Nguyen Q. Anh, Duong N. T. Phuong.

HCMCOUJS-Economics and Business Administration, 11(2), 67-80 67

The impact of credit risk on the financial stability

of commercial banks in Vietnam
Nguyen Quoc Anh1*, Duong Nguyen Thanh Phuong1
1
University of Economics Ho Chi Minh City, Vietnam
*
Corresponding author: [email protected]

ARTICLE INFO ABSTRACT

DOI:10.46223/HCMCOUJS. This study investigates the impact of credit risk on the
econ.en.11.2.1421.2021 financial stability of Vietnamese commercial banks. The paper
uses the Z-score to proxy the financial stability of banks. We use
the data of 27 Vietnamese commercial banks on BankScope,
Received: January 01st, 2021 during 2010 - 2019. The paper applied a dynamic panel data
approach; the selected method is the difference GMM (DGMM).
Revised: March 31st, 2021
The key question discussed is which factor impacts on Z-score.
Accepted: April 01st, 2021 Analysis results show the negative effect of non-performing loans
on the financial stability of banks. When commercial banks have
higher non-performing loans, the lower the financial stability is.
Additionally, bank-specific variables such as equity on asset ratio,
Keywords: the return on equity, the size of the bank and set of macroeconomic
variables affect the bank’s financial stability. Based on the analysis
commercial bank; credit risk;
results, we imply relevant policies for the State Bank of Vietnam
financial stability; GMM; Z-
score and commercial banks.

1. Introduction
The banking system plays an important role in the economy. Many studies have shown
the role of the banking system in national economic development. Therefore, if the banking
system failure that will cause many adverse reactions and possibly lead to financial crises.
Especially the problem of credit risk effects on financial stability (Altman & Sanders, 1998).
Credit risk causes losses to banks such as increasing costs, reducing profits, and reducing the
bank’s reputation (Aduda & Gitonga, 2011; Berger & DeYoung, 1997; Li & Zou, 2014; Million,
Matewos, & Sujata, 2015; Sabeza, Shukla, & Bajpai, 2015). The proof is that since the world
financial crisis in 2008, the issue of financial stability has been concerned more and more. Many
studies on bank stability have shown that banking performance has an impact on bank stability,
such as Ioana-Raluca and Dumitru-Cristian (2015), Ioana-Raluca and Dumitru-Cristian (2014);
research on the effects of credit risk on bank stability through empirical research (A. T. H.
Nguyen & Le, 2020; P. T. Nguyen, 2020). There are many papers to investigate the impact of
liquidity risk, credit risk, and competition on bank stability through the Z-score, such as
Xiaoquing, Lin, and Molyneux (2014), Yiwei (2014), Phan, Anwar, Alexander, and Phan (2018),
Vo and Dang (2016).
According to World Bank (2019), the Credit on GDP ratios in Vietnam in the period of
2013 - 2019, increased from 96.8% to 137.9%. It means that the economy depends heavily on
credit, whereas compared with the total product was produced. It shows a higher tendency to
borrow with product made. This is also potentially risky. On the other hand, when the credit
balance is too high, it will lead to many risks of loss if many unfavorable conditions occur, such
as macro conditions, interest rates, unemployment rate, etc.
68 Nguyen Q. Anh, Duong N. T. Phuong. HCMCOUJS-Economics and Business Administration, 11(2), 67-80

