Significant factors affecting LEV include the ratio of fixed assets to total assets (TAN), the return to equity (ROE), bank size (SIZ), tax (TAX) and state ownership (STA). In particular, ROE and SIZ have a positive impact on LEV, the remaining three factors have a negative impact on LEV (Table 2).
Table 2
Relationship between independent variables to LEV
Relationship following the study
|
LEV |
||
|
LIQ |
Positive |
|
|
TAN |
Negative (1%) |
|
|
ROE |
Positive (5%) |
|
|
SIZ |
Positive (1%) |
|
|
TAX |
Negative (1%) |
|
|
GRO |
Positive |
|
|
STA |
Negative (5%) |
The model also explained quite highly the influence of factors in the study on the capital structure of Vietnamese commercial banks at the rate of 75.79%.
Conclusion and recommendation
The regression method is based on intrinsic factors affecting the firm's capital structure such as retained earnings rate, firm size, liquidity, growth opportunities, actual tax rates, and form ownership, etc. to offer optimal capital structure. On that basis, the author gives some following recommendations:
1. Banks should aim to adjust debt ratios according to market value in the medium term on the basis of an optimal debt ratio of 92.245% to suit industry characteristics.
2. Strengthening the financial capacity
Factors for evaluating financial capacity are shown in the capital, quality of assets, the ratio of income, liquidity, etc., in which capital is the most important factor, including equity capital and reserve fund.
In the market economy, equity capital is a legal basis, an important foundation for securing debts in a business. In the monetary sector such as banking, equity is the vital factor determining the existence and development of the bank. In the period 2010-2016, the economy witnessed a race to increase capital at domestic commercial banks. Up to 2019, BIDV (Bank for Investment and Development of Vietnam) is the leading bank in terms of total charter capital, however, a limitation in the Vietnamese banking system is the collection of many small banks. Therefore, an urgent problem for the Vietnamese commercial banking system is to increase equity capital by adding capital to banks or merging with banks to promote growth, expand the scope of activities, create resilience and competitiveness both domestically and internationally.
3. Effective capital management
Capital management is an indispensable part of the bank's existence. Whether a bank manages capital effectively or not will affect the success or failure of that bank, because the nature of the capital has a great influence on the liquidity, profitability, etc. of the bank.
In the period 2010-2013, the whole Vietnamese banking system fall into a serious lack of liquidity. The crisis in Vietnam is a consequence of the global economic crisis, plus the confidence in credit institutions in the people gradually drops. Therefore, the managers at the bank must map out the capital development strategy and manage them effectively, and must focus on each stage of development.
Administration tasks should be done regularly:
- Maintaining the work of statistics and regular capital reports at commercial banks.
- Building and promoting a model of capital forecasting, creating favourable conditions for policymakers at the bank.
- Effectively balancing liquidity and profitability at the bank.
4. Completing credit work
Credit activity is the activity that brings the biggest profit to the bank. Therefore, this activity is always associated with a series of risks such as operational risks, interest rate risks, exchange rate risks. The completion of credit work will help the banking system to perform its key tasks well in the economy, limit potential risks. There are a number of measures to improve credit work, such as:
- Developing a flexible credit policy, changing according to market fluctuations, both encouraging the key industries of the economy, while controlling and bringing efficiency and safety.
- Standardizing the credit-granting process.
- Completely handling bad debts, carrying out a debt restructuring, and setting up a risk reserve fund according to each form of risk.
- Improving the capacity of staff directly involved in the credit process.
- Regularly analysing and assessing risks according to regulations of Basel II and state banks.
5. Completing the distribution channel system, improving service quality
Network development is to develop distribution channels of products and services of commercial banks. The network expansion also contributes to the development of the brand for commercial banks, in order to reach more and more target customers quickly and better meet the diverse needs of customers.
At the same time, it is necessary to improve the service quality in developing the distribution channel system. This is also considered an important criterion in attracting customers to the bank, in order to increase the competitive advantage of the currency trading sector.
References / Список литературы
1. Akpinar O., 2016. Factors affecting capital structure: a panel data analysis on borsa istanbul. Economic and Social Development: Book of Proceedings. 527.
2. Diamond D.W. & Rajan R.G., 2000. A theory of bank capital. The Journal of Finance. 55(6). 2431-2465.
3. Harris M., & Raviv A, 1991. The theory of capital structure. The Journal of Finance. 46(1). 297-355.
4. Ngan N.T., 2011. Cac yйu to tac dфng dйn cвu truc tаi chmh cщa cac ngвn hаng thuong mai cф phan Viкt Nam (Master Thesis, University of Economics Ho Chi Minh City).
5. Nhung N.T., Huy T.Q., Nhi D.T.Y. and The H.B, 2014. Cac nhвn to аnh hudng dйn cвu truc von, kiem dinh tai thi truong Viкt Nam (Scientific research works, National Economics University.
6. Pahuja D. & Sahi A., 2012. Factors affecting capital structure decisions: empirical evidence from selected indian firms. International journal of marketing, financial services and management research. 3(3). 76-86.
7. Pepur S., Curak M. & Poposki K., 2016. Corporate capital structure: the case of large Croatian companies. Economic Research-Ekonomska Istrazivanja. 29 (1). 498-514.
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