FINANCIAL RATIOS: FOUNDATION FOR FINACIAL PERFORMANCE ASSESSMENT IN THE VIETNAMESE BANKS

Abstract

Financial ratios are commonly used in analyzing business and operating conditions to evaluate the performance of an organization and these ratios are especially important for banks because they need to update their financial situation. However, the challenge is not in calculating specific financial ratios, but the main challenge is choosing ratios that can accurately and promptly reflect the financial situation, performance, level of stability and success of the bank. There are not many studies showing and proving the importance of financial ratios used to evaluate the financial performance of banks. The study aims to examine the relationship of 06 financial variables including liquidity risk ratio, credit risk ratio, bank capitalization ratio, capital adequacy ratio, cost income ratio, bank size ratio and dependent variable is bank performance. The study uses secondary data that are the annual reports of nineteen banks listed on HORSE, HNX and UPCOM from 2015 to 2019. The research results show that there is a linear correlation between the three financial indices with the performance of commercial banks in Vietnam. Among the financial ratios, bank capitalization ratio (CAP) is positively correlated to the profitability of banks (ROE); and cost income ratio (CIR) and capital adequacy ratio (CAR) have negative relationship to performance. This implies that if commercial banks want to grow rapidly based on size but still meet the level of capital adequacy, they need to have parallel solutions, such as: reducing operating costs and choosing the optimal capital adequacy ratio suitable to the size of the bank