In addition, from the perspective of commercial banks, credit activities are still the basic
activities in order to contribute a large of to the total revenue. Credit growth is about 12.5%
(World Bank, 2019), demonstrating non-performing loan data from CIC in the period of 2010 to
2019, illustrating that the credit quality of the Vietnamese commercial banking system is not
good as expected. The Non-Performing Loan (NPL) ratio, as shown through the financial
statement, has decreased but not significantly. The NPL of the commercial banks in Vietnam,
during 2010 - 2019, have potential problems. Specifically: the NPL ratio has decreased slightly,
from 2.093% to 1.63% (World Bank, 2019). And when considering the explanation of the cause,
it is possible: due to the denominator (credit balance) increase; or sell the debt to VAMC to
reduce the numerator. However, during this period, the State Bank has made many positive
actions related to the on-performing loan settlement, but the resolution has not been effective.
The problem that should be proved is that non-performing loans impact the financial stability of
commercial banks? And if this situation occurs continuously throughout the system, there is a
forecast threat to the financial stability of the bank, set in the context with the macro goal of
sustainable development of the banking system to 2030. Therefore, the assessment of the impact
of NPL on banking and financial stability is important and necessary. This proves that the credit
risk management activities of the Vietnamese commercial banks still have many issues that need
to be faced.
The Z-score rate of 27 commercial banks in the period 2010 - 2019 decreased from
13.7% in 2010 to 10.63% in 2019. In which, this rate reached the highest rate during the study
period of 14.86% in 2014, and the lowest was 9.59%. In the following period decreased steadily
and increased again from 2018, 2019. If this index represents financial and banking stability,
then in the 2010 - 2019 period, compared with the analysis of the relevant indexes, the index’s
decline after 2012 is due to what factors. Especially in the framework of presenting the above
issues, special questions: Do credit risks affect the financial stability of banks? Do macro factors
affect the financial stability of a bank? To answer these questions, empirical research that
approaches related research models with reliable data needs to be performed.
Based on the mentioned issues, researching the impact of credit risks on the financial
stability of commercial banks, although not entirely new, is still a critical issue for research in
various contexts. Different scenes and stages. Because, before the evolution of the economy, as
well as the macro conditions, are always affected by many factors, the empirical research by the
forecasting model to make a valid recommendation is still valuable.
2. Literature review
“Credit risk is most simply defined as the potential that a bank borrower or counterparty
will fail to meet its obligations in accordance with agreed terms. The goal of credit risk
management is to maximize a bank’s risk-adjusted rate of return by maintaining credit risk
exposure within acceptable parameters” (Basel for International Settlements, n.d., p. 3).
Financial stability is defined as the ability of the financial system to facilitate and
enhance economic processes, manage risks, and absorb shocks. Moreover, financial stability is
considered a continuum, changeable over time, and consistent with multiple combinations of
finance’s constituent elements (IMF, 2004).
According to ECB (European Central Bank, n.d.), financial stability can be defined as a
condition in which the financial system - which comprises financial intermediaries, markets, and
market infrastructures - is capable of withstanding shocks and unravelling financial imbalances.
Jahn and Thomas (2014) refer to the concept of banking financial stability as follows;
The financial stability of the banking system is a steady state in which the banking system
Nguyen Q. Anh, Duong N. T. Phuong. HCMCOUJS-Economics and Business Administration, 11(2), 67-80 69

performs its functions. Effectively involves allocating resources, distributing risks, and
distributing income.
Through the mentioned approaches, the concept of banking financial stability is
understood as the situation in which a bank can operate smoothly, effectively and, of course, can
perform its functions well such as payment and credit intermediaries. Moreover, the bank must
be able to withstand shocks from the external environment, and the banks themselves do not
create other shocks that negatively affect the economy.
Many studies have been conducted to evaluate the stability of banks/bank’s financial
stability through the Z-score (Roy, 1952). The approach from the financial crisis reduces bank
stability. The approach used at the micro level to capture financial stability is through the Z-
score. This index reflects the overall level risk of the bank, or its probability of default. It is
calculated based on parameters in the bank’s balance sheet.
𝑅𝑂𝐴𝑖𝑡 +𝐸/𝐴𝑖𝑡
Z-scoreit = ( ) (1)
𝛿 (𝑅𝑂𝐴𝑖𝑡 )

