The impact of income diversification on financial performance of commercial banks in vietnam

MINISTRY OF EDUCATION AND TRAINING HO CHI MINH UNIVERSITY OF BANKING GRADUATE THESIS THE IMPACT OF INCOME DIVERSIFICATION ON FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN VIETNAM MAJOR: FINANCE – BANKING CODE: 34 02 01 PHAN NGOC MAI ANH HO CHI MINH CITY, 2023 MINISTRY OF EDUCATION AND TRAINING HO CHI MINH UNIVERSITY OF BANKING GRADUATE THESIS THE IMPACT OF INCOME DIVERSIFICATION ON FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN VIETNAM MAJOR: FINANCE – BANKING CODE: 34 02 01 Student name: PHAN NGOC MAI ANH Student code: 030135190027 Class: HQ7-GE06 ADVISER DR NGUYEN MINH NHAT HO CHI MINH CITY, 2023 i ABSTRACT This study focuses on examining the relationship between income diversification and financial performance of Vietnamese commercial banks The data used for this study collected from the financial statements of 26 Vietnamese commercial banks during 2012 - 2022 The study applies several research models, such as Pooled OLS model, FEM model, REM model, and GMM models to conduct data analysis In addition to determining the impact of income diversification on the financial performance of Vietnamese commercial banks, the study also conducted additional research on the effect of a few other factors on financial performance such as bank size (SIZE), equity to total assets ratio (CAP), deposits to total assets ratio (DTA), loans to total assets ratio (LTA), provision for loans to customers to total assets ratio (LLP), economic growth rate (GDP) and inflation rate (INF) The research results show that macroeconomic variables (GDP, INF) and equity to total assets ratio (CAP) in bank – specific variables have no impact on the financial performance of Vietnamese commercial banks during 2012 – 2022 After analyzing data, the author concludes that income diversification contributes to increasing the financial performance of commercial banks In addition, the expansion of bank scale combined with an increase in lending activities has a positive effect on financial performance At the same time, banks should combine controlling the customer's deposit ratio and reducing provision for loans to customers ratio to maximize their financial performance Keywords: income diversification, commercial banks, Vietnam ii DECLARATION As the author of this thesis, I declare that the following are: Full name: Phan Ngoc Mai Anh Student class: HQ7 – GE06, Faculty of Finance of Banking, Ho Chi Minh University of Banking Student code: 030135190027 I declare that the thesis with the title “The impact of income diversification on financial performance of commercial banks in Vietnam” is the author's own research work, the research results are truthful, and there is no content that has been previously published or content made by others except for fully cited citations in the thesis The author undertakes to take full responsibility for this statement Sincerely Ho Chi Minh City, September, 2023 Author Phan Ngoc Mai Anh iii ACKNOWLEDGEMENTS During the process of writing and completing my graduation thesis, I would like to sincerely express my deep gratitude to Dr Nguyen Minh Nhat wholeheartedly guided and helped In addition, I would like to sincerely thank the teachers of Ho Chi Minh University of Banking dedicatedly taught and guided throughout the study and research process But due to limited knowledge, the thesis cannot avoid shortcomings, so I hope to receive more comments and help from teachers so that I can further improve the thesis iv TABLE OF CONTENTS ABSTRACT i DECLARATION ii ACNOWLEDGEMENTS iii TABLE OF CONTENTS iv LIST OF ABBREVIATIONS viii LIST OF TABLES ix LIST OF GRAFICS x CHAPTER INTRODUCTION 1.1 Reasons for choosing the study 1.2 Research objectives 1.2.1 General Objectives 1.2.2 Specific Objectives 1.3 Research questions 1.4 The research subject and scope of study 1.4.1 Subject of the study 1.4.2 Scope of the research 1.5 Research methodology 1.6 Contributions of the research 1.7 Disposition of the dissertation CONCLUSION CHAPTER v CHAPTER THEORETICAL FRAMEWORK AND REVIEW OF PREVIOUS EXPERIMENTAL STUDIES 2.1 Review of income diversification 2.1.1 Income diversification 2.1.2 The benefits of income diversification on financial performance of commercial banks 2.1.3 Income diversification metrics 2.2 Review of financial performance 11 2.2.1 Financial performance 11 2.2.2 Financial performance metrics 12 2.3 Factors affecting the financial performance of commercial banks 14 2.3.1 The internal (bank-specific) factors 15 2.3.2 Macroeconomic factors 18 2.4 An overview of previous studies 18 2.4.1 Review of foreign researches 18 2.4.2 Review of domestic researches 20 CONCLUSION CHAPTER 30 CHAPTER RESEARCH MOTHODOLOGY 31 3.1 Implementation process 31 3.2 Research model 32 3.3 Research variables metrics 33 3.4 Research hypotheses 36 vi 3.5 The research data 42 3.6 The research methodology 42 CONCLUSION CHAPTER 45 CHAPTER EMPIRICAL RESULTS ANALYSIS 46 4.1 Descriptive statistical analysis 46 4.2 Correlation matrix analysis 49 4.3 Multicollinearity testing 50 4.4 The analysis of regression results 51 4.5 Selection of estimation method 52 4.6 Heteroscedasticity and autocorrelation testing 54 4.6.1 Heteroscedasticity testing 54 4.6.2 Autocorrelation testing 55 4.7 The results of overcoming the research model by FGLS method 55 4.8 Endogenous variables testing 56 4.9 GMM Regression Model Method 57 4.10 Summarizing and discussing research results 59 CONCLUSION CHAPTER 64 CHAPTER CONCLUSIONS AND RECOMMENDATIONS 65 5.1 Conclusions 65 5.2 Suggestions and recommendations 66 5.2.1 Increasing income diversification to improve financial performance 66 5.2.2 Expanding bank scale 68 vii 5.2.3 Continuing to maintain loan activities and improving credit quality 69 5.2.4 Controlling customer deposit ratio 70 5.2.5 Controlling the credit risk provision ratio of commercial banks 70 5.3 Limitations of the graduate thesis and direction for future research 71 5.3.1 Limitations of the graduate thesis 71 5.3.2 Direction for future research 72 CONCLUSION CHAPTER 73 CONCLUSION 74 REFERENCES .i APPENDIX v viii LIST OF ABBREVIATIONS Number Acronym Meaning CAP Equity to total assets ratio DTA Deposit to total assets ratio DIV Income diversification INF Inflation rate FEM Fixed Effects Model FGLS Feasible Generalized Least Squares GDP Economic growth rate GMM Generalized method of moments LLP Provision for loans to customers to total assets ratio 10 LTA Loan to total assets ratio 11 NIM Net Interest Margin 12 OLS Ordinary Least Square 13 SGMM 14 SIZE Bank size 15 REM Random Effects Model 16 ROA Return on assets 17 ROE Return on equity 18 VIF Variance Inflation Factors System generalized method of moments