Literature review
The relationship between diversification and the performance of bank
Diversification is a crucial strategy for financial institutions, particularly in the banking sector, as it can enhance performance and reduce risk Hull (2018) highlights that forming diverse portfolios minimizes the volatility associated with individual assets Levine et al (2016) further assert that implementing diversification leads to risk reduction and improved profitability By adjusting the geographic and lending mix of their loan portfolios, banks can stabilize revenue streams Additionally, expanding beyond traditional lending into non-interest generating activities, such as service charges and trading revenues, can further enhance diversification Moreover, according to Drucker & Puri (2009), the concept of Economies of Scale suggests that growth and innovation in financial products, along with domestic and international expansion, can lower fixed costs and optimize resource utilization across various services and regions.
The Resource-based view, established in 1984, lays the groundwork for understanding how firms' unique capabilities contribute to their strategic advantage This theory integrates traditional strategic concepts with the recognition of the diverse capabilities that differentiate firms from one another By applying the Resource-based view, businesses can better leverage their distinct strengths to enhance competitive positioning.
5 their operations, they will bring benefit through diversification in resources, which enable an entity to create economies of scale when using them efficiently
Implementing diversification in banks can lead to increased non-interest income and improved overall revenue, despite the additional costs involved However, some literature suggests that this strategy may pose risks, including a potential reduction in the bank's market value due to heightened agency issues Empirical evidence presents varying perspectives on whether commercial banks should pursue diversification across products, services, geographic locations, and funding sources.
Diversification enhances the operational efficiency and stability of commercial banks through economies of scope, as highlighted by Allen and Santomero (2001) Banks are increasingly generating income from various services such as brokerage, business consulting, co-financing, portfolio management, money transfers, guarantees, issuance, and asset management, in addition to traditional interest income By leveraging their extensive customer databases from traditional banking methods, banks can effectively cross-sell products This approach proves to be more cost-effective, allowing banks to market and distribute multiple related products simultaneously rather than individually.
In 2007, it was noted that increasing non-interest income in banks' revenue streams could potentially reduce capital requirements by minimizing price fluctuations (Shim, 2013) Furthermore, Perold (2001) emphasized that diversification within core business areas can alleviate the financial burden associated with risky capital expenses.
The expansion of non-traditional activities allows commercial banks to compete in broader market segments, leading to increased income from diverse sources Income diversification has become a key strategy for commercial banks and financial institutions, shifting the income proportion from interest to non-interest income in the US, Canada, and Europe over the past three decades Research by Kim et al (2020) indicates a significant nonlinear relationship between bank diversification and financial stability among OECD member countries, revealing that while moderate diversification enhances stability, excessive diversification can be detrimental.
Contrary to some perspectives, research indicates that diversifying processes may incur certain costs Goetz (2013) analyzed the quarterly financial reports of 964 bank holding companies in the United States, spanning from 1986 to the present, to explore these financial implications.
In 2007, it was argued that increased diversification in product mix and geographical locations leads to lower valuation results, which are associated with heightened insider lending and a decline in loan quality Furthermore, insights from Berger and Ofek support this perspective.
In their 1995 study, Berger and Ofek utilized the Compustat Industry Segment database to apply an industry multiplier approach, concluding that diversification can lead to agency issues due to improper cross-subsidization This phenomenon occurs when underperforming segments consume resources from more successful ones Additionally, Cebenoyan and Strahan (2004) highlight that commercial banks with extensive business diversification frequently face challenges related to these dynamics.
Financial institutions often operate with high leverage ratios, which increases their risk exposure and negatively impacts profitability during uncertain business conditions Research on US commercial banks indicates that these institutions offer a wider range of financial products and services beyond traditional credit and capital mobilization, resulting in volatile returns and a diverse array of risks, including but not limited to credit risk (DeYoung and Rice, 2004).
Empirical evidence on the impact of diversification in the banking sector presents mixed outcomes Lee et al (2014) utilized a dynamic panel GMM model to analyze data from 29 Asia-Pacific countries, encompassing 2,372 banks from 1995 to 2009, and found that diversification strategies can enhance bank performance Similarly, Stiroh and Rumble (2005) examined revenue sources and risk-adjusted results of US banks and financial holding companies, revealing a positive correlation between bank performance and diversification; however, they noted that non-interest activities are not necessarily more profitable than traditional credit activities Additionally, Hughes (1996) indicated that geographic expansion can lead to increased profits and efficiency in the banking industry, based on a study of 433 bank holding companies in 1994, which showed a positive relationship between the number of branches and expected returns Furthermore, Hamdi et al (2017) conducted a panel data analysis of 20 Tunisian banks from 2005 to 2015, highlighting the importance of diversification as a strategic approach.