With:
Z-scoreit: stand for the financial stability of i bank at time t;
ROA it: return on assets of bank i at the time t, i= {1…27}; t = {2010 … 2019};
E/Ait: the equity on total assets of bank i with year t;
σ (ROA): standard deviation of the ROA value. There are many approaches to taking the
value of the standard deviation by quarter, year, period. Particularly in the article, the author
approaches calculating the standard deviation of the ROA for the whole research period.
(Djatche, 2019; Niu, 2012).
It implies that the higher the Z-score, the more stability of bank. Furthermore, 76% of
banks’ probability of failure can be predicted by Z-score (Laura, Ettore, & Federica, 2015).
The literature generally researches factors that can influence the bank’s financial
stability: credit risk, bank-specific and macro elements.
Mark, Srobona, and DeLisle (2007) used multivariate regression to evaluate the impact of
credit risk, market risk, liquidity, and macroeconomic factors on European Union banks and 08
banks in countries period 1997 - 2004. The results showed that: rapid credit growth destabilized
banks; provisioning has a positive effect on banking stability by explaining that spending on
provisioning costs for bad debts decreases bank profits, inconsistency in liquidity risk effects on
bank stability, and banks with low equity are risky than large equity banks.
Similarly, Ghenimi, Chaibi, and Omri (2017) used dynamic panel data during 2006 -
2013 to explore the impact of liquidity risk and credit risk on bank stability. The credit risk
independent variable is the ratio of bad debt to the total outstanding loan. Besides, specific
variables are independent variables: size, ROE, NIM, liquidity risk variable, crisis variable, etc.
The results show the impact of credit risk on banking stability. When credit risk increases,
banking stability decreases. Besides, liquidity risk has a negative impact on banking stability. It
implies that a bank with high liquidity is stronger. Policy implications related to credit risk and
liquidity risk management to increase banking stability. It is recommended to apply the Basel III
framework in risk management.
On the other hand, Chaibi and Ftiti (2015), studies the factors that determine the credit
risk of banks in France (representing the market-based market) and Germany (representing the
bank-based type). The study uses panel data regression during 2005 - 2011. The dependent
70 Nguyen Q. Anh, Duong N. T. Phuong. HCMCOUJS-Economics and Business Administration, 11(2), 67-80

variable is the NPL (non-performing loan) variable. Independent variables are bank-specific.
Besides, the study also uses a set of macroeconomic variables inflation, GDP, unemployment
rate, interest rate, and exchange rate. The results show that the independent variables affect the
NPL, and these effects vary in different markets. In fact, LLP (French commercial banks);
variable lever, and bank size have a positive impact on NPL. Macroeconomic variables except
for inflation have the same effect as the NPL. On the contrary, non-interest income, ROE,
inflation variable, and GDP growth rate negatively affect NPL. From the impact results of the
dependent variables, the author recommends relevant policies.
Ioana-Raluca and Dumitru (2015) research the determinants of banking stability. The
author performed the research by evaluating the determinant of profit, measured by ROA (return
on assets), and financial stability assessment as measured by the variable z-score. The data used
are from 34 countries in the period 2008 - 2013. The independent variables used in the research
paper to include in the regression model include LA (loan to asset ratio), LD (loan to deposit
ratio), EA (equity to asset), OEA (operating account to total assets ratio), salary expense, GDP.
Research results show: variables LA, EA have the same impact on both profitability and
stability, variables OEA have negative effects on both profitability and stability. Meanwhile, the
variable GDP has an impact on profits but not on stability. Lending has a positive impact on
profits, but stability, it has the opposite meaning. From the analysis results, the author proposes
relevant policies to improve banking stability.
3. Econometric modeling and data
According to the research model of Ghenimi et al. (2017). Our baseline empirical model
therefore reads:
𝑍 − 𝑆𝐶𝑂𝑅𝐸𝑖𝑡 = 𝛽0 + 𝛽1 𝑍11𝑖𝑡 + +𝛽2 𝑁𝑃𝐿𝑖𝑡 + 𝛽3 𝐿𝐿𝑅𝑖𝑡 + 𝛽4 𝑅𝑂𝐸𝑖𝑡 + 𝛽5 𝐸𝐴𝑖𝑡 + 𝛽6 𝐿𝐴𝑖𝑡 +
𝛽7 𝑆𝐼𝑍𝐸𝑖𝑡 + 𝛽8 𝐺𝐷𝑃𝑖𝑡 + 𝛽9 𝐼𝑁𝐹𝑖𝑡 + 𝑢𝑖𝑡 (2)
Table 1
Variables in the model
Expected
Name Explanation Measure correlation with
Z-SCORE
𝑅𝑂𝐴 + 𝐸/𝐴
Z-SCORE Financial stability bank 𝑍 − 𝑆𝐶𝑂𝑅𝐸 =
𝜎(𝑅𝑂𝐴)
Z11 The lag of Z-SCORE +/-
Non − performing loan
NPL Non-performing loan 𝑁𝑃𝐿 = –
𝑇𝑜𝑡𝑎𝑙 𝑙𝑒𝑛𝑑𝑖𝑛𝑔
𝐿𝑜𝑎𝑛 𝑙𝑜𝑠𝑠 𝑟𝑒𝑠𝑒𝑟𝑣𝑒
LLR Loan loss reserve 𝐿𝐿𝑅 = –
𝑇𝑜𝑡𝑎𝑙 𝑙𝑜𝑎𝑛
𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦
EA Equity on total asset 𝐸𝐴 = +
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
𝑇𝑜𝑡𝑎𝑙 𝑔𝑟𝑜𝑠𝑠 𝑙𝑜𝑎𝑛
LA Loan on total assets 𝐿𝐴 = -
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
ROE Return on equity 𝑅𝑂𝐸 = +
𝑇𝑜𝑡𝑎𝑙 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦
Nguyen Q. Anh, Duong N. T. Phuong. HCMCOUJS-Economics and Business Administration, 11(2), 67-80 71

