Information technology and bank performance in Vietnam

Nguyen Thi Van

Banking Faculty, Banking Academy
Email: vannguyen@hvnh.edu.vn
Phone: 0973.751.247
Abstract

1.Introduction
Information technology (IT) is an integral part to support, sustain, and grow a business (Norshidah
Mohamed, Jasber Kaur a/p, Gian Singh 2012). Banking is one of the sectors in which the
technological progress is monitored closely and used widespread (Ilyas Akhisar, Batu Tunay, Necla
Tunay 2015). The rapid development and use of information technology (IT) by commercial
entities engaged in trade, investment and financial services have increased banks’ capacity to
achieve more benefits, including gains in profitability from efficiency of operation and reductions
in transaction costs (Daoud et al., 2016). Hence, banks make huge investments in IT. Yet a large
portion of IT investment
 does not guarantee high returns (Norshidah Mohamed et al., 2012). The
Standish Group (2006) reports that approximately 
 67 percent of IT projects failed or were
challenged to justify the investment.
 As corporations invest highly in and rely heavily on IT, they
expose themselves to high
 risks
 . In Vietnam, in the context of industrial evolution 4.0, the
innovations from this evolution bring banks competitive advantages to compete with advanced
banks in the local region and in the world. By 2018, digital technology businesses will contribute
44% of banking revenue (compared to 32% in 2014 according to BamBoo Capital Group). It is
clear that digital banking and application of IT in bank operations play an important role in bank
profitability and bank development. However, according to Vietnam ICT Index 2014 report, 13/25
surveyed commercial banks reported a ratio of digital transaction (through Internet banking, mobile
banking) value less than 2% while these channels have been offered since 2004. Thus, investments
in information technology really improve bank profitability is still a question. Hence, this study
attempts to examine the impact of spending on information technology on bank profitability
including return on total asset (ROA) and return on equity (ROE). Data is collected from 4 state-
owned commercial banks and 12 private joint-stock commercial banks from 2005 to 2019. From the
empirical results, the author hopes to find out the effect of IT investments on bank profitability and
to provide usful practical references for banks in order that they could make a sound decision in
their process of digitalization and management.
2. Literature review
Information technology has been defined a lot in various areas of studies in the literature.
According to Odunfunwa, B. (2002) information technology is a body of tools, with the
convergence of communication and computers. Goldberg (2002) describes information technology
as series of machines, which can execute sequences of instructions. Drawing from the resource-
based view of competitiveness, according to Bharadwaj (2000), Barney (1991), and Grant (1950)
also classified IT resources as IT infrastructure, human IT resources and IT-enabled intangibles.
Many researchers found a positive relationship between IT investment and the productivity of a
banking firm. (Syrine Ben Romdhane 2013; Saeid Khajeh dangolani 2011; Hossein Ahmadirezaei
2011; Cemal Zehir et al. 2010; An and Choi 2004; Zifeng Feng, Zhonghua Wu 2018). Hussam-
eldin and Daoud (2016) investigate the relationship between IT investment and financial
performance in the Jordanian Banking industry from 1993 to 2014. In this study, the effect of IT
investment on bank performance and it is compared with different bank groups, such as large- and
small- asset banks, and high- and low-IT use. Additionally, IT investment is measured by computer
budget ratio (computer budget divided by total budget). The results indicate that IT has a positive
impact on ROA and ROE but only significant for ROA only in the large banks while those of small
banks are positive significant for both ROA and ROE. The author also concluded that effect of IT
investment on bank’s profitablity is more significant in small–asset banks that in large-asset ones.
Jun, S (2006) explores the nexus between the information technology (IT) investment of Korean
banks and their management performance. The IT investment of large banks shows a stronger
positive influence on improving bank returns than that of small banks.
About methodologies, panel data analysis such as Pool OLS, fix effect model or random effect
model are used popularly in these above studies. A part from panel data from annual reports and
financial statements, some studies used questionaires to employees and bank managers to collect
data and then using the 5-point Likert scale to determine the impact of Information technology in
the banking system such as the studies of Saeid Khajeh dangolani (2011), Hossein Ahmadirezaei
(2011), Cemal Zehir et al (2010)…In these studies, IT has a positive impact on bank performance in
three ways: cost-effective, network effect (facilitate transactions among customers within the same
network) and saves the time of the customers and the employees conspicuously. Syrine Ben