Diversifying activities and adjusting balance sheet denominations are essential for Tunisian banks to enhance performance and reduce uncertainty, as non-interest income negatively correlates with return on equity volatility (Hamdi, 2017) A study by Ammar and Boughrara (2019) involving 275 banks from 14 Middle Eastern countries confirms a positive correlation between diversification and bank profitability, highlighting trading-generating businesses as the most effective non-interest activities for profit enhancement while maintaining stability Additionally, Shim (2019) found that increased loan diversification positively impacts financial management in U.S commercial banks, indicating that diversified banks in highly concentrated markets exhibit greater financial stability compared to those in less concentrated environments.
In contrast, research by Lepetit et al (2008) to explore the relationship between risk and product diversification of European commercial banks in the period 1996 to
A 2002 study challenges the notion that diversification benefits financial institutions, revealing that commercial banks with higher credit risk are more likely to expand their offerings beyond traditional credit activities (Lepetit, 2008) This research highlights a correlation between increased product and service deployment and elevated credit risk levels in banks.
Research indicates a negative correlation between the non-interest income share and profitability for small banks, suggesting that expanding into non-interest activities may not yield benefits and could increase default risks (Lepetit, 2008; Delpachitra & Lester, 2013) Studies show that diversification in bank income does not enhance profitability or mitigate risks, highlighting the need for banks to concentrate on their core business (Delpachitra & Lester, 2013) Additionally, non-interest income has been found to be more unstable than interest income, raising concerns about risk exposure (Smith et al., 2003) Similar findings in the analysis of Islamic and conventional banks in the Middle East indicate that sectoral loan diversification diminishes returns and heightens risks (Seho, 2021) Overall, banks should be closely monitored to assess whether non-interest income activities are detrimental to their financial health.
32 Ghanaian banks from 2000 to 2015 According to their findings, asset
10 diversification had a negligible impact on all three of these indicators while increasing income diversity had an unfavorable effect on all three
A study by Vo (2018) on 37 banks in Vietnam revealed that institutions with diverse funding sources achieve higher profitability, although this is linked to engaging in riskier activities that necessitate careful management Pham (2020) analyzed 44 commercial banks from 2002 to 2019, finding that banks with diversified asset portfolios outperform their peers and experience lower risk, but face negative returns during the Global Financial Crisis State-owned banks recorded the lowest profitability ratios, while international banks achieved the highest returns Additionally, banks with larger market shares and total assets tend to have greater diversification compared to smaller banks Supporting this, Luu (2020) demonstrated the positive impact of income diversification on bank earnings from 2007 to 2017, attributing significant gains to economies of scope, which reduce redundant activities and leverage existing customer information to facilitate new service offerings.
Bank performance during Covid-19 period and the influence of
A comprehensive analysis of the impact of Covid-19 on bank performance has been conducted, utilizing a panel data regression model developed by Elnahass (2021), which examined quarterly data from nearly 1,100 banks across 116 countries between 2019 and 2020 The study assessed both accounting and market factors, categorizing banks geographically into five regions Findings reveal that the Covid-19 pandemic has negatively influenced banks' performance and financial stability, leading to increased default, liquidity, and asset risks, regardless of the banks' locations, sizes, risk profiles, or the income status of their respective countries.
A research by Rizwan (2020) also indicates the adverse influences of Covid-19 in
The banking sector faces significant systemic risk, primarily due to three factors: restricted access to capital markets, reduced intermediation income from regulatory changes, and potential credit rating downgrades A study utilizing data from the 30 largest banks in eight countries severely impacted by COVID-19 highlights the adverse effects of the pandemic on banks compared to corporations and non-bank financial institutions Larger and public banks experienced steeper declines in stock returns, indicating their heightened role in crisis resolution, while banks with lower pre-crisis liquidity faced even greater losses The research underscores the importance of effective policy responses, particularly liquidity support and borrower assistance, in enhancing bank performance during the pandemic Additionally, a study on Saudi Arabia reveals that the initial interest rate cuts, including repo and reverse repo rates, played a crucial role in the financial landscape during this challenging period.
The influence of the 13 federal reserves has significantly affected the Saudi banking index, leading to reduced interest rates that compress net interest margins, slow credit expansion, and increase subprime loans and provisions Consequently, the profitability of banks and the banking index are expected to decline due to these factors In India, the banking industry has faced challenges in maintaining deposit values as depositors increasingly prefer more secure, state-owned institutions, as highlighted by Singh and Bodla (2020) Additionally, smaller private banks are grappling with liquidity issues, as reduced lending may cause defaults among companies reliant on these loans In Vietnam, Trinh (2021) analyzed the impact of COVID-19 on 27 commercial banks listed on the stock exchange, revealing a decrease in bank performance during the pandemic attributed to a decline in credit size and a lower beta coefficient of credit efficiency compared to the average for the entire operating period.