Expected
Name Explanation Measure correlation with
Z-SCORE

SIZE Logarithm of total assets 𝑆𝐼𝑍𝐸 = 𝐿𝑛 (𝑡𝑜𝑡𝑎𝑙 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠) +/-

GDP Real Growth GDP +/-
INF Consumer Price index +/-
Source: The researcher’s data analysis

3.1. Data
We use the data of 27 Vietnamese commercial banks on BankScope, from 2010 to 2019.
All the statistical information was formed based on data provided by the World Bank, such as
GDP growth, inflation.
3.2. Summary statistics of the variables
Table 2
Summary statistics of variables

Source: Data analysis from Stata software, version 15.0

NPL has a mean of 2.27, the minimum value is 0.02, and the maximum is 11.4, so the
variation between the maximum, the average and the minimum is quite large. And from this
result, we see a significant disparity in NPLs of banks in the data set studied.
ROE has the largest data variation compared to the variables, the amplitude of the
minimum and the maximum value variation is very large from -56.23 to 29.237. In the period
2010 - 2019, there is a vast difference between commercial banks in terms of profits. This
reflects the business performance of commercial banks that have clear segments in the data set.
LA, mean value is 55.12, the minimum value is 14.48, the maximum value is 78.59.
Thus, it can be seen that the ratio of loans to total assets of commercial banks fluctuates quite
high. This can be seen, the difference if compared according to criteria of total assets
(denominator) or loan ratio (numerator) of commercial banks is quite different.
EA, mean value is 9.01, the minimum value is 2.82, the maximum value is 23.98. Equity
over total assets also has many differences between commercial banks.
SIZE represents the size of the bank, calculated in Neper Lograrit of total assets, with the
minimum value of 16.61, the maximum of 29,237.
72 Nguyen Q. Anh, Duong N. T. Phuong. HCMCOUJS-Economics and Business Administration, 11(2), 67-80

ZSCORE proxy the financial stability bank, the minimum value is 3.45 and the maximum
at 32.04. Thus, it can be seen that the variable value of ZSCORE fluctuates in the data set with
quite a long amplitude, proving that there are many differences between commercial banks in the
data set.
GDP, mean value is 6.11, the minimum value is 5.25 and the maximum value at 7.08.
During the research period, the GDP variable did not change much.
INF (consumer price index), the minimum value is 0.63 and the maximum at 18.68.
Thus, it can be seen that in the period 2010 - 2019, high inflation rate volatility. In particular,
there are five rates below 1%, partly reflecting the effectiveness of the SBV’s macro policy
management.
3.3. Testing and choosing the model
The research data in the article is designed in the form of a panel (panel data), so it is
necessary to choose a suitable estimation method.
Performing Breusch and Pagan Lagrangian stances. From the test results, look at p-value
=< 0.05. thus rejecting the hypothesis H0: the appropriate OLS model. From there, we choose the
FEM (fixed estimation model) model.
Using Hausman test to perform FEM or REM selection, result: FEM selected.
3.4. Testing for autocorrelation
From the results of the Wooldridge test, p-value = 0.003 < 0.05. Therefore, the
hypothesis H0: the model does not have autocorrelation, accept hypothesis H1: the model has
autocorrelation. From there, the model concludes the autocorrelation phenomenon.
Table 3
Result of autocorrelation test
Wooldridge test for autocorrelation in panel data
H0: no first-order autocorrelation
F( 1, 25) = 10.802
Prob > F = 0.0030

