Bank Size, Credit Risk and Bank Profitability in Vietnam

Abstract

This paper empirically examines the relationship between bank size, credit risk and profitability of Vietnam’s commercial banks during the period from 2009 to 2018. By employing off-balance sheet items in the denominator when calculating return on assets, this paper highlights the role of off-balance sheet items in generating non-interest income as well as contributes to the literature on profitability measurement. By utilising the two-step system GMM, the outcomes show that credit risk has adverse impact on profitability and this impact tends to be slighter in large size banks. The negative correlation between bank size and profitability indicates that large banks tend to perform inefficiently rather than small banks. Also, we found evidence of a non-linear relationship between bank size and profitability, suggesting that bank size has improved bank profitability until it reaches the optimal threshold, which then decreases profitability.