Determinants of banks’ capital adequacy ratio: case study from Vietnam

Abstract

Using panel data of 26 commercial banks (accounting for 79.6% of total bank assets) in period of 7 years (2009-
2015), this research aims to investigate the determinants of the Capital Adequacy Ratio (CAR) of Vietnamese
commercial banks with Random Effects Model (REM). The main findings are: (i) there are seven main determinants
of Vietnamese commercial banks’ CAR are: Loan Loss Reserve (LLR), Banks’ size (SIZE), Return on Asset (ROA),
Total-Equity-to-Total-Liabilities ratio (EQTL), Deposit Asset Ratio (DAR), Economic Growth (GDPG), Inflation rate
(INF). (ii) Loan Loss Reserve, Banks’ size, Economic Growth have biggest negative impacts on Capital Adequacy
Ratio. (iii) Surprisingly, Non-Performing Loan (NPL), Loan Asset Ratio (LAR) and Lending interest rate (IR) do not
have statistically significant correlation with capital adequacy ratio. Therefore, recommendations for Vietnamese
commercial banks are: (i) increasing equity capital by raise Tier 2 Capital, Mergers and Acquisitions and issue
share; (ii) decreasing Risk-Weighted Asset by tightening in commitments and credit conditions and supervise the
process of using leverage ratio and diversifying assets of commercial banks