Source: Data analysis from Stata software, version 15.0

Heteroscedasticity test: using the Hausman test to detect the pattern of variable variance
that occurred.
Test the multi-collinearity phenomenon: Look at the VIF (Variance inflation factor) < 2.
Conclusion: The model does not have a multi-collinearity phenomenon (Gujarati, 2003).
Table 4
Results of the multi-collinearity test
. vif
Variable | VIF 1/VIF
-------------+----------------------
EA | 3.58 0.279340
Z11 | 3.20 0.312501
SIZE | 1.85 0.540044
GDP | 1.62 0.618354
Nguyen Q. Anh, Duong N. T. Phuong. HCMCOUJS-Economics and Business Administration, 11(2), 67-80 73

. vif
Variable | VIF 1/VIF
-------------+----------------------
INF | 1.56 0.639914
ROEA | 1.43 0.698442
NPL | 1.43 0.699033
LLR | 1.40 0.715380
LA | 1.25 0.799678
-------------+----------------------
Mean VIF | 1.92
Source: Data analysis from Stata software, version 15.0
The results of overcoming model defects by estimating Generalized Least Square (GLS)
(generalized least square) and Generalized Moment Method (GMM).
Table 5
Results of FEM, REM, GLS, and GMM regression
----------------------------------------------------------------------------
(FEM) (REM) (GLS) (GMM)
ZSCORE ZSCORE ZSCORE ZSCORE
----------------------------------------------------------------------------
Z11 -0.0496*** -0.0516*** -0.0183** 0.00292
(-7.20) (-7.76) (-2.87) (0.48)

EA 1.361*** 1.353*** 1.312*** 1.283***

(125.39) (142.34) (142.72) (125.04)

NPL -0.00489 -0.00428 0.00944 -0.0211**

(-0.28) (-0.26) (1.01) (-3.12)

LLR -0.00887 -0.0594 -0.107*** -0.0659*

(-0.16) (-1.23) (-3.34) (-2.26)

ROEA 0.103*** 0.101*** 0.0964*** 0.0904***

(26.74) (30.84) (40.41) (23.41)

LA -0.00704* -0.00444* -0.00444** -0.00205

(-2.46) (-2.29) (-3.20) (-1.44)

GDP 0.0110 -0.0269 -0.0111 -0.00387

(0.25) (-0.68) (-0.46) (-0.26)

INF -0.00467 -0.000868 0.00348 0.00917*

(-0.85) (-0.17) (0.98) (2.21)

SIZE -0.0533* -0.0329 -0.0230 -0.0453

(-2.15) (-1.82) (-1.82) (-1.85)

_cons 0.950 0.685 0.357 0.797

(1.34) (1.18) (0.93) (1.11)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(FEM) (REM) (GLS) (GMM)
ZSCORE ZSCORE ZSCORE ZSCORE
----------------------------------------------------------------------------
N 219 219 219 219
----------------------------------------------------------------------------
t statistics in parentheses
* p < 0.05, ** p < 0.01, *** p < 0.001
Source: Data analysis from Stata software, version 15.0
74 Nguyen Q. Anh, Duong N. T. Phuong. HCMCOUJS-Economics and Business Administration, 11(2), 67-80

