NATIONAL ECONOMICS UNIVERSITY

Program of Public Management and Policy in English (E-PMP)

GROUP ESSAY

Topic: financial factors and banks performance

Subject: Econometric

Class: E-PMP 7

Group: 9

Group members: Nguyen Duc Duong - 11211577

Pham Thu Hien - 11212173

Nguyen Thi Yen Nhi - 11214568

Tang Thi Thao Nhung - 11214634

Nguyen Vu Dan Thuy - 11219621

Nguyen Tien Tung – 11216129

Ha Noi, 04/2023
Table of Contents
1. Introduction of your work.................................................................................................................3
2. Reviewing theoretical background on the performance of a firm and methods for studying this.
4
3. Specifying the linear models for ROA and ROE and state your hypothesis (expectation) on the
relationship between dependent variables and each independent variable...........................................6
3.1. Specifying the linear models of ROA........................................................................................6
3.1.1. Linear relationship between return on assets and capacity adequacy...........................6
3.1.2. Linear relationship between return on assets and Size of company...............................7
3.1.3. Linear relationship between return on assets and Size of company...............................7
3.1.4. Linear relationship between return on assets and Asset Quality...................................7
3.1.5. Linear relationship between return on assets and Asset Composition...........................7
3.1.6. Linear relationship between return on assets and GDP Growth...................................8
3.1.7. Linear relationship between return on assets and inflation............................................8
3.2. Specifying the linear models of ROE........................................................................................9
3.2.1. Linear relationship between return on equity and capital adequacy.............................9
3.2.2. Linear relationship between return on equity and Size of company............................10
3.2.3. Linear relationship between return on equity and Asset Quality................................10
3.2.4. Linear relationship between return on equity and Asset Composition........................10
3.2.5. Linear relationship between return on equity and GDP Growth.................................10
3.2.6. Linear relationship between return on equity and inflation.........................................11
4. Using descriptive statistics to analyze the data..............................................................................11
4.1. Summary statistics...................................................................................................................11
4.2. Scatter plots..............................................................................................................................13
4.2.1. Model 1.............................................................................................................................13
4.2.2. Model 2.............................................................................................................................17
4.2.3. Correlation matrix...........................................................................................................21
5. Model estimation.............................................................................................................................21
5.1. Results.......................................................................................................................................22
5.2. Check with hypothesis.............................................................................................................22
5.3. Explain the result.....................................................................................................................23
5.4. Test for significance of variables and model..........................................................................24
5.4.1. Test for significance of each variable.............................................................................24

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 5.4.2. Check the importance of the model................................................................................24
6. Check for the problems of multicollinearity, heteroscedasticity, functional form, normality of
errors........................................................................................................................................................25
6.1. Check for the problems of multicollinearity..........................................................................25
6.2. Check for the problems of heteroscedasticity........................................................................25
6.3. Check for the problems of functional form............................................................................27
6.4. Check for the problems of normality of errors......................................................................27
7. Comments and recommendations..................................................................................................28
7.1. Comments.................................................................................................................................28
7.2. Recommendations for model...................................................................................................28
7.3. Recommendations for banks...................................................................................................29
References.................................................................................................................................................31

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 Table list
Table 1: summary statistics.......................................................................................................................12
Table 2: relationship between ROA and CA...........................................................................................13
Table 3: relationship between ROA and logA.........................................................................................14
Table 4: relationship between ROA and AQ...........................................................................................14
Table 5: relationship between ROA and AC............................................................................................15
Table 6: relationship between ROA and GDP.........................................................................................16
Table 7: relationship between ROA and INF..........................................................................................17
Table 8: relationship between ROE and CA...........................................................................................17
Table 9: relationship between ROE and LogA........................................................................................18
Table 10: relationship between ROE and LogA......................................................................................18
Table 11: relationship between ROE and AC..........................................................................................19
Table 12: relationship between ROE and GDP.......................................................................................20
Table 13: relationship between ROE and INF........................................................................................21
Table 14: correlation matrix.....................................................................................................................21
Table 15: Output Model 1.........................................................................................................................22
Table 16: Output Model 2.........................................................................................................................22
Table 17: The results of the factor analysis to release the variance of the equation with the
dependent variable.....................................................................................................................................25
Table 18: white test results for model 1....................................................................................................26
Table 19: white test results for model 2....................................................................................................27
Table 20: Results of the Ransey reset test for model 1............................................................................27
Table 21: Resutls of the Ransey reset test for model 2............................................................................27
Table 22: Results of Skewness-Krutoisis test...........................................................................................28

