Liquidity Risk, Credit Growth and Bank Profitability in Vietnam: The Moderating Role of Bank Size
This study of Vietnamese banks from 2015 to 2023 reveals that while liquidity management and bank size directly enhance profitability, the impact of credit growth is contingent on bank size, with larger banks better able to leverage credit expansion for profits due to superior risk management capabilities, whereas smaller banks face greater vulnerability to aggressive lending.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer
In the world of banking, a financial institution acts much like a bridge between people who have extra money and those who need to borrow it. To keep this bridge standing, a bank must hold enough cash on hand to pay back depositors who want their money immediately, while simultaneously lending that money out to earn interest. This balancing act creates a constant tension: if a bank keeps too much cash sitting idle, it earns very little profit; if it lends out too much too quickly, it risks running out of cash when depositors need it or facing a wave of bad loans that never get paid back. The health of a bank depends on how well it manages this trade-off, and how its size might change the rules of the game. In Vietnam, where the economy has grown rapidly and the demand for loans has surged, understanding these dynamics is crucial for the stability of the entire financial system.
Researchers set out to examine exactly how these factors play out in the Vietnamese banking sector, looking at data from twenty-four commercial banks over a nine-year period from 2015 to 2023. This timeframe was chosen because it captures a wide range of economic conditions, including the severe disruption caused by the global pandemic and the subsequent recovery. The team analyzed how three specific internal factors influenced a bank's ability to generate profit: how well the bank managed its liquidity, how fast it was growing its loan portfolio, and the mix of money it borrowed from customers. They also investigated whether the sheer size of the bank changed how these factors affected performance. By using a statistical method that compares banks against their own past performance over time, the researchers could isolate the specific impact of these decisions while accounting for the unique, unchanging characteristics of each institution, such as its ownership structure or long-term business strategy.
The study revealed that managing liquidity effectively is a clear path to higher profits. Banks that successfully deployed a larger share of their customer deposits into loans tended to earn more, suggesting that in Vietnam, the act of lending remains a primary engine for income. However, the story becomes more complex when looking at how fast a bank expands its lending. When the researchers looked at credit growth on its own, without considering the size of the bank, the results were unclear. It appeared that simply lending more money did not automatically lead to higher profits across the board. This ambiguity vanished once the researchers introduced the size of the bank into the equation. They found that the speed of lending expansion matters deeply depending on whether the bank is large or small.
For smaller banks, rapid credit growth actually hurt profitability. When these smaller institutions tried to expand their loan books quickly, they often struggled to manage the associated risks, leading to weaker financial performance. It seems that without the resources to thoroughly check borrowers or absorb potential losses, aggressive lending becomes a liability. In contrast, larger banks were able to turn rapid credit expansion into a profit booster. The data showed that as a bank grew larger, its ability to handle the risks of lending more money improved significantly. This suggests that bigger institutions possess advantages such as more diversified loan portfolios, better technology for assessing risk, and stronger systems to monitor borrowers, allowing them to grow their lending without suffering the same negative consequences as their smaller counterparts.
Interestingly, the study found that the specific mix of money a bank borrowed from customers did not directly determine its profitability. Whether a bank relied more on short-term deposits or longer-term time deposits did not have a significant independent effect on how much money it made. The researchers also confirmed that the pandemic years of 2020 and 2021 were a period of reduced profitability for the sector, a result that aligns with the broader economic challenges faced during that time. The most significant takeaway, however, is that there is no single strategy that works for every bank. The ability to profit from lending growth is not a universal trait but is instead tied closely to the scale and capacity of the institution.
These findings offer a clear lesson for bank managers and regulators in Vietnam. The research suggests that treating credit expansion as a guaranteed route to higher earnings is a mistake, particularly for smaller banks that may lack the infrastructure to support aggressive growth. For these smaller institutions, rapid lending can be dangerous, potentially weakening their financial health if they cannot manage the increased risk. Larger banks, with their broader resources and sophisticated systems, are better equipped to turn lending growth into sustainable profit. Consequently, strategies for growth should be tailored to the specific capabilities of each bank rather than applying a one-size-fits-all approach. The study concludes that while liquidity management and institutional scale are reliable drivers of success, the benefits of lending more money depend entirely on whether the bank has the size and systems necessary to handle the risks that come with it.
Drowning in papers in your field?
Get daily digests of the most novel papers matching your research keywords — with technical summaries, in your language.