Romdhane (2013) investigates the performance of information technology (IT) investments in a
sample of 15 Tunisian banks over the period 1998–2009 and uses both SFA Data Envelopment
Analysis (DEA) method and the Stochastic Frontier Analysis (SFA) method to test the soundness of
these approaches to efficiency measurement.
Oppositely, many studies show a negative link between IT capacity and bank profitability such as
the researches of Siam (2006) and Ross (2002), Al-Samadi & Al-Wabal (2011), Ilyas Akhisar et al.
(2015). Siam (2006) and Ross (2002) have both conducted studies on the relationship between IT
investment and financial performance, of banking firms and manufacturing firms respectively. Both
indicate that IT investment has a negative impact on the financial performance of banking and
manufacturing firms in the short run. Siam explains that IT investment takes a heavy cost on the
financial performance of banks in the short run, but in the long run the additional revenue streams
created by the initial investment will lead to a more positive financial performance. For Jordan
banks (Al-Samadi & Al-Wabal 2011), findings show that the impact on the profitability of some
electronic banking is negative. This study used panel data of 15 Jordanian banks for the period
2000-2010 and regressed on relevant variables using OLS regression. The results show that
electronic banking has a significant negative impact on banks' performance. The reason is that
Banks' customers in Jordan depend on traditional channels to carry out their banking operations. As
a result, costs associated with adopting electronic banking are still higher than revenues from
provision electronic services. Similarly, Ilyas Akhisar et al. (2015) investigated the effects of the
bank's profitability performance of electronic-based banking services and the findings indicate that
the number of POS terminals and the number of customer using internet banking service are
determined to effect profitability negatively.
On the other hand, IT does not influence on bank performance significantly. (Shin 2004; Strassman
1997; Council of Economic Advisors 2001; McKinsey Global Institute 2001).
Reseaching about impact of IT investment on bank performance is not rarely seen. Only one related
research was studied by Dinh V, et al. (2015) and it measures the impact of internet-banking to
bank performance of Vietnamese banks from 2009 to 2014. In the study, internet banking is
measured by 3 dummy variables which represent the time period when commercial banks started to
transact on Internet banking. In some other researches, impact of information technology is
measured by number of internet banking or digital banking transactions. There is no research that
measures IT investment as value of information technology investment. Thus, the difference of this
research is the measurement of effect of information technology. It is calculated by sum of
investments in hardware and software components of the banks during research period from 2005 to
2018.
3. Data and Methodology
Research question and Study objects
Based on the literature review, the effect of IT investment on bank profitability could be positive,
negative or no significant. In Vietnam, the cost for IT investment accounts for a major part of total
tangible and intangible assets while the ratio of digital transaction (through Internet banking, mobile
banking) value less than 2%. Hence, the author assumes that impact of IT investment on bank
performance is negative in the research period. Specifically,
-Research question: What is the impact of information technology on Vietnamese bank
performance?
-The specific study objectives are:
To analyse the relationship between IT and bank performance in private joint-stock commercial
banks.
To analyse the relationship between IT and bank performance in state-owned commercial banks.
Hypothesis
H1: IT has a significant negative impact on ROA of private joint-stock commercial banks.
H2: IT has a significant negative impact on ROA of state-owned commercial banks.
H3: IT has a significant negative impact on ROE of private joint-stock commercial banks.
H4: IT has a significant negative impact on ROE of state-owned commercial banks.
3.1 Conceptual theory
Information technology (IT) can be accepted as a unique resource in a firm in the ends of the 20th
century and 21th century. In this paper, the Resource Based Theory is selected as the theoretical
foundation for a conceptual model, to explain Information Technology impact on bank
Performance, intervened and moderated by firm characteristics and macroeconomic factors.
Resource-based theory contends that the possession of strategic resources provides an organization
with a golden opportunity to develop competitive advantages over its rivals (Resource-Based
Theory: The Basics). These competitive advantages in turn can help the organization enjoy strong
profits ( Barney, J. B. 1991). The benefits of using IT in financial institution are several: it expands
potential marketplaces; improves communication with customers, vendors and employees; speeds
