Credit Risk and Financial Performance of Commercial Banks: Evidence from Vietnam

Credit risk is a crucial topic in the field of financial stability, especially at this time given the profound impact of the ongoing pandemic on the world economy. This study provides insight into the impact of credit risk on the financial performance of 26 commercial banks in Vietnam for the period from 2006 to 2016. The financial performance of commercial banks is measured by return on assets (ROA), return on equity (ROE), and Net interest margin (NIM); credit risk is measured by the Non-performing loan ratio (NPLR); control variables are measured by bank-specific characteristics, including bank size (SIZE), loan loss provision ratio (LLPR), and capital adequacy ratio (CAR), and macroeconomic factors such as annual gross domestic product (GDP) growth and annual inflation rate (INF). The assumption tests show that models have autocorrelation, non-constant variance, and endogeneity. Hence, a dynamic Difference Generalized Method of Moments (dynamic Difference GMM) approach is employed to thoroughly address these problems. The empirical results show that the financial performance of commercial banks measured by ROE and NIM persists from one year to the next. Furthermore, SIZE and NPLR variables have a significant negative effect on ROA and ROE but not on NIM. There is no evidence found in support of the LLPR and CAR variables on models. The effect of GDP growth is statistically significant and positive on ROA, ROE, and NIM, whereas the INF is only found to have a significant positive impact on ROA and NIM.