Numerous studies suggest that diversification is a crucial strategy for recovery in the banking sector Kozak and Wierzbowska (2022) investigate the influence of non-interest income on bank profitability across 40 European countries amid the COVID-19 pandemic Their research, utilizing a linear cross-section model, indicates that the profitability of these banks significantly improved during this challenging period.
The COVID-19 pandemic has led to an increase in the proportion of non-interest income in total income for US banks, highlighting a growing dependence on this revenue stream as the negative impacts of the pandemic continue Research by Li et al (2021) examines key performance indicators such as return on assets and return on equity, alongside various factors related to non-interest income The findings suggest that diversifying income sources positively correlates with bank efficiency during the pandemic Furthermore, the study underscores the significance of recent financial innovations and technological advancements that enhance bank performance by boosting non-interest earnings.
A study conducted in 2022 examined the Islamic banking system's performance during the Covid-19 pandemic, utilizing data from Q4 2013 to Q4 2020 It highlighted the benefits of income diversification through the use of Sukuk to mitigate the pandemic's negative impact on bank profitability Research by Simoens and Vennet (2022) revealed that European banks with high functional diversification experienced a 10% smaller decline in market value during the early months of the pandemic, while geographic diversification had no significant effect on stock performance The analysis indicated a slight positive impact from lending counterparty diversification, leading investors to view functional diversification as crucial for maintaining future profitability In a prolonged low-interest-rate environment, banks that can access non-interest income sources are better positioned to thrive.
A recent study reveals that banks exhibiting lower pre-Covid systematic risk (beta) and higher liquidity coverage ratios (LCR) experienced greater stock returns This finding aligns with the research conducted by Danisman et al (2021a), which analyzed 1927 publicly listed banks.
A study analyzing 110 countries during the initial wave of Covid-19 reveals that banks with greater diversification experienced less impact on their stock value Key factors contributing to bank resilience during the pandemic include higher capitalization, increased deposits, lower non-performing loans, and larger overall size Additionally, research by Maghyereh (2022) on 42 banks from Gulf Cooperation Council (GCC) countries from January 2008 to December 2020 demonstrates that income diversification significantly reduces systemic risk, benefiting banks both before and after the first Covid-19 wave.
While extensive research has focused on the effects of Covid-19 in developed nations like the USA, China, and European countries, emerging economies such as Vietnam have received less attention, primarily relying on local authors for analysis Nguyen (2022) conducts an efficiency analysis of 26 Vietnamese commercial banks, revealing that their average operating efficiency improved during the pandemic Unlike the typical decline seen in banks globally during crises, Vietnamese commercial banks either maintained or slightly increased their performance, with diversification identified as a key factor contributing to this resilience.
Despite a significant decrease in revenue from credit activities, Vietnamese commercial banks have managed to enhance their operational efficiency through increased non-interest income driven by technological advancements and service diversification (Nguyen, 2022) Research conducted by Tran (2022) on 27 Vietnamese commercial banks from 2014 to 2021 confirms that the transition from traditional credit operations to alternative income sources, such as services and proprietary trading, plays a crucial role in ensuring sustainable profits While previous studies have primarily addressed the overall impact of the Covid-19 pandemic on market indices and the policies implemented, they have not specifically examined how diversification influences the performance of these banks.
This research enhances the existing literature by critically analyzing the impact of diversification on the profitability of the banking sector in an emerging economy While previous studies have explored the relationship between diversification and performance in developed nations, there is a notable gap in research focusing on emerging markets Vietnam is selected as the empirical context for this investigation due to its unique economic characteristics, highlighting the need for a single-country study to effectively address the substantial economic variations that cross-country analyses may overlook.
Vietnam is rapidly emerging as one of the fastest-developing nations, driven by significant political and economic reforms that have transitioned its economy from a centralized model to a market-driven one Despite this shift, Vietnam maintains its unique identity among transitional economies by upholding its socialist system, with the Communist Party governing key sectors, including banking and finance Recent research has explored whether a diversification strategy can mitigate the negative impacts of COVID-19 on the profitability of Vietnamese banks, highlighting a gap in prior studies regarding the influence of revenue diversity on bank performance during the pandemic.