up responses to customer inquiries; provides easier ordering and tracking; and improves the quality
and speed of transaction processes ( Daoud
 et al. 2016). Its resources possibly become a
competitive advantage of a firm. According to Resource-Based Theory, IT resources can improve
business performance (Acemoglu et al. 2007; Bartel et al. 2007; Barua and Mukhopadhyay 2000;).
Hence, banks seek to enhance their financial performances with increased use of IT. Additionally
bank performance is affected by numerous factors including other internal elements characterizing
the operations of banks and some external forces representing the effects of macro-economy.
Barney (1986, 1991) supposed resource-based view (RBV) as a potential framework for
augmenting the conceptual analysis of IT effects on firm performance and links the performance of
organizations to resources and skills that are firm-specific, rare and difficult to imitate or substitute.
Based on a review of literature of bank profitability equation, there are two kinds of elements that
affect on bank performance including the bank-specific (internal) and macro-economic (external)
factors. In this study, the internal factors are bank size (total asset), capital structure (equity asset
ratio), credit risk (non-performing loan ratio), IT resources (IT investments), IT investment level
and external ones encompass inflation rate and GDP.
3.2 Variables
Dependent variables: Bank performance: Based on literature review, return on total asset (ROA)
and return on equity (ROE) are choosen in measurement bank performance.
Independent variables
Information technology (IT)
IT capability of a firm encompasses IT infrastructure, human IT resources comprised of technical
and managerial IT skills, and IT-enabled intangibles such as knowledge assets, customer
orientation, and synergy (Bharadwaj 2000). Beccalli, E (2006), represents the first attempt to
measure the relationship between performance and IT investments in European banking. This study
uses in formation on banks IT investments in the hardware, software and other IT services from an
external provider. Syrine Ben Romdhane (2013), used technology investments as a proxy of
information technology with the components of in tangible assets (hardware), investments in
intangible assets (software) and investments in training and maintenance. The term IT refers to the
technological side of information systems, including modern technologies such as computers,
facsimiles, telecommunications, microelectronics, hardware, databases, software, networks and
other devices (Turban et al., 1996). In this study, IT investment is measured according to the study
of Syrine Ben Romdhane (2013). In Vietnam, because of the very-low value of IT training and
maintainance investment in comparison with the other components (tangible assets and intangible
assets) so IT investment is identified by matching investments of tangible assets (hard ware &
network ) and intangible assets (software). In the model, IT variable is proxied by the natural
logarithm of IT investment.
IT investment level (ITILEVEL) describes the level of IT investment of each bank. The banks with a
high level investment in IT may have a competitive and get a higher return on total asset or equity.
It equals IT investment divided by total assets.
Bank size
Various studies identify the bank size as an internal factor that influences the performance. The
effect is not clear. On one hand, greater size may generate economies of scale, thus an increase of
performance. This factor (TA) is proxied by the natural logarithm of total bank assets.
Capital structure
Another internal factor is the financial structure, which shows the way the bank’s assets are
financed and the capacity of the bank to cover losses (Hassan and Bashir 2003). It may be described
by capital adequacy ratio (the ratio of equity to total assets- EAR). A higher solvency may have a
positive effect on performance as it reduces the risks taken by the bank (Athanasoglou et al. 2006).
On the other hand, higher solvency will reduce the leverage effect, thus it may increase the
financing costs (Akbas 2012).
Credit risk (NPL)
The credit risk is one of the main factor that affect the bank performance, due to that a high credit
risk results in a increasing the cost for increasing provisioning. It is measured by Non-performing
loan ratio( NPL: Non performing loans divided by total loans) The literature usually expresses it by
the ratio of loan loss reserves to gross or net loans granted by banks. We expect a negative effect on
performance of the potential losses from bad quality loans (Mansur et al. 1993)
Inflation rate (INFL) & Gross Domestic Production (GDP)
As external factors, the macroeconomic conditions influence the bank profitability. In the economic
growth described by the GDP growth, both the increase of customer deposits and loans granted and
of the interest margins have a positive impact on bank profitability. When the economic activity
decreases, the demand for loans and deposits decreases and negatively affects the profit margins