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1. Introduction of your work

Facing the far-reaching influence of the 4.0 revolution, the demand for payment
transactions in the field of production - business and life is huge. Grasping this trend,
many banks have focused on investing in technology to change management systems and
customer services to improve competitiveness. With the development of countless
industrial revolutions, people's lives, especially the needs in payment activities, must be
met. Domestic banks can not only implement traditional banking services, but also
develop e-banking services to meet not only the needs of corporate customers, but also
individuals in banking transactions.
Commercial banking is a very difficult service sector to measure output, technical change
or productivity growth. It creates idle finance through the mobilization of capital from
deposits of economic sectors, and then provides this capital into the production process,
investing in economic development. In developing countries, banks contribute nearly
50% to gross domestic product, deposits are key to economic growth because bank
deposits are the basis of capital formation connected to the investment sector. However,
bank operations are often influenced by macro factors, as macro factors reflect the health
of the economy, namely the inflation index (CPI), indicators reflecting economic growth
(GDP), fluctuations in exchange rates, etc required reserve ratio, government bond yield,
stock index... Our report also looks at the performance of 120 banks to examine how they
are impacted by financial and macro factors.
To measure performance, we use two metrics: ROA and ROE.
ROA - Return on total assets, is a measure of profitability per dollar of assets of a
company. ROA provides investors with information about the returns generated from the
amount of capital invested (or the amount of assets).
ROE - Return on common equyty, which is the most important ratio for shareholders,
measures the profitability per dollar of common shareholders' capital. ROE is an accurate
measure to evaluate how much profit a capital spent and accumulated generates. This
ratio is often analyzed by investors to compare with peers in the market, from which to
refer when deciding which company to buy shares.
Finally, our aim is to accurately measure the performance of those banks and then
provide more comments and recommendations to help banks achieve higher operational
efficiency.
2. Reviewing theoretical background on the performance of a firm and methods for
studying this.

We use OLS linear regression estimation method with two linear models to measure ROA
and ROE of 120 banks, respectively, for which we have collected data. Specific analysis
of the theoretical background and methods used for the two linear regression models:

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- Model 1:
+ ROA (Return on Assets) is the dependent variable in this model, measured as the
ratio of a bank’s net income to its total assets. It is typically expressed as a
percentage and reflects how efficiently a bank uses its assets to generate profits.
+ CA (Capital Adequacy) is the independent variable in this model, which
represents a bank’s ability to absorb losses without becoming insolvent. It is
measured as the ratio of a bank’s regulatory capital to its risk-weighted assets. The
higher values of CA indicate that a bank has a stronger capital base and can better
withstand financial shocks.
+ LogA (Logarithm of Size of company) is an independent variable in the model,
measured as the natural logarithm of a bank’s total profit. Log transformation is
used to account for the fact that the effect of bank size on ROA may not be linear
but rather diminished at higher levels of assets.
+ AQ (Asset Quality) is another independent variable in the model, which
measures the quality of a bank’s loan portfolio. It is calculated as the ratio of non-
performing loans to total loans. Higher values of AQ indicate a lower quality of
the bank’s loan portfolio.
+ AC (Asset Composition) is also an independent variable in the model, which
measures the composition of a bank’s assets. It is calculated as the ratio of loans to
total assets. Higher values of AC indicate that a bank’s assets are predominantly
composed of loans. INF (Inflation) is a control independent in the model, which
represents the overall level of inflation in the economy. It is typically measured as
the percentage change inn the Consumer Price Index (CPI) over time.
+ GDP (Gross Domestic Product) Growth is also an independent variable in the
model, which measures the rate of growth of the economy. It is typically expressed
as the percentage change in the real GDP over time.
- Model 2:
+ ROE (Return on Equity) is the dependent variable of the model, measured as the
ratio of a bank’s net income to its total equity. ROE is typically expressed as a
percentage and reflects the bank’s profitability in relation to its equity base.
+ CA (Capital Adequacy) is the independent variable of the model. It is a measure
of a bank’s ability to absorb losses without becoming insolvent. CA is measured as
the ratio of a bank’s regulatory capital to its risk-weighted assets.
+ LogA (Logarithm of Size of Company) is an independent variable in the model.
It measures the size of a bank, represented by its total profit, and is transformed
using a logarithm function to fit the research model.

