DETERMINANTS OF COMMERCIAL BANKS' PROFITABILITY: EVIDENCE FROM VIETNAM

The commercial banks' profitability is evaluated and the impact of interest rate, inflation and banks' size variables on their profitability has been analyzed. The article is applied by pooled ordinary least squares (OLS) model, the fixed effect model, random effect model and Hausman test to select suitable model between fixed effect model (FEM) and random effect model (REM). The profitability dependent variable (ROE) and independent variables of real interest rates, inflation and size of banks variables are selected. Dataset is collected from major banks and time series during 2003 to 2018. Real interest rates and inflation are closely correlated (r = 77.7%) leading to multicollinearity, besides the correlation between inflation and ROE is not closely related (r = 26%) and not statistically significant (sig = 0.156 > 0.05). However, both bank size and real interest rate variables are relatively closely related to profitability variables (r approximate to 58%; 63%) and are statistically significant (sig = 0.03; 0.005 < 0.05). The empirical results show that the inflation variable does not impact on banks' profitability, but real interest rates and the banks' size variables have a strong impact on the profitability of banks. They are required to set appropriate monetary policies and targets for economic development.