(Sufian & Chong 2008). The inflation rate is another macroeconomic factor positively related to the
bank performance.
3.3 Models
According to resource-based theory and the previous literature about profitability equation, this
study will employ the following profitability equation and will apply it to panel data. The models
will be regressed separately for two bank groups.
ROA = + 1*TA + 2 *EAR + 3 *NPL + 4*INFL + 5 *GDP + 6*ITI + 7*ITILEVEL +
(1)
ROE = + 1*TA + 2 *EAR + 3 *NPL + 4*INFL + 5 *GDP + 6*ITI + 7*ITILEVEL +
(2)
Where:
ROA: return on total asset,
ROE: return on equity
TA: Bank size, natural logarithm of total bank assets
EAR: capital structure, equity to total asset ratio
 NPL: credit risk, non-performing loans divided by total loans
INFL: inflation rate
GDP: value of gross domestic production
ITI: value of information technology investment
ITLEVEL: IT level, IT investment divided by total assets *100%
3.4 Data collection
The panel data of bank-specific variables are collected from financial statements of each individual
bank while macro-economic factors including GDP and inflation rate are collected from database
on the General Statistics Office of Vietnam. Data are collected in two bank groups. The first group
encompasses 4 big bank in Vietnam with the dominance of total assets as well as four commercial
state-owned banks including: Joint Stock Commercial Bank for Foreign Trade of Vietnam,
Vietnam Joint Stock Commercial Bank for Industry and Trade, Vietnamese Bank of Agriculture
and Rural Development, Bank for Investment and Development of Vietnam. The second group
consists of 12 joint-stock commercial banks with much lower total assets. They are: An Binh Bank,
Maritime Bank, Techcombank, Military Bank, Vietnam International Bank, Saigon Bank, Saigon-
Hanoi Bank, VP bank, Eximbank, HD bank, ACB and Sacombank. The time period is from 2005 to
2018.
Table 1: Descriptive statistics of the dependent and explanatory variables for small bank group
(joint-stock commercial banks)
ROA ROE TA EAR NPL INFL GDP ITI ITILEV
EL
Mean .009455 .10887 7.8494 .09452 .02561 .10428 6.19613 5.16048 .5514756
34 22 41 7 57 3 7
Median .0087957 .10038 8.0046 .08381 .01976 .0785 6.23632 5.29572 .2144652
28 94 41 7 3
Max .0297401 .29800 8.7066 .38675 .098 .353 9.70701 6.91596 49.86379
86 78 9
Min .000218 .00274 5.8323 .03257 .00012 .009 1.72837 1.99563 .0145651
2 22 18 4 5
Std Dev .0060344 .06921 .55486 .05083 .01993 .08920 2.89050 .635487 3.831445
43 22 27 04 04 5
Skewness .5489193 .47692 1.1250 3.1775 1.4282 1.6450 - - 12.80355
25 68 08 3 87 .108234 1.56094
4 1
Kurtosis 3.039538 2.6427 4.1190 16.540 4.6322 4.8733 1.51526 7.49242 165.2904
88 68 1 18 63 4
Variance .0000364 .00479 .00258 .00039 .00795 8.35502 .403843 14.67997
06 .30787 4 72 67 7
2
Observatio 168 168 168 168 168 168 168 168 168
n
Source: Caculations of the author from Stata MP14
Table 2: Descriptive statistics of the dependent and explanatory variables for large bank group
(state-owned commercial banks)
ROA ROE TA EAR NPL INFL GDP ITI ITILEV
EL
Mean .00748 .13431 8.650701 .05686 .02975 .10428 6.19613 5.84073 .1795398
37 1 85 57 3 6
Median .00758 .12376 8.683779 .05791 .02279 .0785 6.23632 5.86831 .1495744
12 59 18 5 7 8
Max .01711 .37141 9.118277 .10023 .16007 .353 9.70701 6.23067 .462172
89 55 65 82 8
Min .00150 .02721 8.063581 .00406 .00102 .009 1.72837 5.09704 .0547128
84 83 11 4 1
Std Dev .00361 .05951 .3019232 .01574 .02591 .08920 2.89050 .254519 .1020394
03 05 73 4 04 5 4
Skewness .43516 1.2244 - .02744 2.7242 1.6450 - - 1.126374
45 7 .2567823 95 68 87 .108234 .717468
4 7
Kurtosis 2.8090 6.1214 1.96721 5.0168 13.112 4.8733 1.51526 3.59510 3.570388
75 8 85 23 63 7
Variance .00001 .00354 .0911576 .00024 .00067 .00795 8.35502 .064780 .010412
3 15 8 15 67 1
Observation 56 56 56 56 56 56 56 56 56
Source: Caculations of the author from Stata MP14
4. Empirical results
4.1 Finding unit root
With panel data, results from regressions will not be meaningful if the variables are not stationary:
that is, if they possess time trend. To determine whether a series is stationary or non-stationary, a
unit root test must be carried out. The study adopts the Levin-Lin-Chu (Levin et al. 2002; Harris-
Tzavalis 1999) Unit Root Test for this purpose
 . Appendix 1 & Appendix 2 illustrate the results
obtained from the Levin et al. (2002) test and Harris-Tzavalis test.
 The results indicate that the
variables used for the analysis of profitability equations are stationary.
4.2 Regression results
First, the study conducts regression of profitability equation using fix effect (FE) model and random
effect (RE) model. Second, Hausman test is used to choose the most appropreate one. After that, the
study conducts the tests related to the defects of the models including : heteroscedasticity, auto-
correlation, and Collinearity Diagnostics.
For the state-owned commercial banks, Hausman Test ( appendix 4) indicates that fix effect model
is better appropreate than the random effect model. Table 3 shows the estimation results for fix
effect model of equation (1) and equation (2). ITI impacts on bank performance (ROA &ROE)
negatively but this relationship is not significant.

