The impact of capital structure on bank performance: GMM estimation for the case of Vietnam

Purpose- Bank managers have recently focused more on capital structure with the aim of achieving optimal financial cost allocation in bank operations in order to enhance their performance. Methodology- Employing the database of 28 Vietnamese commercial banks during the period 2010-2019, this paper investigates the impact of capital structure on bank performance. Findings- By applying Pooled OLS, FEM and REM regression models, combined with SYS-GMM technique to fix some diagnose problems as well as endogeneity phenomena, the empirical findings reveal that capital structure (measured by total debt to assets and debt to equity ratios) negatively and significantly influences the performance of selected commercial banks (measured by ROA and ROE). Meanwhile, most of control variables (bank size, non-performing loan, liquidity, and GDP growth rate) represent significant and positive relationships with bank performance, except for the negative impact of operating cost rate. Conclusion- Regarding these outcomes, some implications are suggested to policy makers and bank managers to improve bank performance, subsequently to enhance the stability of the Vietnamese banking system – especially under the current uncertain economic conditions. some of revealed their significant relationship (such as et al., 2017; El-Chaarani and El-Abiadn, 2019), the results have been inconclusive. The first group of papers agrees with the results about the negative impact of capital structure on bank performance. Goyal (2013) investigated the effect of capital structure on the performance of 19 listed Indian banks for the period 2008-2012. The outcomes showed that debt to total assets ratio, debt to capital ratio negatively correlated with ROA, ROE and EPS. Note that profitability ratios, including return on total assets (ROA), return on equity (ROE), and return on equity (EPS), are mainly used to represent for bank performance in many studies. The negative impact of capital structure on bank performance was also demonstrated in many others, such as the study of Ronoh (2015) for listed commercial banks in Kenya during the period 2009-2013; Birru (2016) for commercial banks in Ethiopia during 2011-2015; Pinto and Quadras (2016) for Indian banks for the period 2006-2014; Siddik et al. (2017) for 22 banks in Bangladesh in the period 2005 - 2014; and Nwude and Anyalechi (2018) for banks in Nigeria from 2001 to 2013. Not only for traditional commercial banks, Pratomo and Ismail (2006) analyzed 15 Islamic banks in Malaysia from 1997 to 2004 and proved that a high leverage ratio or a lower equity ratio helped banks reduce agency costs, thereby increasing profitability. Although the effect was mutual, the result was not marked for large banks. the positive impact of capital structure on bank performance has found in Saeed et al. (2015). While using ROA, ROE and EPS to measure the performance of Pakistani banks listed on Karachi stock exchange from 2007 to 2011, the outcomes of multiple regression model suggested that capital structure ratios (including long-term debt to capital, short-term debt to capital and total debt to capital) positively related with bank performance. growth (GDP) and inflation (CPI)