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 + AQ (Asset Quality) is an independent variable in the model. It measures the
quality of a bank’s loan portfolio, specifically the percentage of non-performing
loans to total loans.
+ AC (Asset Composition) is an independent variable in the model. It measures the
composition of a bank’s asset base, specifically the percentage of loans to total
assets.
+ INF (Inflation) is an independent variable in the model. It measures the general
level of price increases in an economy, represented by the annual percentage
change in the Consumer Price Index (CPI).
+ GDP (Gross Domestic Product) Growth is an independent variable in the model.
It measures the rate of economic growth in an economy, represented by the annual
percentage change in real GDP.

The model is estimated using the OLS (Ordinary Least Squares) regression method, with
ROE as the dependent variable and CA, LogA, AQ, AC, INF and GDP Growth as the
independent variables. The hypothesis is that there is a statistically significant
relationship between the dependent variable (ROE) and each of the independent variable
(CA, LogA, AQ, AC, INF, and GDP Growth), and that this relationship can be captured
using a linear regression model.

In essence, Model 2 is identical to Model 1, except that it uses ROE instead of ROA as
the dependent variable. The choice between ROA and ROE as the dependent variable
depends on the research question and the specific focus of the analysis. While ROA
captures a bank’s ability to generate profits from its equity base, which may be more
relevant to investors and shareholders.

3. Specifying the linear models for ROA and ROE and state your hypothesis
(expectation) on the relationship between dependent variables and each
independent variable.

3.1. Specifying the linear models of ROA

To test the relationship of dependent variables ROA with the independent variables, we
offer models.

Model 1:

ROA = β0 + β1*CA + β2*LogA + β3*AQ + β4*AC + β5*GDP + β6*INF

ROA: Returns on Assets.

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CA: Capital Adequacy.

LogA: Logarithm of Size of company.

AQ: Asset Quality.

AC: Asset Composition.

GDP: GDP Growth.

INF: Inflation.

3.1.1. Linear relationship between return on assets and capacity adequacy.

Higher ROA in the banking industry is associated with a higher level of capital
adequacy. This is because a bank that is making healthy profits is also likely to have
enough capital to absorb potential losses. Conversely, a bank with a low capital
adequacy may not be able to maintain a high level of profitability. Therefore, we have
the assumption that.

H1; Capital adequacy has a positive effect on return on assets.

3.1.2. Linear relationship between return on assets and Size of company.

Return on Assets (ROA) and bank size as measured by the total profit (Net Income) of
a bank are two important metrics to evaluate a bank’s performance. The total profit of a
bank is the total value of income after deducting expenses and losses for the financial
period. ROA is calculated by dividing total profit by total assets. Therefore, we have
the assumption that.

H2: Size of company has a positive effect on return on assets.

3.1.3. Linear relationship between return on assets and Size of company.

Return on Assets (ROA) and bank size as measured by the total profit (Net Income) of
a bank are two important metrics to evaluate a bank's performance. The total profit of a
bank is the total value of income after deducting expenses and losses for the financial
period. ROA is calculated by dividing total profit by total assets. Therefore, we have
the assumption that.

H2: Size of company has a positive effect on return on assets.

3.1.4. Linear relationship between return on assets and Asset Quality.

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The asset quality of a bank is usually assessed based on metrics such as NPL ratio,
Debt delinquency ratio, Risky bond ratio, etc. These numbers only show the level of
risk in the bank's loan portfolio. The relationship between ROA and asset quality is
often considered a negative relationship. If the Bank's asset quality is not good, it
means that the Bank is exposed to risk in its loan portfolio, which can lead to a
decrease in ROA. Conversely, if the Bank's asset quality is good, that is, the Bank is
reducing the level of risk in its loan portfolio, this can lead to an increase in ROA.
Therefore, we have the assumption that.