Table 3: Regression results of fix effect model (1) and for the large banks

Equation (1): Effect of ITI on ROA in state-owned commercial banks in

Vietnam
Variables Coefficient Std. Prob
Errors
TA .0212888 .0084778 0.016 R-square:
EAR .0884348 .0293773 0.04 -Within: 0.3090
NPL -.0021973 .0147801 0.882 -Between: 0.0000
INFL -.0023077 .0036149 0.526 -Overall: 0.1108
GDP -.0017346 .0005156 0.002 Prob: 0.0000
ITI -.0051075 .0054054 0.350 Number of obs = 56
ITILEVEL .0169508 .0135165 0.216 Number of groups = 4
Cons -.1438661 .0492047 0.005
Equation (2): Effect of ITI on ROE in state-owned commercial banks in
Vietnam
Variables Coefficient Std. Prob
Errors
TA .1142931 .1844841 0.539 R-square:
EAR -2.109299 .6392759 0.002 -Within: 0.3675
NPL .005045 .3216271 0.988 -Between: 0.8965
INFL -.0460056 .0786638 0.562 -Overall: 0.0257
GDP -.0214558 .0112201 0.062 Prob: 0.0001
ITI .0813076 .1176268 0.493 Number of obs = 54
ITILEVEL -.1093796 .2941306 0.712 Number of groups = 4
Cons -1.052119 1.070736 0.331
Source: Caculations of the author from Stata MP14
It is clear that in the large banks, ITI impacts on profitability in different directions. Namely, its
effect on ROA is negative but its effect on ROE is positive. However, both the relationships are not
significant enough with significance level of 10%. Looking at the value of IT investment of total
assets in big four banks, it can be said that IT investment only accounts for a very small portion of
total asset (mean value about 0.18%). Loan is the main assets and interest income is still the
majortity. Incomes from activities related to ITI investment such as internet-banking, mobile
banking, electronic banking, digital banks,…account for a very small proportion of total income.
Maybe it is the reason why impact of IT investment on bank profitability is not significant.
Moreover, in the state-owned commercial banks, banksize (TA) have a significant positive impact
on both ROA and ROE while economic growth (GDP) significantly affects on them in a negative
way. Effect of Capital structure (EAR) on ROA is positive but its effect on ROE is strongly
negative. Of all elements EAR also has the strongest effect on ROE.
For the private joint-stock banks, Hausman test (appendix 6) shows that random effect model is
more appropreate for the both estimations of return on asset and return on equity.
Table 4: Regression results of model (1) and (2) for the small banks
Equation (1) Effect of ITI on ROA in large banks in Vietnam (RE model)
Variables Coefficient Std. Prob
Errors
TA .0083499 .0018514 0.000 R-square:
EAR .0369537 .0082071 0.000 -Within: 0.3540
NPL -.0723118 .0206444 0.000 -Between: 0.4471
INFL .0034815 .0038119 0.361 -Overall: 0.3663
GDP -.0015391 .0002338 0.000 Prob: 0.0000
ITI -.0022771 .0012857 0.077 Number of obs = 168
ITILEVEL .0000651 .0001084 0.548 Number of groups = 12
Cons -.0368388 .0102009 0.000
Equation (2) Effect of ITI on ROE in large banks in Vietnam (RE model)
Variables Coefficient Std. Prob
Errors
TA .0960052 .0203739 0.000 R-square:
EAR -.2358476 .0901885 0.009 -Within: 0.3487
NPL -.7661051 .2294421 0.001 -Between: 0.4529
INFL .0509695 .0416265 0.221 -Overall: 0.3816
GDP -.0180844 .0025778 0.000 Prob: 0.0000
ITI -.0338108 .014332 0.018 Number of obs = 168
ITILEVEL .0010601 .0011901 0.373 Number of groups = 12
Cons -.3221595 .1124386 0.004
Source: Caculations of the author from Stata MP14
Opposite to the results of large banks, the findings of these model are similar with many previous
studies. The influence of ITI on the bank performance with both ratios in the small bank group is
significantly negative. ITI investment on ROE is stronger than that on ROA although both are
negative. In the small banks, the ratio of IT investment to total assets is relatively high – mean of
0.55% ( in comparison with the ratio in the large banks: 0.179%). The smaller banksize and a high
level of IT investment may result in a significant impact of IT on bank performance. There may be
some reasons behind the negative relationship. First, due to small capital, the IT investments in the
small banks take a heavy cost on financial performance. Second, some studies show that electronic
banking in Vietnam is not effective when it has a negative relationship with financial performance.
In Vietnam, traditional channels are the main way to carry out banking operations. As a result, costs
associated with adopting electronic banking exceed its income. Electrocnic or modern banking
services require a high level of IT investment have not attracted customers due to shameful habit of
using high-tech services of Vietnamese customers. Electronic banking market in Vietnam has
developed rapidly in some recent years and it is in the period of educating market or customers.
Thus, Vietnamese people need more time to familiar and believable in the high IT services.
Moreover, in the estimation of ROA, all the variables in the model except INFL are strongly
significant with the significance level of 5%. Bank size influence positively on both ROA and ROE.
It means bank with a higher volume of total asset has a higher financial performance. Related to
capital structure, it is clear that an increase in EAR leads to a rise in ROA but a decrease in ROE.
Similar to the literature of bank profitability, credit risk (NPL) has a strongest negative impact on
both ROA and ROE due to that a high ratio of NPL cause a high amount of cost for credit risk
provisions. In all models, ITI level does not impact on bank profitability.
4.3 Testing for model’s defects of profitability equation for the private joint-stock commercial
banks
Model (1)
Using Breusch and Pagan Lagrangian multiplier test to test heteroscedasticity and Wooldridge test
for autocorrelation in panel data for RE model of equation (3). The results (appendix 7) suggest that
this model contains both heteroscedasticity and autocorrelation but it does not exist Collinearity
Diagnostics. Then, the author uses the FGLS (feasible generalized least square) approach to correct
autocorrelation and heteroscedasticity and the result of modified model is in appendix 8. The
modified model shows that the impact of NPL, GDP and ITI on return on asset is negative but the
relationship between IT investment and return on asset is very weak. The effect of bank size and
capital structure is strongly positive. However, instead of EAR, NPL has the strongest effection on
return total assets.
Model (2)
Using Breusch and Pagan Lagrangian multiplier test to test heteroscedasticity and Wooldridge test
for autocorrelation in panel data for RE model of equation (4). The results (appendix 9) suggest that
this model contains both heteroscedasticity and autocorrelation but it does not exist Collinearity
Diagnostics. Then, the author uses the FGLS (feasible generalized least square) approach to correct
autocorrelation and heteroscedasticity and the result of modified model is in appendix 10. In the
modified model, the impacts of bank size, capital structure, credit risk, economic growth (GDP) on
return on equity are strongly significant. However, effect of IT investment is weaker than it in the
original model although this relationship is still negative.
5. Conclusion
The study attempts to measure the effect of ITI on Vietnamese bank performance using fix effect
model. The impact of ITI on profitability of the banks is estimated and compared for two bank
groups: large bank (state-owned commercial banks) and small banks( joint-stock commercial
banks). The empirical analysis shows that:
In the state-owned commercial banks, ITI has no link with bank performance while effect of bank
size is only significant positive on ROA and is not significant on ROE.