19 Because of these factors, Vietnam offers a fascinating and rather distinctive setting for us to study the relationship between diversity and bank performance Because of the financial innovation that has taken place in the banking industry over the past two to three decades, our results may not be consistent with those of earlier studies Fintech, which comprises online and digital technology utilized in the financial services sector, is changing many aspects of banking (Frame et al, 2019) Fintech may improve the efficiency of traditional banking processes while also enabling banks to reach new markets and customer groups, opening up new opportunities for fee-based revenue As a result, this paper is expected to contribute to policy makers as suggestions of solutions to the banking industry in upcoming pandemic-affected period
The impacts the Covid-19 pandemic on Vietnamese Commercial banks 18 2.1 Covid-19 appearance and its global development
The impacts of Covid-19 pandemic on the economy
2.1.1 The impacts of Covid-19 on the global economy
The period from January 2020 to the end of 2021 marked the outbreak stage of Covid-19, occurring amid a strong globalization process that facilitated rapid and uncontrollable spread The pandemic's economic consequences were severe, with the World Bank estimating a global GDP of approximately US$84.54 trillion in 2020, reflecting a 4.5% decline in economic growth and a loss of nearly $2.96 trillion in output In 2021, while the growth of the world economy showed signs of slowing, it remained at a low level.
The COVID-19 pandemic prompted governments worldwide to implement extended social distancing measures to curb virus transmission within communities This situation highlighted the highly centralized nature of global production structures, which rely heavily on a few key players.
The Covid-19 pandemic significantly disrupted global production networks and supply chains, particularly affecting key centers such as China, Japan, Korea, and the US Manufacturing industries in less affected countries faced challenges in sourcing necessary inputs from more impacted regions, leading to increased import costs and a stagnation in global supply and demand Consequently, world trade volume experienced a notable decline starting in early 2020, with the International Monetary Fund (IMF) reporting a negative GDP growth rate of 3.5 percent for the global economy, reflecting the widespread economic struggles faced by major economies.
Figure 2.4 Global GDP growth by regions in 2020 (Source: IMF)
The pandemic significantly impacted developing countries, with emerging nations in Asia experiencing the largest GDP decrease of approximately 8% Latin America and the Caribbean, along with sub-Saharan Africa, followed with declines of around 7% and 6%, respectively Countries in the Middle East and Central Asia, as well as those in Emerging and Developing Europe, saw similar declines between 4% and 5% Notably, four sectors exceeded the global average decline In 2020, the two largest economies, China and the US, recorded a GDP fall of about 1%.
Figure 2.5 Global GDP growth by regions in 2019, 2020, 2021 (Source: OCED)
If in the early stages of the COVID-19 pandemic emerged the situation of limited supply, reduced demand and delaying investment, then from the beginning of
2022, thanks to the widespread coverage of the Covid-19 vaccine, the world is considered to survive the darkest period of the Covid-19 pandemic At this threshold,
The market is experiencing a positive shift in the supply-demand relationship, with a notable increase in demand for goods and efforts to address supply disruptions in production and distribution According to Figure 2.5, the annual GDP growth rate for the analyzed countries averages around 5 percent, with the UK, China, and India achieving approximately 8 percent, while Turkey leads with an impressive GDP growth rate exceeding 10 percent.
2.1.2 The impacts of Covid-19 on the Vietnamese economy
Vietnam's economy is experiencing significant challenges amidst a global recession, largely due to its high level of openness and integration into international markets This downturn has severely impacted various socio-economic sectors, leading to disruptions in supply chains and trade flows, as well as stagnation in production, business, and service activities (National Institute for Finance, 2022).
Figure 2.6 Vietnam quarterly GDP growth (Source: General Statistics Office of
Vietnam demonstrated remarkable resilience during the Covid-19 pandemic, achieving a positive GDP growth of 2.1% in 2020, primarily due to its sustainable agriculture sector and strong public support for government measures (Doan, 2022) However, prolonged social distancing policies hindered international trade, leading to a significant economic downturn, with the third quarter of 2021 marking the first negative GDP growth since 2000 at -6.2% As an emerging economy with a favorable population structure, Vietnam has the potential for rapid recovery if strategic decisions are implemented The country boasts strengths in various sectors, including agriculture, tourism, services, and telecommunications, suggesting a high likelihood of regaining economic momentum post-lockdown Following policy adjustments by authorities, Vietnam has successfully returned to positive GDP growth in the fourth quarter of 2021 and the first quarter of 2022.
In 2022, the GDP growth rate was around 5 percent, with the General Statistics Office (GSO) reporting a significant increase of 7.72 percent in the second quarter, marking the highest growth for this period from 2011 to 2021.