H3: Asset Quality has a negative effect on return on assets.

3.1.5. Linear relationship between return on assets and Asset Composition.

The asset composition of a bank includes funds, loans, investments and other assets.
Each of these asset components has different levels of return and risk, and a bank's
asset allocation can affect a bank's ROA. If the bank has a high-risk and unprofitable
asset portfolio, this can lead to a decrease in ROA. Conversely, if the bank allocates
assets properly and optimizes the return and risk of each asset, this can lead to an
increase in ROA. Therefore, we have the assumption that.

H4: Asset Composition has a positive effect on return on assets.

3.1.6. Linear relationship between return on assets and GDP Growth.

Return on assets (ROA) and GDP growth rate can have a positive relationship in the
banking industry. As GDP increases, sales of businesses also increase, leading to an
increase in the demand for loans by businesses. This can be a boon for banks, as they
will provide businesses with loans to grow and expand their businesses. When these
loans are repaid on time and according to plan, the bank's ROA will increase.
Therefore, we have the assumption that.

H5: GDP Growth has a positive effect on return on assets.

3.1.7. Linear relationship between return on assets and inflation.

Return on assets (ROA) and inflation can have a negative relationship in the banking
industry. Inflation is often accompanied by a decrease in the value of a currency, which

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leads to a decrease in the value of deposits and loans in bank accounts. This can lead to
a decrease in the value of the bank's assets, reducing the bank's ROA.

H6 : Inflation has a negative effect on return on assets.

Figure 1: Expectation for ROA

3.2. Specifying the linear models of ROE.

To test the relationship of dependent variables ROE with the independent variables, we
offer the models.

Model 2:

ROE = β0 + β1*CA + β2*LogA + β3*AQ + β4*AC + β5*GDP + β6*INF

ROE: Returns on Equity.

CA: Capital Adequacy.

LogA: Logarithm of Size of company.

AQ: Asset Quality.

AC: Asset Composition.

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GDP: GDP Growth.

INF: Inflation.

3.2.1. Linear relationship between return on equity and capital adequacy.

ROE and Capital adequacy have a linear relationship with each other in the banking
industry. This means that when ROE increases, the capital adequacy level of the bank
also increases and vice versa, when ROE decreases, the level of capital adequacy also
decreases. Therefore, we have the assumption that.

H1a: Capital adequacy has a positive effect on return on equity.

3.2.2. Linear relationship between return on equity and Size of company.

ROE and bank size as measured by Net Profit in the banking industry have a linear
relationship with each other. When ROE increases, the Bank's Net Profit also increases
and vice versa, when ROE decreases, the Bank's Net Profit also decreases. Therefore, we
have the assumption that.

H2a: Size of company has a positive effect on return on equity.

3.2.3. Linear relationship between return on equity and Asset Quality.

ROE and Asset Quality have an inverse linear relationship with each other in the banking
industry. That is, when ROE increases, the level of asset quality of the bank may decrease
and vice versa, when the asset quality of the bank is better, ROE may increase. Therefore,
we have the assumption that.

H3a: Asset Quality has a negative effect on return on equity.

3.2.4. Linear relationship between return on equity and Asset Composition.

In the case of banks with effective asset management, investment in high-returning

assets and good risk management, ROE and asset composition can have a linear
relationship, i.e. when the asset composition assets with a higher percentage of high-
yielding assets, the bank's ROE may increase. Therefore, we have the assumption that.

H4a: Asset Composition has a positive effect on return on equity.

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 3.2.5. Linear relationship between return on equity and GDP Growth.

ROE and economic growth rate often have a positive relationship, that is, when the
economic growth rate increases, the bank's ROE usually also increases and vice versa.
The reason is that as the economy grows, so do financial markets and banking
activities. Therefore, we have the assumption that.

H5a: GDP Growth has a positive effect on return on equity.