Correcting the model defect by using differential regression (Difference GMM), the way
of introducing endogenous variables often uses the delay variable of the dependent variable and
the appropriate instrumental variables. In this paper, the author uses the Z11 variable as the lag
of the Z-Score.
Table 6
Results of D-GMM regression
Dynamic panel-data estimation, two-step system GMM
------------------------------------------------------------------------------
Group variable: BANK Number of obs = 186
Time variable: YEAR Number of groups = 26
Number of instruments = 53 Obs per group: min = 3
Wald chi2(9) = 330831.72 avg = 7.15
Prob > chi2 = 0.000 max = 9
------------------------------------------------------------------------------
D.ZSCORE | Coef. Std. Err. z P>|z| [95% Conf. Interval]
-------------+----------------------------------------------------------------
Z11 |
D1. | -.0069146 .0034235 -2.02 0.043 -.0136245 -.0002048
|
EA |
D1. | 1.273723 .0061637 206.65 0.000 1.261642 1.285803
|
NPL |
D1. | -.0288493 .0110089 -2.62 0.009 -.0504262 -.0072723
|
LLR |
D1. | .013732 .0446904 0.31 0.759 -.0738596 .1013237
|
ROEA |
D1. | .0864254 .0028906 29.90 0.000 .08076 .0920909
|
LA |
D1. | -.0008342 .0019387 -0.43 0.667 -.0046341 .0029656
|
GDP |
D1. | -.0252709 .0114691 -2.20 0.028 -.0477499 -.0027919
|
INF |
D1. | .0103893 .0027784 3.74 0.000 .0049438 .0158349
|
SIZE |
D1. | -.0563412 .0148253 -3.80 0.000 -.0853983 -.0272842
|
_cons | .0056697 .0093816 0.60 0.546 -.0127179 .0240574
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Arellano-Bond test for AR(1) in first differences: z = -2.15 Pr > z = 0.032
Arellano-Bond test for AR(2) in first differences: z = 0.13 Pr > z = 0.896
------------------------------------------------------------------------------
Sargan test of overid. restrictions: chi2(43) = 95.60 Prob > chi2 = 0.000
(Not robust, but not weakened by many instruments.)
Hansen test of overid. restrictions: chi2(43) = 19.63 Prob > chi2 = 0.999
(Robust, but can be weakened by many instruments.)

Difference-in-Hansen tests of exogeneity of instrument subsets:

GMM instruments for levels
Hansen test excluding group: chi2(35) = 15.71 Prob > chi2 = 0.998
Difference (null H = exogenous): chi2(8) = 3.93 Prob > chi2 = 0.864
iv(D.EA D.NPL D.LLR D.ROEA D.LA D.SIZE D.GDP D.INF)
Hansen test excluding group: chi2(35) = 15.09 Prob > chi2 = 0.999
Difference (null H = exogenous): chi2(8) = 4.54 Prob > chi2 = 0.806
Source: Data analysis from Stata software, version 15.0
Nguyen Q. Anh, Duong N. T. Phuong. HCMCOUJS-Economics and Business Administration, 11(2), 67-80 75

Based on the results, the calculated appropriateness of the recovery process by the GMM
method was evaluated through Wald, Sargan, and Arellano-Bond (AR) tests. The F-test
examines the statistical significance of a numerical system. Hansen test checks for over-
identifying restrictions and checking the AR second-order serial correlation.
Using Hansen’s test to check the instrument validity, with p-value for Hansen J-statistic
greater than 0.1. We should accept the hypothesis H0: the model is correctly defined, the
variation representation is reasonable. The F-test statistic (p-value) = 0.000 < 0.1, thus we reject
the hypothesis H0: all the estimation systems in the method are equal to 0, so the estimation
systems of the solute like meaningful statistics.
The p-value for AR(1) = 0.032 < 0.05 should reject hypothesis H0: there is no correlation
of the first order series Conclusion: The model has the correlation of the first- order series.
The p-value for AR(2) is 0.896 > 0.1 should accept the hypothesis H0: there is no
correlation of the second-order series in the remainder of the regression model, Basu (2008).
Estimated results by the DGMM method show that the model does not have any defects.
Specifically, the test of residual cointegration showed that there was a first-order correlation (the
p-value for AR (1) was less than the significance level 5%) and there was no second-degree
cointegration (the p-value for AR (2) is 5% greater than significance level). Hansen’s test all
have p-value greater than the significance level of 5%, showing that the model and the
representative variables used are suitable.
4. Results and discussion
According to the study of Mark et al. (2007), Cho, Fu, and Yu (2012), increasing bad
debt, higher provisioning will make banks unstable and reduce profits, leading to a risk of
bankruptcy. This research support previous researches and have the same result. In fact, the
variable NPL has a negative effect on the Z-score with statistically significant, and has the
significance at level α = 1%. This can be explained, when NPL has a negative effect on the Z-
score or, in other words, a negative effect on bank stability. Because there exist too many
unresolved NPL, causing losses to the bank, and in the long run, it affects the bank’s liquidity.
The worst consequence is bankruptcy. This result provides clear evidence impact of NPLs on
financial stability. According to World Bank, the credit to GDP ratio tends to be different in the
period 2010 - 2012 to decrease; in the next period from 2013 to 2019, it increased from 96.8% to
137.9%. The reason for this, in the increasing period, shows that the economy depends more on
credit; and if compared with the total product produced, it offers a higher tendency to borrow
with created products. Although, when compared to developed economies, the ratio of
outstanding credit on GDP is still high. Still,compared to the Vietnamese economy in the stage
of development, this is also potentially risky. Because when the credit balance is too high, it will
lead to many risks of loss when many unfavorable conditions take place, such as macro
conditions, interest rates, etc. Besides, when the credit increases, it is possible that the capital
flow function will easily be deviated into the portfolio of high-risk credit: real estate,
consumption, while for production activities, credit demand is limited because it depends on
efficiency. Because of this, instead of focusing on product development and sustainable
economic growth, credit focuses on non-major activities.
EA is positively significant to Z-score, with significance at 1% level. It implies that low-
equity banks will have more stability problems than high-equity commercial banks. In fact, base on
data of 27 commercial banks, shows during 2010 - 2019, commercial banks increased their size
banks, which can be seen through the index of total assets. Commercial banks have a strategy to
increase their total assets. In 2011, the total assets of commercial banks decreased compared to
76 Nguyen Q. Anh, Duong N. T. Phuong. HCMCOUJS-Economics and Business Administration, 11(2), 67-80