In the private joint-stock banks, impact of ITI on both ROA and ROE is strongly negative with a
high level of significance.
In the private joint-stock commercial banks , Effects of credit risk and economic growth (GDP) on
both ROA and ROE are negative. In addition, EAR has a strong impact on bank profitability.

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Appendix
Appendix 1: Unit Root test for data from small banks
Variables Levin-Lin-Chu Test (Prob) Harris-Tzavalis test (Prob)
ROE 0.0172 0.0003
ROA 0.0003 0.0148
TA 0.0000 0.4668
EAR 0.0000 0.0000
NPL 0.0006 0.0000
INFL 0.0000 0.0000
GDP 0.0000 0.9950
ITI 0.0000 0.0007
ITILEVEL 0.0000 0.0000
Appendix 2: Unit Root test for data from large banks
Variables Levin-Lin-Chu Test (Prob) Harris-Tzavalis test (Prob)
ROE 0.1621 0.0000
ROA 0.0091 0.0000
TA 0.0794 0.9349
EAR 0.0056 0.0022
NPL 0.0000 0.0000
INFL 0.0015 0.0000
GDP 0.0001 0.9314
ITI 0.0099 0.7060
ITILEVEL 0.1941 0.6181
Appendix 3: Results of random effect model (1,2) (for the large banks)
Equation (1): Effect of ITI on ROA in large banks in Vietnam
Variables Coefficient Std. Prob
Errors
TA . 009604 . 0099411 0.334 R-square:
EAR . 1460766 . 0305108 0.000 -Within: 0.1266
NPL -.0239886 . 0173528 0.167 -Between: 0.8688
INFL -.0019406 . 0045949 0.673 -Overall: 0.4448
GDP -.0004652 . 0005924 0.432 Prob: 0.0000
ITI -.0082863 . 0063443 0.192 Number of obs = 56
ITILEVEL . 018928 . 014515 0.192 Number of groups = 4
Cons -.0355112 . 0558774 0.525
Equation (2): Effect of ITI on ROE in large banks in Vietnam
Variables Coefficient Std. Prob
Errors
TA -.0184296 .2024426 0.927 R-square:
EAR -.7043961 .6213265 0.257 -Within: 0.3675
NPL -.3923789 .3533743 0.267 -Between: 0.8965
INFL .0283229 .0935705 0.762 -Overall: 0.0257
GDP -.0005103 .0120645 0.966 Prob: 0.0001
ITI -.0308914 .1291956 0.811 Number of obs = 54
ITILEVEL .0984185 .2955846 0.33 Number of groups = 4
Cons .508438 1.137895 0.655
Source: Caculations of the author from Stata MP14
Appendix 4: Hausman test results for models of state-own commercial banks

Model (1)
---- Coefficients ----
| (b) (B) (b-B) sqrt(diag(V_b-V_B))
| fem rem Difference S.E.
-------------+----------------------------------------------------------------
TA | .0212888 .009604 .0116847 .
EAR | .0884348 .1460766 -.0576418 .
NPL | -.0021973 -.0239886 .0217913 .
INFL | -.0023077 .0019406 -.0042483 .
GDP | -.0017346 -.0004652 -.0012694 .
ITI | -.0051075 -.0082863 .0031788 .
ITILEVEL | .0169508 .018928 -.0019773 .
------------------------------------------------------------------------------
b = consistent under Ho and Ha; obtained from xtreg
B = inconsistent under Ha, efficient under Ho; obtained from xtreg