3.2.6. Linear relationship between return on equity and inflation.

ROE and inflation have an inverse relationship, that is, when inflation increases, the
bank's ROE usually decreases and vice versa. The reason is that when inflation
increases, the value of money decreases and the purchasing power of customers
decreases, leading to a decrease in the customer's ability to pay debts, reducing the
bank's sales and profits. At the same time, inflation also increases the cost of capital for
banks, reducing net profit and ROE. Therefore, we have the assumption that.

H6a: Inflation has a negative effect on return on equity.

Figure 2: Expectation for ROE

4. Using descriptive statistics to analyze the data
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 4.1. Summary statistics

Table 1: summary statistics

This table presents descriptive statistics for 8 variables, each based on 120
observations. Here's a brief overview of what each variable represents:

ROA: Return on assets

ROE: Return on equity

CA: Current assets

LogA: Natural logarithm of total assets

AQ: Asset quality

AC: Asset composition

GDP: Gross domestic product

INF: Inflation rate

For each variable, the table displays the number of observations, the mean, standard
deviation, minimum, and maximum values.

Overall, it appears that the sample mean for ROA is 0.823, which suggests that the
companies in the sample have a relatively high return on assets. The mean ROE is
10.1275, which is also relatively high. The mean for CA is 8.727, which indicates that the
companies in the sample have a relatively high amount of current assets. The mean LogA
is 18.983, indicating that the sample companies have large total assets. The mean AQ is
2.196, suggesting that the sample companies have relatively good asset quality. The mean

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AC is 0.827, which indicates that the sample companies have a relatively low proportion
of current assets in their total assets. The mean GDP is 6.455, indicating that the sample
is likely based in a country with a relatively high GDP. The mean inflation rate (INF) is
4.291, which is relatively high, and could indicate that the sample is based in a country
with higher inflation.

4.2. Scatter plots

4.2.1. Model 1

Table 2: relationship between ROA and CA

From Table 4.2, we see that ROA and CA have a relationship with each other and have
a positive relationship. The positive relationship between current assets (CA) and return
on assets (ROA) suggests that companies with higher levels of current assets tend to
have higher profitability. The relationship is shown most closely in the range of ROA
from 0% to 1.5%.

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 Table 3: relationship between ROA and logA
Table 4.3 presents data regarding the correlation between return on assets (ROA) and
the natural logarithm of total assets (LogA). From the table, we see that these two
variables have no correlation with each other.

Table 4: relationship between ROA and AQ

Table 4.4 indicates that there is a negative correlation between ROA (Return on Assets)
and AQ (Asset Quality The negative correlation coefficient between ROA and AQ
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suggests that companies with higher asset quality tend to have a lower return on assets,
while firms with lower asset quality tend to have a higher return on assets. The
relationship is shown most closely in the range of ROA from 0% to 1.5%.

Table 5: relationship between ROA and AC

From Table 4.4, we see that ROA and AQ have a relationship with each other and have
a negative relationship. The negative relationship between current assets (CA) and
return on assets (ROA) suggests that companies with higher levels of current assets
tend to have higher profitability. The relationship is shown most closely in the range of
ROA from 0% to 1.5%.

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 Table 6: relationship between ROA and GDP
Table 4.6 displays data related to the correlation between ROA (Return on Assets) and
GDP (Gross Domestic Product). The table suggests that there is no significant linear
relationship between these two variables. Therefore, changes in ROA do not
correspond to changes in GDP.

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 Table 7: relationship between ROA and INF
The data presented in Table 4.7 pertains to the correlation between ROA (Return on
Assets) and INF (Inflation Rate), and it reveals that there is no noteworthy linear
association between the two variables.

4.2.2. Model 2

Table 8: relationship between ROE and CA

Table 4.8 displays data on the correlation between ROE (Return on Equity) and CA
(Current Assets). The table suggests that there is a negative correlation between these
two variables, indicating that changes in one variable are associated with changes in the
other variable in an inverse manner. The negative correlation coefficient between ROE
and CA suggests that firms with a higher proportion of current assets tend to have a
lower return on equity, and vice versa. Moreover, the relationship is most prominent in
the range of ROE from 5% to 15%.

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 Table 9: relationship between ROE and LogA
Table 4.9 presents data regarding the correlation between return on equity (ROE) and
the natural logarithm of total assets (LogA). From the table, we see that these two
variables have no correlation with each other.