The impacts of Covid-19 pandemic on the banking activities
Basel III introduced enhanced capital and liquidity requirements for banks in response to the 2008 global financial crisis, significantly bolstering the safety of the global banking system (Baldwin and Weder di Mauro, 2020).
COVID-19 has, nonetheless, affected banks more severely than most other industries Due to the fact that banks are extremely vulnerable during crisis periods (Goodell,
The COVID-19 pandemic is expected to have a more significant negative impact on banks than previous crises, as highlighted by Aldasoro et al (2020) Banks worldwide rely heavily on US dollar-denominated borrowings to support international trade and financial investments, making them vulnerable during financial crises when money markets become constrained This situation disproportionately affects banks in emerging economies due to reduced funding flows In response, central banks are expanding existing swap lines and establishing new ones to lower dollar funding costs (Bahaj and Reis, 2020) To mitigate the pandemic's adverse effects on financial stability, regulatory measures such as easing capital buffers and adjusting non-performing loan treatments have been implemented (Bitar and Tarazi, 2020) Research by Danisman et al (2021b) indicates that equity markets in countries with stricter capital and liquidity regulations are more resilient to COVID-19, thanks to Basel III reforms that better equip banks to handle the crisis However, relaxing capital buffers and allowing non-performing loans to increase during the pandemic could jeopardize banks' solvency, especially with the risk of significant deposit withdrawals from businesses and households (Goodell, 2020; Perotti).
2020) would both negatively influence banks' performance
According to the State Bank of Vietnam (SBV), the total mobilized capital of the whole system as of December 21, 2020 increased by 12.87% (the same period in
In 2020, the banking system demonstrated strong liquidity, effectively addressing customer credit demands, with total means of payment rising by 12.56% compared to the end of 2019, reflecting a notable increase from the previous year's growth of 12.1%.
In 2020, the epidemic significantly reduced credit demand, prompting many commercial banks to purchase State Bank of Vietnam (SBV) bills at minimal interest rates By the end of the second quarter of 2020, interbank interest rates fell to nearly 0%, compelling banks to lower deposit interest rates This situation resulted in a decline in mobilized capital, although it remained higher compared to the same period in previous years.
Figure 2.7 Growth rate of mobilized capital of Vietnam's banking system in the period 2011 - 2020 (Source: General Statistics Office of Vietnam)
Credit growth of the Vietnamese banking system in 2020 increased by about 10.14% compared to 2019 (GSO, 2020), but this is still the lowest growth rate in the past 7 years (from 2013 to 2020)
Figure 2.8 Credit growth of the Vietnamese banking system between 2011 and 2020
(%) (Source: General Statistics Office of Vietnam)
In 2020, the State Bank of Vietnam (SBV) implemented three adjustments to operating interest rates, resulting in a total reduction of 1.5-2% per year Alongside these measures, the SBV and the government provided support to businesses and individuals by allowing delayed tax payment deadlines and mandating commercial banks to lower interest rates for pandemic-affected enterprises These initiatives contributed to a slight increase in bank credit growth compared to the previous year.
Empirical results on the roles of diversification on bank performance
Data
This study investigates the impact of diversification on the performance of commercial banks in Vietnam during the Covid-19 pandemic The author analyzed quarterly data from 27 commercial banks, spanning from the first quarter of 2020 to the second quarter of 2022 Financial indicators were sourced from the banks' published financial statements, resulting in approximately 243 credible observations.
The names of the commercial banks included in the data sample can be found in Appendix 1 The data was transferred to an Excel platform, where errors were filtered out, and subsequently analyzed using Eview software to evaluate and process the information through an econometric model.
