Impact of Bank Capital Adequacy on Bank Profitability under Basel II Accord: Evidence from Vietnam

This paper explores the impact of capital adequacy on bank profitability in the context of Basel II Accord implementation in Vietnam. In this study, bank profitability is measured by return on assets and return on equity. Apart from capital adequacy ratio, we also control various potential determinants of profitability including bank-specified variables (capital adequacy ratio, net interest margin, non-performing loans, non-interest income, ownership and regulatory variable proxied by the bank’s application of Basel standards), and macroeconomic indicators (growth rate of gross domestic product, inflation rate). Using panel data regression analysis with a sample of 22 Vietnamese commercial banks for the period 2010-2018, this paper shows that bank capital adequacy, net interest margin, and non-interest income measures are positively correlated with profitability indicators while non-performing loan indicator and state ownership measure negatively effect on bank profitability. This paper also provides a more in-depth analysis of the impact that bank capital adequacy imposes on profitability by dividing the sample into two subsamples of large-sized banks and small-sized banks. We find that bank capital adequacy has a positive impact on return on assets for small-sized banks meanwhile it has no significant impact on profitability for large-sized banks in Vietnam. In another aspect, the paper also finds that the large-sized banks’ return on assets, as well as return on equity, are not significantly correlated with the Basel II implementation meanwhile it is statistically meaningful to the small-sized banks’ situation. Based on the outcomes found, this study provides several policy implications. Particularly, the regulatory authority should encourage bank capital reinforcement and continuous bank ownership restructuring.