Table 10: relationship between ROE and LogA

According to Table 4.10, which shows the correlation between ROE (Return on Equity)
and AQ (Asset Quality), there is a negative relationship between these two variables.

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This means that changes in one variable are linked to changes in the other variable in
an opposite direction. The negative correlation coefficient implies that firms with better
asset quality tend to have a lower return on equity, and vice versa. Furthermore, this
relationship is most evident within the range of ROE from 5% to 15%.

Table 11: relationship between ROE and AC

Table 4.11 illustrates the correlation between ROE (Return on Equity) and AC (Asset
Composition), which reveals a positive relationship between these two variables. This
indicates that changes in one variable are associated with changes in the other variable
in a similar direction. The positive correlation coefficient between ROE and AC
suggests that firms with a larger proportion of current assets are likely to experience
higher profitability, and vice versa. Moreover, this relationship is most evident within
the range of ROE from 0% to 20%.

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 Table 12: relationship between ROE and GDP
Table 4.12 presents information on the correlation between ROE (Return on Equity)
and GDP (Gross Domestic Product). The data indicates that there is no noteworthy
linear correlation between these two variables. This suggests that changes in one
variable are not closely related to changes in the other variable. In other words, there is
no significant correspondence between changes in ROE and changes in GDP.

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 Table 13: relationship between ROE and INF
Table 4.13 shows the correlation between ROE (Return on Equity) and INF (Inflation
Rate), and the results indicate that there is no significant linear relationship between
these two variables. This means that changes in one variable are not closely linked to
changes in the other variable. In other words, there is no significant correlation between
ROE and INF.

4.2.3. Correlation matrix

Table 14: correlation matrix

The correlation matrix in Table 4.14 presents the correlations among the variables
ROA, ROE, CA, LogA, AQ, AC, GDP, and INF.

We can observe that ROA and ROE have a strong positive correlation of 0.8616, which
indicates that they tend to move together in the same direction. Additionally, there is a
weak positive correlation between ROA and CA (0.1737), whereas LogA and CA have
a moderate negative correlation (-0.7447).

The variables AQ and INF do not show any significant correlation with other variables
except for a moderate negative correlation between INF and GDP (-0.8888). The
variable AC has a weak positive correlation with ROE (0.3732) and a moderate positive
correlation with ROA (0.3466).

Finally, the variable GDP has a weak positive correlation with LogA (0.2330), whereas
the correlation between GDP and ROA is negligible (0.0190), indicating that changes
in GDP are not associated with changes in ROA. The variable INF has a negligible
positive correlation with LogA (0.1021) and a moderate negative correlation with GDP
(-0.8888).

5. Model estimation
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 5.1. Results

Model 1: Output

Table 15: Output Model 1

Model 2: Output

Table 16: Output Model 2

5.2. Check with hypothesis

Both the results of models 1 and 2 show that capital adequacy (CA) positively affects
both return on assets (ROA) and return on equity (ROE) with corresponding coefficients:
β1= 0.068; β1= 0,04. This supports the H1 and H1a hypotheses we put forward earlier.

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The Logarithm of size of the company variable (LogA) also supports two hypotheses H2
and H2a corresponding to two models respectively, model 1 and model 2 (β2 = 0.218; β2
= 2.263). The inverse relationship of asset quality (AQ) is also indicated. Specifically, the
coefficients of this variable in model 1 are: β3= -0.034 and in model 2: β3= -0.34 the two
coefficients confirm that our assumptions about the two models, H3 and H3a, are correct.
The variable asset composition (AC) has coefficients in the two models β4= 0.743 and
β4= 10.125, respectively, which also support the two hypotheses H4 and H4a. The GDP
growth variable supports our assumptions for the two models. The hypotheses are: H5
and H5a. This is evidenced by the coefficients of the variable with two models.
Specifically, the 2 coefficients are: β5 = 0.289; β5= 4,307. As for the last variable,
inflation (INF), we both reject our two assumptions given with two models, H6 and H6a
with two coefficients of the two models respectively β6 = 0,094; β6= 1,236.

