The impact of revenue diversification on the performance of vietnamese commercial banks during the covid 19 pandemic

Dissertation submitted in partial fulfillment of the Requirement for the MSc in Finance FINANCE DISSERTATION ON THE IMPACT OF REVENUE DIVERSIFICATION ON THE PERFORMANCE OF VIETNAMESE COMMERCIAL BANKS DURING THE COVID-19 PANDEMIC NGUYEN DO PHUONG NAM ID No: 21071804 Intake Supervisor: Dr Le Hai Trung September 2022 Tai ngay!!! Ban co the xoa dong chu nay!!! 17014129038721000000 Executive Summary In Vietnam, credit is the main activity of commercial banks as the interest income accounts for an enormous proportion of total revenue However, exercising credits is riskier than other products and services Therefore, the fast pace of credit growth in the banking system will make it difficult to control the credit quality and cause uncertainties for the banking system Specially, in the context of the COVID-19 epidemic from the beginning of 2020 until now, the global economy in general and Vietnamese market in particular, has been severely affected In addition, transactions with direct customers of commercial banks have been disrupted due to social distancing policies In order to improve competitiveness and adapt to the epidemic, banks have been focusing on the development of e-banking services, digital banking, and non-credit services to meet the payment requirement of the society, reducing the dependence on traditional activities Therefore, surveying and understanding non-interest income sources and its impact on the performance of Vietnamese commercial banks in the COVID-19 pandemic is essential work, contributing to the sustainable development of the banking sector Using information from 27 listed commercial banks in Vietnam's financial statements and quarterly reports, this study was carried out to assess the effect of income diversification on the performance of commercial banks between the first quarter of 2020 and the second quarter of 2012 My findings were intended to i demonstrate how banks gain from diverse activity in various ways The effect of revenue diversification actually results in better levels of bank performance and sustainability during Covid-19 period An evaluation framework for these concerns in the Vietnamese banking sector is presented by the analysis ii Acknowledgement I would like to thank my supervisor, Dr Le Hai Trung, for his assistance with the laboratory analysis during this project work I want to express my deep gratitude to him for offering me moral support throughout the project and helpful comments on the thesis I wrote I am also thankful to the head of department and the peers from my work place for facilitating my participation in this course Finally, I would like to thank my family, UWE classmates and coordinators for their support throughout the year Nguyen Do Phuong Nam September 2022 iii Table of Contents Executive Summary i Acknowledgement iii List of figures v List of tables vi Introduction Chapter 1: Literature review 1.1 The relationship between diversification and the performance of bank 1.2 Bank performance during Covid-19 period and the influence of diversification 11 Chapter 2: The impacts the Covid-19 pandemic on Vietnamese Commercial banks 18 2.1 Covid-19 appearance and its global development 18 2.2 The impacts of Covid-19 pandemic on the economy 22 2.3 The impacts of Covid-19 pandemic on the banking activities 26 Chapter 3: Empirical results on the roles of diversification on bank performance during the Covid-19 pandemic in Vietnam 30 3.1 Data 30 3.2 Methodology 30 3.3 Descriptive statistics 32 3.4 Empirical result 33 3.5 Result discussion 34 Chapter 4: Conclusions and recommendations 37 Appendix 41 References 43 iv List of figures Figure 2.1 Statistical map of deaths due to Covid-19 Figure 2.2 Global Daily new confirmed Covid-19 cases per million people Figure 2.3 Vietnam Daily new confirmed Covid-19 cases per million people Figure 2.4 Global GDP growth by regions in 2020 Figure 2.5 Global GDP growth by regions in 2019, 2020, 2021 Figure 2.6 Vietnam quarterly GDP growth Figure 2.7 Growth rate of mobilized capital of Vietnam's banking system in the period Figure 2.8 Credit growth of the Vietnamese banking system between 2011 and 2020 v List of tables Table Descriptive statistics of model’s variables Table Results of GMM implication on the model in two cases of dependent variable vi Introduction The operations of Vietnamese commercial banks are highly extensive and varied in the current era of integration and globalization These financial institutions now offer a wider range of diversified financial services and products, including insurance, investment, asset management, securities trading, etc., in addition to the traditional capital raising and credit extension activities This is an urgent matter and the state management agencies have also realized its necessity, which is reflected in the Decisions No 254/QD-TTg and 1058/QD-TTg by the Prime Minister about the approval of restructuring credit institutions system in the period 2011 - 2015 and associated with bad debt settlement in the period 2016 - 2020 This fierce competition reduces the distance between income from traditional and non-traditional activities The total operating profit of commercial banks trading in Vietnam is increasingly influenced by income from financial services and profit from investment operations However, given the governing regulatory framework, investing in stocks, buying real estate, or trading foreign currencies are always potentially risky activities for Vietnamese commercial banks The framework regarding these exercises in Vietnam is still in an incomplete stage and the risk management capacity of the commercial banks themselves is still limited This paper examines the association between non-interest revenue and Vietnamese banks’ rate of return given the current situation of the Coronavirus pandemic An acute respiratory infection caused by a new strain of Coronavirus, lately named Covid-19, appeared in December 2019, and on January 31, 2020, the World Health Organization (WHO) declared a global emergency health status Up to now, the epidemic situation has been serious and with its variants, there are still uncertainties about the total impact, cures, and end time of the pandemic period Generally, Covid19 has affected on a global scale, disrupting the supply chains of many products and goods in the world, and stalling production and business; temporary decline in demand from China for goods and services, affecting global growth Vietnam has a relatively large economic openness and is geographically adjacent to China, so the epidemic will comprehensively affect all socio-economic fields of Vietnam such as people's psychology, trading, and production activities, thereby restricting Vietnam's economic growth and indirectly affecting the state budget situation Approximately years after the first case was found, many nations all over the world are gradually considering Covid-19 as a common illness, and the global economy is entering the recovery stage Therefore, a relevant question to inspect is whether diversification activities brought beneficial influence and became a promising deployment direction for banks to sustain the possibility of having another pandemic in the future In this paper, a sample of Vietnamese commercial banks is examined to decide whether banks that emphasize more on expanding non-interest activities have better financial results during this pandemic period Our result indicates the profitable influences brought by revenue from diversification sources from early 2020 to the end of 2021 as the worldwide economy was being affected by the spread of Covid-19 In several different ways, the current paper adds to the body of knowledge on banking research First, it presents new evidence on the impact of bank revenue and funding diversity on bank performance in Vietnam The context of advanced markets, where the financial system is very different from that of frontier markets, is where this topic is primarily discussed More specifically, this subject has not been studied in relation to Vietnam, especially after suffering from Covid-19 pandemic Second, the discovery that bank diversity is linked to higher profitability is crucial for the strategies used in banking operations For the formulation of prudential policies, this is also crucial In particular, this encourages authorities to revise regulatory policy frameworks governing bank liquidity risk This paper is organized as follows: Chapter provides several existing literatures on diversification, profitability and the effect of Covid-19 to the banking system In the next chapter, there will be an explanation of the data gathered for this research as well as the tested hypothesis Chapter contains an empirical report and the last section has a summary of the findings from this study and concluding remarks