2010. Due to the bankruptcy of a number of weak banks, the situation in this period was merged.
From 2011 to 2019, the total assets of the commercial banking system have steadily increased by
nearly three times, proving that the bank’s strategy of scale development has been concerned.
However, during 2010 - 2019, the equity on total assets of commercial banks decreased from
9.69% in 2010 to 7.77% in 2019. In which, the highest rate of 11.44% in 2012 and the lowest
7.27% in 2017. In the following years, this rate increased again, reaching 7.77% in 2019. (World
Bank, 2019). Indeed, as mentioned in the introduction, the z-score in this paragraph, the uptrend is
similar to the EA index. This illustrates more clearly the effects of EA in the research model. This
can be explained: when EA increases, it means total equity and total assets higher, payable
decrease. This result is the clock with the headers of the author Mark et al. (2007).
ROE has statistically significant at level α = 1%. Effects in the same direction on the Z-
score. When a bank is operating profitable, it will create a source of money to be able to conduct
investment activities and high liquidity. When operating effectively and profitable, financial
resources will be stable, improving stability. This result is similar to Adusei (2015), Valentina,
Calvin, and Liliana (2009) studies.
SIZE has a negative effect on Z-score, with significant at level α = 1%. This explains
when an increase in total bank assets does not mean an increase in stability. Because when the
bank expands in scale, it requires an adequate and effective management capacity level to
promote operational efficiency rather than the mechanical increase in total assets. This result is
supported by previous studies, such as Shrieves and Dahl (1992) and Yong and Christos (2013).
GDP has a negative effect on bank stability, having statistical significance at the level α =
5%. It implies that when GDP growth, with the capital needs of businesses and individuals to
serve production activities. This can lead to laxity in credit, threatening banking stability
(Imbierowicz & Rauch, 2014).
The inflation variable is statistically significant, at the level of α = 1%. Inflation is
positively correlated with banking stability. In this period, inflation remained relatively stable in
2011, a sudden period with the inflation rate increasing to 18.68%. In the following years,
inflation gradually decreased to the lowest level of the whole period of 0.63% in 2015. In the
following years, inflation increased again, reaching 2.8% in 2019, keeping the target inflation
below 4%. (World Bank, 2019). The bank bases on inflation rates to adjust interest rates or
manage operating costs effectively, thereby, increasing the bank’s income and ensuring stability
Samir (2013). Research by Putranto, Herwany, and Sumirat (2014) showed that the inflation rate
positively affects the profitability of banks (Yiwei, 2014). There are many different views on the
impact of inflation on banking and financial stability. However, the issues of controlling inflation
need to be considered carefully and have a harmonious policy.
5. Conclusion and policy implications
Firstly, from empirical research results, we show the negative impact of bad debt on the
financial stability of commercial banks. Therefore, requirements related to bad debt issues,
including prevention, limitation, and handling of non-performing loans should be considered.
In terms of conditions, credit activity is still an important activity that contributed a great
deal of revenue to commercial banks. Then the requirement to improve credit risk management
capacity must be done by commercial banks. Credit growth must be accompanied by credit
quality that must be guaranteed such as diversification of credit portfolio, demonstrating
diversification of industries and areas to invest, implementing diversified borrowers, avoiding
the case of gathering turning with certain customers, diversifying loan terms, ensuring
regulations on the ratio of mobilized capital for medium and long-term loans, promote M&A
Nguyen Q. Anh, Duong N. T. Phuong. HCMCOUJS-Economics and Business Administration, 11(2), 67-80 77