5.3. Explain the result.

- Model 1

+ Capital Adequacy (CA): with a 1% increase in capital adequacy, the return on

assets will increase by 0.068% points.
+ Logarithm of Size of company (LogA): with a 1% increase in Size of company,
the return on assets will increase by 0.218% points.
+ Asset Quality (AQ): with a 1% increase in Asset Quality, the return on assets
will decrease by 0.034% points.
+ Asset Composition (AC): with a 1% increase in Asset Composition, the return
on assets will increase by 0.743% points.
+ GDP Growth (GDP): with a 1% increase in GDP Growth, the return on assets
will increase by 0.289% points.
+ Inflation (INF): with a 1% increase in INF Growth, the return on assets will
increase by 0.289% points.

- Model 2
+ Capital Adequacy (CA): with a 1% increase in capital adequacy, the return on
assets will increase by 0.04% points.
+ Logarithm of Size of company (LogA): with a 1% increase in Size of company,
the return on assets will increase by 2.263% points.
+ Asset Quality (AQ): with a 1% increase in Asset Quality, the return on assets
will decrease by 0.34% points.
+ Asset Composition (AC): with a 1% increase in Asset Composition, the return
on assets will increase by 10.125% points.

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 + GDP Growth (GDP): with a 1% increase in GDP Growth, the return on assets
will increase by 4.307% points.
+ Inflation (INF): with a 1% increase in INF Growth, the return on assets will
increase by 1.236% points.
5.4. Test for significance of variables and model.

5.4.1. Test for significance of each variable.

Model 1:

As can be seen in table 5.1, most variables are statistically significant (P-value<0.05).
Only two variables, Asset Quality (AQ) and GDP Growth (GDP), are not statistically
significant with 2 p-values respectively: 0.396 and 0.106 (greater than 5% of
importance.). The explanation for this phenomenon may be that the model is suffering
from some defects that we will test.

Model 2:

In model 2 (table 5.2), most variables are also statistically significant (P-value<0.05).
Only two variables, Capital Adequacy (CA) (P-value = 0.854>0.05) and Asset Quality
(AQ) (P-value = 0.46>0.05), were not statistically significant.

5.4.2. Check the importance of the model.

Before testing the importance of the model, we give the value of F (α; k-1; n-k).

α: It's important. In this report, we use a significance level of 5%

k: Is the number of variables of the model. The number of variables in both models we
gave was 7

n: Is the number of observations of the data and we use 120 observations for the above 2
models.

F (0.05;6;113) = 2.18

Model 1:

From table 5.1 we can see that F-test = 6.235 > F (0.05;6;113) = 2.18 hence we conclude
that model 1 is statistically significant.

Model 2:

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From table 5.2 we can see that F-test = 7.565 > F (0.05;6;113) = 2.18 hence our
conclusion that model 2 is statistically significant.

6. Check for the problems of multicollinearity, heteroscedasticity, functional form,

normality of errors.

6.1. Check for the problems of multicollinearity.

We calculate the VIF variance inflating factor to verify whether the model has linear
multi-addition in the model. Table 6.1 shows that the mean value of the VIF is 2.95 and
the individual values fall between 1.15 and 5.34. It can be seen that the values are all less
than the value of 10 and are still acceptable. From this it can be concluded that model 1
and model 2 are multicollinear but still acceptable.

Table 17: The results of the factor analysis to release the variance of the equation with
the dependent variable
6.2. Check for the problems of heteroscedasticity.

Model 1:

We use the white test for model 1 and the results in table 6.2 show the value Prob > chi2
= 0,0001 < 0,05 (significant level 5% ). That means rejecting the null hypothesis H0. It
means that the model has heteroscedasticity.

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 Table 18: white test results for model 1

Model 2:

We use the white test for model 2 and the results in table 6.2a show the value Prob > chi2
= 0,0008 < 0,05 (significant level 5% ). That means rejecting the null hypothesis H0. It
means that the model has heteroscedasticity.

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 Table 19: white test results for model 2
6.3. Check for the problems of functional form

Model 1: We use the ramsey reset test method to check the fit of the linear regression
model with the initially selected independent variables. Table 6.3 shows that p-value
(0,0031) is less than 5% significance level, thus rejecting hypothesis H0 and also means
that the model is not suitable.