Test: Ho: difference in coefficients not systematic

chi2(7) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 2020.73
Prob>chi2 = 0.0000
(V_b-V_B is not positive definite)
Model (2)
---- Coefficients ----
 | (b) (B) (b-B) sqrt(diag(V_b-V_B))
| fem rem Difference S.E.
-------------+----------------------------------------------------------------
TA | .1142931 -.0184296 .1327227 .
EAR | -2.109299 -.7043961 -1.404903 .1504228
NPL | .005045 -.3923789 .3974239 .
INFL | -.0460056 .0283229 -.0743286 .
GDP | -.0214558 -.0005103 -.0209455 .
ITI | .0813076 -.0308914 .112199 .
ITILEVEL -.1093796 .0984185 -.2077981 .
------------------------------------------------------------------------------
b = consistent under Ho and Ha; obtained from xtreg
B = inconsistent under Ha, efficient under Ho; obtained from xtreg

Test: Ho: difference in coefficients not systematic

chi2(7) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 48.05
Prob>chi2 = 0.0000
(V_b-V_B is not positive definite)
Appendix 5: Results for fix effect model: private joint-stock commercial banks
Equation (1): Effect of ITI on ROA in joint-stock commercial banks in Vietnam (FE)
Variables Coefficient Std. Prob
Errors
TA .0088394 .0018886 0.000 R-square:
EAR .0334617 .0083244 0.000 -Within: 0.3595
NPL -.057984 .0220333 0.009 -Between: 0.2931
INFL .0036404 .0037608 0.335 -Overall: 00.3296
GDP -.0014739 .0002413 0.000 Prob: 0.0000
ITI -.003549 .0013928 0.012 Number of obs = 168
ITILEVEL .0001254 .0001099 0.256 Number of groups = 12
Cons -.0346081 .0104531 0.001
Equation (2) Effect of ITI on ROE in private joint-stock commercial banks in Vietnam(FE)
Variables Coefficient Std. Prob
Errors
TA .0991145 .0207148 0.000 R-square:
EAR -.2564123 .0913067 0.006 -Within: 0.3520
NPL -.630911 .2416728 0.010 -Between: 0.3729
INFL .0522822 .0412503 0.207 -Overall: 0.3561
GDP -.0174538 .0026472 0.000 Prob: 0.0000
ITI -.0436693 .0152769 0.005 Number of obs = 168
ITILEVEL .0015185 .001205 0.210 Number of groups = 12
Cons -.3015076 .1146548 0.009
Appendix 6: Results of Hausman test for model (1) & (2) of private joint-stock commercial
banks
Model (1)

---- Coefficients ----

| (b) (B) (b-B) sqrt(diag(V_b-V_B))
| fem rem Difference S.E.
-------------+----------------------------------------------------------------
TA | .0088394 .0083499 .0004895 .0003729
EAR | .0334617 .0369537 -.0034921 .0013927
NPL | -.0579846 -.0723118 .0143272 .007699
GDP | -.0014739 -.0015391 .0000652 .0000601
INFL | .0036404 .0034815 .0001589 .
ITI | -.003549 -.0022771 -.001272 .0005357
ITILEVEL | .0001254 .0000651 .0000603 .0000181
------------------------------------------------------------------------------
b = consistent under Ho and Ha; obtained from xtreg
B = inconsistent under Ha, efficient under Ho; obtained from xtreg
Test: Ho: difference in coefficients not systematic
chi2(7) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 6.56
Prob>chi2 = 0.4756
(V_b-V_B is not positive definite)
Model (2)
---- Coefficients ----
| (b) (B) (b-B) sqrt(diag(V_b-V_B))
| fem rem Difference S.E.
-------------+----------------------------------------------------------------
TA | .0991145 .0960052 .0031093 .0037425
EAR | -.2564123 -.2358476 -.0205648 .0142461
NPL | -.630911 -.7661051 .1351941 .0759084
GDP | -.0174538 -.0180844 .0006307 .0006023
INFL | .0522822 .0509695 .0013126 .
ITI | -.0436693 -.0338108 -.0098586 .0052895
ITILEVEL | .0015185 .0010601 .0004584 .0001888
------------------------------------------------------------------------------
b = consistent under Ho and Ha; obtained from xtreg
 B = inconsistent under Ha, efficient under Ho; obtained from xtreg
Test: Ho: difference in coefficients not systematic:
chi2(7) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 5.67
Prob>chi2 = 0.5785
(V_b-V_B is not positive definite)
Appendix 7: Results for test for heteroscedasticity, autocorrelation and Collinearity
Diagnostics of private joint-stock commercial banks, model (1)
Test for heteroscedasticity
ROA[BANK1,t] = Xb + u[BANK1] + e[BANK1,t]

Estimated results:

| Var sd = sqrt(Var)