activities, carry out a review of weak and ineffective banks, well implemented banking
restructuring activities.
As a manager, the SBV needs to continue implementing the project of restructuring credit
institutions, controlling problem banks, acquiring weak banks, allowing weak banks to merge
with big banks, gradually handling bad debts for the bank to operate more and more stably.
Promulgate strict policies and legal corridors in dealing with bad debts, Referring to specific
instructions on dealing with bad debts in the next stage, creating a strictly legal basis for
activities related to bad debt handling: debt trading, securitization, promoting the role of
VAMCs, strengthening debt trading activities, strengthening debt pricing and auction activities.
Continue to regulate safety indicators in operations for commercial banks such as capital
adequacy ratio, liquidity ratio, credit growth, etc. recommend approaching to improve risk
management according to international standards (Basel). By doing so, new commercial banks
will increase financial stability and increase competitiveness in international markets. Issuing
guidelines related to credit risk management. Continue to recommend research and application of
international standards (Basel), depending on each condition; banks choose the appropriate
approach: basic method, standard method, advanced method, and inappropriate interested route,
not scratching by all commercial banks.
Secondly, the study also shows the impact of equity ratio, return on equity, and bank size
also affects the financial stability of commercial banks. This implies the problem of cost
management, equity management, and expansion strategy. In essence, the research results
present an interesting problem for commercial banks because the variables impact different
trends on financial stability. Indeed, while equity ratios and equity returns change financial
stability, bank size has a negative effect on financial stability. Because of this, there are different
strategic scenarios: i) scale down, to increase the EA coefficient, increase financial stability; ii)
increase the size and increase equity so that EA also holds or increases and increases ROE to
increases financial stability. However, depending on the strategy and capacity, every commercial
bank will have a good plan.
For the bank size, the State Bank needs to control and supervise the process of expanding
the scale of commercial banks according to economic development.
Banks need to improve their capacity to properly assess capital adequacy; allocating and
managing capital more effectively and saving capital; measure performance and management
based on equity value.
Finally, the results highlight the impact of GDP and inflation on the bank’s financial
stability. This is not difficult to understand because commercial banks are directly affected by the
management of the Vietnam State Bank and include the positions of the State Bank in the political
system. Precisely from this issue, the requirements for effective monetary policy management in
the coming time should continue to be promoted: raising the CPI of the State Bank, promoting the
independence of the State Bank in operating the national monetary policy. The request to solve the
problem of economic growth, along with curbing inflation before the requirement of reducing
financial instability, is not a small challenge for the State Bank of Vietnam.
For the national economy to develop stably, requiring flexible management of the
Government utilizing tools to regulate the macroeconomy stably, of which one of the most
important tools is monetary policy. Monetary policy and the banking system are essential to the
economy as the vascular system of the living organism, especially for a market economy that has
been deeply integrated into the world economy gender. The administration of the State Bank’s
78 Nguyen Q. Anh, Duong N. T. Phuong. HCMCOUJS-Economics and Business Administration, 11(2), 67-80

monetary policy is to achieve the goals of stability and economic growth - such as curbing
inflation, maintaining exchange rate stability, achieving full employment or growth economy.

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