Assessing the soundness of commercial banks in Vietnam using the CAMELS model

Abstract

The study assesses the soundness of Vietnamese commercial banks from 2018 to 2023 using the CAMELS model, incorporating component weights through the entropy method. Unlike the conventional ratio method, this study uses Data Envelopment Analysis (DEA) to assess the management efficiency of banks. The findings show that only one state-owned commercial bank is listed among the ten best-performing banks. A common feature among the top-ranked banks is their strong digital transformation efforts. Furthermore, the study identifies the three worst-performing banks, providing the State Bank of Vietnam with important information to monitor and implement appropriate measures to improve the efficiency of the commercial banking system. Assessing the health of banks is an important task that the State Bank of Vietnam is currently carrying out annually for credit institutions in Vietnam, as stipulated in Circular 52/2018/TT-NHNN. This study has scientific and practical significance, providing managers with insights and methodologies to determine the appropriate weights of CAMELS components. These weights are adjusted according to risk management and financial health assessment of the banking system, in line with specific risk management objectives for each period. By providing a comprehensive analysis, This study has both scientific and practical implications, providing managers with insights and methodological ways for determining the proper weights of CAMELS components.this study not only contributes to the academic field but also provides practical implications for policy makers and bank managers. The study helps them understand the dynamics of bank performance and the impact of digital transformation on bank efficiency. In addition, the study also helps investors invest in suitable stocks and customers choose to use products and services of healthy banks. Identifying underperforming banks allows for targeted intervention, ensuring the stability and robustness of the banking sector. This approach is consistent with the broader objective of enhancing financial stability and promoting a resilient banking environment in Vietnam.