---------+-----------------------------

ROA | .0000364 .0060344

e | .0000182 .0042645

u | 4.30e-06 .0020733

Test: Var(u) = 0

chibar2(01) = 34.53

Prob > chibar2 = 0.0000 there is an existence of Heteroscedasticity

Test of Autocorrelation
Wooldridge test for autocorrelation in panel data
H0: no first-order autocorrelation
F( 1, 11) = 8.583
Prob > F = 0.0137
Test for Collinearity Diagnostics
SQRT R-
Variable VIF VIF Tolerance Squared
----------------------------------------------------
ROA 1.62 1.27 0.6161 0.3839
TA 8.63 2.94 0.1159 0.8841
EAR 1.56 1.25 0.6414 0.3586
NPL 1.21 1.10 0.8234 0.1766
GDP 4.28 2.07 0.2334 0.7666
 INFL 1.03 1.02 0.9704 0.0296
ITI 4.00 2.00 0.2498 0.7502
ITILEVEL 1.38 1.18 0.7228 0.2772
----------------------------------------------------
Mean VIF 2.97
Appendix 8: Estimation result of model (1) of private joint-stock commercial banks after
modifying heteroscedasticity and autocorrelation.
Cross-sectional time-series FGLS regression
Coefficients: generalized least squares
Panels: heteroskedastic
Correlation: common AR(1) coefficient for all panels (0.5875)

Estimated covariances = 12 Number of obs = 168

Estimated autocorrelations = 1 Number of groups = 12
Estimated coefficients = 8 Time periods = 14
Wald chi2(7) = 58.27
Prob > chi2 = 0.0000

------------------------------------------------------------------------------
ROA | Coef. Std. Err. z P>|z| [95% Conf. Interval]
-------------+----------------------------------------------------------------
TA | .0081015 .0017421 4.65 0.000 .004687 .011516
EAR | .0247468 .0060345 4.10 0.000 .0129195 .0365741
NPL | -.0565067 .0164606 -3.43 0.001 -.0887688 -.0242445
GDP | -.0015787 .0002815 -5.61 0.000 -.0021304 -.0010269
INFL | -.0023062 .0022546 -1.02 0.306 -.0067251 .0021127
ITI | -.001795 .00118 -1.52 0.128 -.0041078 .000517
ITILEVEL | .0000934 .0000788 1.19 0.236 -.0000611 .0002479
_cons | -.0353999 .00982 -3.60 0.000 -.0546467 -.0161531
Appendix 9: Results of test for heteroscedasticity, autocorrelation and Collinearity
Diagnostics of private joint-stock commercial banks, model (2)
Test of heteroscedasticity: Breusch and Pagan Lagrangian multiplier test for random effects
ROE[BANK1,t] = Xb + u[BANK1] + e[BANK1,t]

Estimated results:
| Var sd = sqrt(Var)
---------+-----------------------------
ROE | .0047906 .0692143
e | .0021879 .0467747
u | .0007368 .0271441
 Test: Var(u) = 0
chibar2(01) = 58.37
Prob > chibar2 = 0.0000
Test of autocorrelation
Wooldridge test for autocorrelation in panel data
H0: no first-order autocorrelation
F( 1, 11) = 9.515
Prob > F = 0.0104
Test of Collinearity Diagnostics
SQRT R-
Variable VIF VIF Tolerance Squared
----------------------------------------------------
ROE 1.67 1.29 0.5993 0.4007
TA 8.68 2.95 0.1153 0.8847
EAR 1.39 1.18 0.7199 0.2801
NPL 1.21 1.10 0.8234 0.1766
INFL 1.03 1.02 0.9676 0.0324
GDP 4.37 2.09 0.2287 0.7713
ITI 4.02 2.01 0.2485 0.7515
ITILEVEL 1.38 1.18 0.7233 0.2767
----------------------------------------------------
Mean VIF 2.97
Appendix 10: Estimation result of model (2) of private joint-stock commercial banks after
overcoming heteroscedasticity and autocorrelation.
Cross-sectional time-series FGLS regression
Coefficients: generalized least squares
Panels: heteroskedastic
Correlation: common AR(1) coefficient for all panels (0.5290)

Estimated covariances = 12 Number of obs = 168

Estimated autocorrelations = 1 Number of groups = 12
Estimated coefficients = 8 Time periods = 14
Wald chi2(7) = 82.28
Prob > chi2 = 0.0000

------------------------------------------------------------------------------
ROE | Coef. Std. Err. z P>|z| [95% Conf. Interval]
-------------+----------------------------------------------------------------
TA | .0806336 .019375 4.16 0.000 .0426592 .118608
EAR | -.202829 .0616758 -3.29 0.001 -.3237114 -.0819466
 NPL | -.7074345 .1956757 -3.62 0.000 -1.090952 -.3239171
INFL | -.0004272 .0266618 -0.02 0.987 -.0526835 .051829
GDP | -.0165916 .0030303 -5.48 0.000 -.0225307 -.0106524
ITI | -.0187356 .011798 -1.59 0.112 -.0418593 .0043881
ITILEVEL .0007823 .0009444 0.83 0.407 -.0010687 .0026333
_cons | -.2821983 .1073967 -2.63 0.009 -.492692 -.0717047