Methodology
The following equations are estimated in this study to examine the relationship between net noninterest income (NNII) and bank profitability:
𝐵𝑃 𝑖,𝑡 = 𝛽 0 + 𝐵𝑃 𝑖,𝑡−1 + 𝛽 2 𝑁𝑁𝐼𝐼 𝑖,𝑡 + 𝛽 3 𝐶𝑜𝑛𝑡𝑟𝑜𝑙 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝑠 𝑖,𝑡 + 𝜀 𝑖,𝑡 where: πi,t= bank profitability, measured by return on assets (ROA) or return on equity (ROE),
NNII = ratio of net noninterest income to net operating income, and
The control variables used in this investigation include:
LnTA = the natural logarithm of total assets, ΔTA (DeltaTA) = the growth rate of total assets,
Loans = the ratio of loans to total assets,
Deposits = the ratio of deposits to total assets,
Equity = the ratio of equity to total assets, and
LLP = the ratio of loan loss provisions to total assets
In which i represents the number of banks in the research sample, i = 1 … 13; t represents the time (t = Q1.2020 to Q2.2022)
The paper estimate the above model to investigate the effect of noninterest on bank profitability Based on previous researches by Lee et.al (2014), Li et.al (2021),
Research by Le et al (2022) indicates that a bank's performance is significantly influenced by the diversification effect These findings challenge the hypothesis that diversification does not impact revenue Consequently, this study formulates the null hypothesis as follows:
H0: noninterest income does not affect bank profitability, measured by return on assets (ROA) and return on equity (ROE), during the COVID-19 pandemic period
To test the research hypothesis, the paper used a panel data model with the lag variable of the dependent variable In this study, I use the dynamic panel data models'
The Generalized Method of Moments (GMM) estimator, introduced by Arellano and Bover (1995) and later expanded by Blundell and Bond (1998), addresses the issue of endogeneity, where certain variables depend on others, particularly in the context of bank indexes According to Wooldridge (2009), this endogeneity can complicate analyses GMM effectively utilizes lagged first-differences as instruments to capture endogenous variables in levels, as noted by Blundell and Bond (1998) Additionally, Arellano and Bover (1995) established a test for autocorrelation with a null hypothesis of no autocorrelation, indicating that GMM is a robust method for correcting both autocorrelation errors and endogeneity issues.
Descriptive statistics
Table 1 Descriptive statistics of model’s variables
The descriptive statistics for each variable used in this study are shown in Table
1 The purpose of this paper is to evaluate the impact of revenue diversification on the performance of the Vietnamese banking industry during Covid-19 period based on the data of 27 commercial banks The average value of performance indicators, which are
The return on assets (ROA) and return on equity (ROE) for the analyzed Vietnamese banks stand at 0.42% and 4.8%, respectively, with standard deviations of 0.3% for ROA and 2.8% for ROE indicating their fluctuations The average non-interest income constitutes 8.6% of operating income, highlighting a strong reliance on traditional banking activities Additionally, loans and deposits account for over half of the total assets in the sample banks The average quarterly growth rate for these banks is 4%, and they set aside approximately 0.9% of total assets to ensure adequate funds for servicing depositors.
Empirical result
Table 2 Results of GMM implication on the model in two cases of dependent variable
Table 2 illustrates the research findings, where the author utilized GMM to analyze the impact of the NNII variable on ROA and ROE, maintaining a consistent set of explanatory variables The results indicate a probability of less than 0.05 for the NNII variable, leading to the rejection of the null hypothesis Consequently, it can be concluded that, at a 5 percent significance level, the net ratio of net non-interest income to net operating income positively influences both return on assets and equity during the Covid-19 period in Vietnam.
Result discussion
This study highlights the positive impact of diversification on the profitability of the banking system during the Covid-19 pandemic Consistent with previous research, such as Vo (2018), Pham (2020), and Luu (2020), banks with higher levels of diversification have shown superior performance in the Vietnamese market These benefits have become even more pronounced during the recent pandemic Additionally, this paper aligns with findings from Nguyen (2022) and Tran (2022) on the Vietnamese market, as well as global studies by Li et al (2021) and Le et al., reinforcing the significance of diversification in enhancing bank resilience.
In 2022, Simoens and Vennet examined banks across the US, Islamic nations, and Europe, highlighting diversification as an effective strategy for sustaining profitability amid the pandemic's negative impact on traditional banking activities The global banking system has increasingly leveraged this approach to navigate challenging economic conditions.
To diversify banking revenue, institutions are increasingly focusing on non-interest income sources, such as fees from banking applications and services like investment management, bill payments, and travel bookings While interest income remains the primary revenue stream for banks, there is a growing expectation that non-interest income will expand and take on greater importance This shift, however, contrasts with findings from earlier studies, including research by Lepetit et al (2008).
Delpachitra and Lester (2013) and Seho (2021) highlight the negative impact of diversification on bank performance, emphasizing the risks involved in this process Developing countries often lack the experience of their developed counterparts in leveraging technological advancements, which can lead to inappropriate implementations and uncertainties Consequently, diversification should be approached with careful study and gradual adoption to mitigate potential risks.
The analysis of control variables reveals that top-performing banks maintained their success during the pandemic, as indicated by the positive and statistically significant lagged return on assets (ROA) and return on equity (ROE) While the growth rate of total assets does not significantly impact bank performance, bank size shows a positive correlation Additionally, the loan-to-total-assets ratio positively influences ROE but is insignificant for ROA Loan loss provisions negatively affect ROE, suggesting that banks capable of extending more credit with low loan loss provisions tend to achieve better profitability Conversely, increasing the equity-to-total-assets ratio improves ROA but does not influence ROE Furthermore, the deposit-to-total-assets ratio significantly impacts both ROA and ROE.
