How do the green credits affect profitability performance of commercial banks? - Evidence in Vietnam

Abstract

As people become more aware of the alarming environmental problems, actions to promote a sustainable economy and a better ecological environment are called. One of the most promising ways is green credit, which is a unit that delivers positive impacts on the environment. This paper investigates how the presence of green credits in banks' portfolios affects their profitability performance, providing evidence from banks operating in Vietnam. The research is based on the panel data of 30 selected banks out of the total of 49 banks operating in Vietnam from 2015 through 2022 from consolidated financial statements and annual reports. The study uses panel unit root tests and a fixedeffects model with moderation. The results of the Hausman test and the F-test confirm that the fixed-effects model was the most appropriate method for identifying the factors, which affect the profitability of Vietnam's banking institutions, impacted by green credit. Our research shows that green credit does affect a bank’s profitability performance. Specifically, the presence of green credits in banks’ portfolios reduces the impact of the loans-to-deposit ratio, but not the bank size and capital adequacy, on both banks’ ROA and ROE. This implies that banks should implement a green credit policy to mitigate the liquidity risks on their profitability. We suggest banking institutions in Vietnam leverage the findings of this study to inform their strategic decision-making processes and enhance their financial performance while contributing to sustainable development. This study also identifies potential avenues for future research