Analysing the loan loss provisioning and efficiency of the banks in Vietnam

Abstract

This study examines the loan loss provision practices of banks in Vietnam to see whether its behaviours follows the business cycle, or subjects to the management objectives with regards to earnings management and capital management. In addition, a relationship between banks’ efficiency and their level of provisioning for loan losses is also studied. Using the accounting data of 38 commercial banks in Vietnam from 2006 to 2011, the estimates of efficiencies’ level of all the banks sampled were obtained from the stochastic input distance function. These efficiency scores would then be incorporated into the regression of loan loss provision against other explanatory variables. The estimated results from Generalised Moments of Method (GMM) estimators suggest that banks in Vietnam do not use loan loss provision to smooth income or manage regulatory capital. However, the provisioning practice is found to follow procyclicality because loan loss provision is negatively correlated with earnings, and GDP growth. Moreover, loan loss provision is found to be positively correlated with gross loans and size. Furthermore, efficiency can significantly explain the behaviour of loan loss provision in Vietnam in a way that banks with higher efficiency level would have lower loan loss provision