Increasing Return on Assets (ROA) and Return on Equity (ROE) is believed to negatively impact profitability The author anticipated this trend, as the pandemic has led to a suspension of economic activities, limiting businesses' ability to secure loans Consequently, as deposit levels rise, banks face higher obligations to pay interest, which, coupled with a constrained primary income source, results in a decline in profits.
Conclusions and recommendations
The COVID-19 pandemic has created an unprecedented global shock, significantly impacting the economy through the disease and associated mitigation measures like social isolation and lockdowns In response, banks were expected to play a crucial role by providing essential credit to businesses and consumers to help absorb the economic shock To achieve this, banks needed to operate sustainably and maintain acceptable performance levels However, traditional banking activities faced challenges, leading to tighter credit standards and decreased demand across various sectors Consequently, the potential impact of non-interest income emerged as a vital factor in enhancing the resilience of financial institutions during the pandemic.
This study leverages the economic crisis induced by the COVID-19 pandemic to explore the connection between profits and the utilization of non-interest income sources within the Vietnamese banking sector Analyzing data from 27 listed banks in Vietnam from Q1 2020 to Q2 2022, the research investigates the relationship between profitability and income diversification Utilizing an econometric model based on previous studies, the generalized method of moments (GMM) procedure was applied to achieve optimal results while addressing endogeneity concerns Findings indicate a positive correlation between non-interest returns and the performance of Vietnamese banks during the rapid spread of COVID-19 and its economic repercussions.
This research aims to provide valuable insights and effective recommendations for the Vietnamese banking sector, highlighting the importance of diversifying income sources as a key strategy for profitability With advancements in technology, banks are increasingly developing new products and services, leading to a gradual rise in non-interest income, which significantly enhances overall bank performance Additionally, diversification serves as a crucial alternative revenue stream during economic downturns, as interest-related activities may suffer To mitigate this, banks are encouraged to generate income through fees from digital applications, account management, and other services In recognition of these opportunities, numerous digital transformation initiatives were launched by Vietnamese banks in 2022, including a significant event hosted by the State Bank of Vietnam on August 4, 2022, focused on the digital transformation of the banking industry in Hanoi.
Techcombank has introduced two innovative digitization solutions: iDO, a digital platform designed for branches, and PayLink, a Payment Hub that connects to interbank payment networks Additionally, the Techcombank mobile application now offers a suite of personal financial planning solutions Meanwhile, BIDV has become the first bank to successfully implement chip-mounted citizen identification for banking transactions, utilizing a biometric authentication solution integrated with this identification, as provided by the Ministry of Public Security.
The effectiveness of diversification in Vietnamese banks largely hinges on their characteristics, with larger banks benefiting from superior resources, including financial capacity, technology, and government support, leading to higher profits To remain competitive, intermediate and smaller banks should focus on research and development and enhance their IT capabilities to optimize products and strategies Banks are categorized based on their asset-based or equity-based return approaches, with those possessing higher equity expected to achieve better profitability Sufficient capital allows banks to diversify activities and seize business opportunities, enhancing financial efficiency To boost equity, commercial banks can increase charter capital by issuing additional shares to existing shareholders or foreign investors, necessitating transparency in financial disclosures to attract capital through the stock market Additionally, raising capital can be achieved through stock dividends or bonus shares, fostering shareholder engagement and accountability Regarding return on equity, banks must balance credit provision with prudent management of loan loss provisions, ensuring compliance with crediting regulations such as the minimum capital adequacy ratio and credit limits per customer.
To improve the examination process, managers should enhance periodic inspections and supervision by involving third-party investigations from the risk control department In scenarios related to Return on Assets (ROA) and Return on Equity (ROE), banks are encouraged to seek funding sources beyond traditional deposits, although deposits remain a crucial aspect of banking, often representing the largest share of a bank's equity Therefore, this concept necessitates further exploration to achieve optimal results.