Table 20: Results of the Ransey reset test for model 1

Model 2: We use the ramsey reset test method to check the fit of the linear regression
model with the initially selected independent variables. Table 6.3 shows that the p-value
(0,3578) is greater than the 5% significance level, so we conclude that model 2 is
appropriate.

Table 21: Resutls of the Ransey reset test for model 2

6.4. Check for the problems of normality of errors.

We use Skewness-Kurtosis test (SK test) to test for residuals normal distribution. Table
6.4 indicates that the P-value is less than 5% significance level. This means that the
distribution of residuals in the data is not close to the normal distribution.

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 Table 22: Results of Skewness-Krutoisis test
7. Comments and recommendations.

7.1. Comments.

- In general, neither model 1 nor model 2 are sufficiently certain. The two
dependent variables ROA and ROE, both of which have R2 values under 40%,
cannot be accounted for by the model. Additionally, because some variables in
both models are not statistically significant, all the independent variables cannot
fully explain the model.
- In terms of the model's flaws, we looked at four common ones: multicollinearity,
heteroscedasticity, functional form, and error normalcy. Both models have the
same three faults following testing: heteroscedasticity, functional form, and error
normality. This can be explained by the fact that since both models estimate using
the same variables, their errors will be the same. Additionally, it establishes the
inadequacy of the model and the variables.
7.2. Recommendations for model.

- The first is the heteroscedasticity error, which is the variation that exists among
various data points in a set of heterogeneous data. As a result, the data points
typically scatter irregularly about the mean. We have a couple methods that are
effective to get around this. Using a quadratic model, the WLS (Weighted Least
Squares) model, and converting variables into logarithmic form to lessen and
overcome the problem of variance change. either robust standard errors or
standard errors.
- The functional form error is the second. When a model is used to forecast values
in a fresh data set but the results are not accurate or accurate to an acceptable level,
this is known as a model mismatch error. This error can happen when the model is
either overfitting or underfitting the data samples, or when the model cannot fit the

28
 data samples. There are a few solutions. Use a different model, Handle noisy or
faulty data; apply the ensemble technique.
- The final mistake is the normality of errors. When model errors do not follow the
normal distribution, the errors are said to be non-normal. The model will not
function properly, and its predictions will be incorrect, if the errors do not follow a
normal distribution. Use a different model, alternative explanatory variables, or a
different data set to correct this, among other options.
7.3. Recommendations for banks.

- To increase ROA, there are some recommendations that businesses can implement
as follows:
1. Increasing working capital (CA): This can be achieved by increasing cash,
reducing inventory, accelerating receivables collection, and reducing short-
term liabilities.
2. Increase Total Profit: This can be achieved by increasing sales or reducing
costs to increase profits.
3. Increase asset utilization: This can be achieved by increasing the
receivables ratio, reducing inventory, and increasing sales.

In addition, enterprises can also apply a number of other measures such as

increasing labor productivity, increasing product quality, increasing production
scale or optimizing production processes to reduce costs. All of these measures can
help businesses increase ROA.

However, increasing AC, Total profit and CA to increase ROA needs to be

scrutinized and ensured that these measures do not reduce the asset quality,
profitability and solvency of the business.

- To increase ROE, there are some recommendations that businesses can implement
as follows:
1. Increase in GDP (Gross Domestic Product): This can be achieved by
increasing the output and value of domestically produced products and
services. This will increase the company's revenue and profits, leading to an
increase in ROE.
2. Increasing working capital (AC): This can be achieved by increasing cash,
reducing inventory, accelerating receivables collection, and reducing short-
term liabilities. This will help increase equity to total assets ratio and
increase ROE.

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 3. Increase Total Profit: This can be achieved by increasing sales or reducing
costs to increase profits. This will increase ROE through increasing net
profit.

However, increasing GDP, AC and Total profit simply to increase ROE may not be
the optimal solution, as increasing ROE must be done simultaneously with
increasing profit and increasing equity-to-equity ratio. total assets. Otherwise, an
increase in GDP, AC and Total profit may lead to an increase in assets and profits
but not an increase in return on equity, leading to a decrease in ROE.

References

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