Appendix 1 List of commercial banks in the research sample
No Name of Bank Abbreviation
2 Bank for Investment and Development of Vietnam BID
3 Vietnam Joint Stock Commercial Bank for Industry and Trade
4 Vietnam Export Import Commercial Joint Stock Bank EIB
5 Military Commercial Joint Stock Bank MBB
6 National Citizen Commercial Joint Stock Bank NVB
7 Saigon-Hanoi Commercial Joint Stock Bank SHB
8 SaigonThuongtin Commercial Joint Stock Bank STB
9 Vietnam Technological and Commercial Joint Stock
10 TienPhong Commercial Joint Stock Bank TPB
11 Bank for Foreign Trade of Vietnam VCB
12 Vietnam Posperity Joint Stock Commercial Bank VPB
13 AnBinh Joint Stock Commercial Bank ABB
14 BacA Joint Stock Commercial Bank BAB
15 BaoViet Joint Stock Commercial Bank BVB
16 Vietnam Maritime Commercial Joint Stock Bank MSB
17 KienLong Commercial Joint Stock Bank KLB
18 NamA Commercial Joint Stock Bank NAB
19 HoChiMinh City Development Joint Stock
20 Orient Commercial Joint Stock Bank OCB
21 Vietnam International Commercial Joint Stock Bank VIB
22 Saigon Commercial Joint Stock Bank SGB
23 VietA Commercial Joint Stock Bank VAB
24 Petrolimex Group Commercial Joint Stock Bank PGB
25 LienViet Post Commercial Joint Stock Bank LPB
26 Vietnam Public Joint Stock Commercial Bank PVCOMBANK
27 South-East Asia Commercial Joint Stock Bank SSB
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The study by Lee, Hsieh, and Yang (2014) investigates the impact of revenue diversification on bank performance, emphasizing the roles of financial structures and reforms The research highlights that banks with diverse revenue streams tend to perform better, suggesting that effective financial structures and regulatory reforms are crucial in enhancing banking performance The findings indicate that strategic revenue diversification can lead to improved financial stability and profitability for banks.
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I don't know!
Li, X., Feng, H., Zhao, S and Carter, D.A (2021) The effect of revenue diversification on bank profitability and risk during the COVID-19 Retrieved from: https://www.sciencedirect.com/science/article/pii/S1544612321000386
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The National Institute for Finance (2022) evaluates the effects of the Covid-19 pandemic on the global economy and Vietnam, highlighting significant economic disruptions and challenges faced by various sectors The report underscores the need for strategic responses to mitigate these impacts and foster recovery For further details, visit the official publication at the Ministry of Finance's website.
The COVID-19 pandemic has significantly impacted the global economy, leading to widespread disruptions and challenges for nations worldwide Vietnam's response to these challenges has been proactive, focusing on economic recovery and resilience The strategies implemented by the Vietnamese government aim to stabilize the economy, support businesses, and ensure public health, demonstrating a commitment to overcoming the adverse effects of the pandemic.
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The COVID-19 pandemic has significantly impacted the performance of Vietnamese commercial banks, particularly in terms of non-interest income This study by Tran (2022) explores how these banks have adapted their strategies to maintain financial stability during the crisis The findings indicate that diversification of income sources has become crucial for banks to enhance their overall performance amidst challenging economic conditions By focusing on non-interest income, Vietnamese banks can better navigate the uncertainties brought on by the pandemic and ensure long-term sustainability.
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The COVID-19 pandemic has significantly affected the operations of banks listed on the stock exchange, leading to challenges such as decreased profitability, increased credit risk, and operational disruptions Banks have had to adapt to changing market conditions and implement new strategies to mitigate these impacts The pandemic has accelerated the digital transformation of banking services, highlighting the importance of technology in maintaining customer engagement and operational efficiency Overall, the ongoing effects of COVID-19 continue to reshape the banking sector, necessitating resilience and innovation among financial institutions.
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Technological advancements and financial innovations are reshaping the banking sector, presenting significant implications for the Fintech industry The integration of new technologies is driving efficiency and transforming traditional banking practices As Fintech continues to evolve, it is crucial for financial institutions to adapt to these changes to remain competitive This evolution highlights the importance of embracing innovation to meet customer demands and enhance service delivery in the financial landscape.
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According to the General Statistics Office's report on the socio-economic situation for the second quarter and first half of 2022, key insights highlight significant trends and developments in various sectors The report provides an analysis of economic performance, including growth rates, employment statistics, and sectoral contributions to GDP It also addresses the impact of external factors on the economy and outlines measures taken to enhance economic resilience For detailed statistics and further insights, the full report can be accessed at the General Statistics Office's official website.
In a press release by the General Statistics Office in 2020, key insights into the socio-economic situation for the fourth quarter and the entire year were presented The report highlights the economic challenges faced during 2020, emphasizing the impact of global events on local markets It provides a comprehensive overview of economic performance indicators, including GDP growth, employment rates, and sectoral contributions to the economy The findings underscore the resilience of certain sectors while pointing to areas needing recovery and support For more detailed statistics, the full report can be accessed at the General Statistics Office's official website.
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Our World in Data (2022) Coronavirus (COVID-19) Vaccinations Retrieved from: https://ourworldindata.org/covid-vaccinations?country=OWID_WRL