The impacts of income diversification on commercial bank performance the case of vietnam

Dissertation submitted in partial fulfillment of the Requirement for the MSc in Finance FINANCE DISSERTATION ON THE IMPACTS OF INCOME DIVERSIFICATION ON COMMERCIAL BANK PERFORMANCE: THE CASE OF VIETNAM Le Kieu Trinh ID No: 18045124 Intake Supervisor: Dr Roberto Ercole September 2022 Tai ngay!!! Ban co the xoa dong chu nay!!! 17014129073441000000 Abstract Financial institutions have really been able to record higher income from their nontraditional revenue sources as a result of policies with financial liberalization, as shown in the majority of banks developing or engaging in non-intermediation operations Although the majority of commercial banks are renowned for making the majority of their money from interest-based sources, there has been a steady trend in recent years as they have begun to diversify by chasing non-interest-based forms of income The purpose of this study was to determine how revenue diversification affected the effectiveness of commercial banks in Vietnam Between 2017 and 2021, a census of 30 Vietnamese commercial banks was undertaken For the employed period, a dataset was gathered from the yearly financial statements of 30 banks The analysis used a multiple regression model using a descriptive research methodology The Herfindahl-Hirshman index was adopted to assess income diversification, and six control variables—bank size, debt to deposit ratio, equity ratio, deposit ratio to equity ratio, inflation, and GDP growth—were also taken into consideration The study discovered a significant relationship between income diversification and commercial banks' efficiency The impact was statistically significant, according to the regression result While equity ratio had a negative impact on efficiency, deposit ratio and GDP growth had positive, significant impacts However, there was a statistically significant link The outcomes also showed that the impact of the other factors on the effectiveness of Vietnamese commercial banks was insignificant According to the study, it is essential to create revenue diversification methods that are uniquely designed for each commercial bank Therefore, this study recommends that bank policymakers and regulators develop suitable policies that can be utilized to sustain financial stability throughout the whole banking industry Acknowledgement This dissertation would not have been accomplished completely without the assistance of several people I want to start by sincerely thanking my thesis advisor, Dr Roberto Ercole, for his enthusiastic support and dedication during the whole process Without his guidance and assistance, this project could not have been completed I would also want to thank all of my instructors and friends at BAV Not only brought knowledge for me, they also encouraged me to complete my thesis Table of Contents Abstract .2 Acknowledgement List of Tables .6 INTRODUCTION .7 1.1 Research aim and motivation 1.2 Research objectives 1.3 Research questions .9 1.4 Scope of the study 1.5 Research structure 1.6 Significant of the thesis LITERATURE REVIEW 11 2.1 Related theories 11 2.1.1 The resource-based theory .11 2.1.2 The signalling theory .12 2.2 Banking sector and the practice of diversification in Vietnam 13 2.3 Empirical evidences 15 2.3.1 Positive relationship 15 2.3.2 Negative relationship 17 2.4 Evidences in Vietnam 18 2.5 Limitations of the research in the context of Vietnam 18 DATA AND METHODOLOGY .20 3.1 Data collection 20 3.2 Variables description 20 3.2.1 Description of dependent variables 20 3.2.2 Description of independent variables and Expected signs of the variables21 3.3 Research methodology 24 3.4 Model selection and Diagnostic tests 26 3.4.1 Results of Hausman test and Breusch-Pagan test 27 3.4.2 Diagnostic tests and GLS approach 29 REGRESSION RESULTS AND DISCUSSION 32 4.1 Descriptive statistics 32 4.2 Impacts of Income Diversification on Vietnamese bank performance 34 4.3 Differences between the impacts of Income Diversification on Bank profitability across ownership types 38 4.4 Result discussion 41 POLICY RECOMMENDATIONS .45 CONCLUSION 47 REFERENCES 49 APPENDIX .62 Appendix – List of sampled commercial banks and raw data 62 Appendix – Regression results under different methods .68 Appendix – Results of diagnostic tests 69 List of Tables Table 1: Description of independent variables and expected signs Error! Bookmark not defined Table 2: Methodologies of experimental studies 23 Table 3: Correlation matrix and VIF values 27 Table 4: Descriptive statistics 30 Table 5: Impacts of Income diversification on Vietnamese bank profitability 32 Table 6: GLS regression of income diversification and bank financial return across ownership types 36 INTRODUCTION 1.1 Research aim and motivation The banking industry has always been regarded as a remarkable financial industry worldwide Commercial banks play an important and essential role in economic activities and systems as they are financial institutions that take deposits and use them to provide loans and invest, thereby promoting efficient economic growth In particular, banking activities play a crucial role in effectively mobilizing and allocating financial flows as well as providing services and utilities in terms of financial and monetary circulation (Casu et al, 2016) Therefore, identifying the factors that determine the financial performance of commercial banks is always an urgent need as the health of banks is not only significant to the stability of the financial markets, but also related to the development of the economy In the previous period, Vietnam also suffered from the economic recession caused by the 2008 financial crisis, like other countries in the world (Nguyen, 2012) This crisis has made it difficult for businesses to operate while interest rates have risen, which has resulted in businesses being insolvent and pushing up bad debts (Ho and Ho, 2018) This made the bank's profits decrease significantly because banks not earn interest on loans, not grow credit, increase provisioning according to regulations of the State bank In addition, the combination of the trend of liberalizing market interest rates, fierce competition between banks, and the impact of the industrial revolution 4.0 in these days puts great pressure on operations based on the traditional profit model (Nguyen et al, 2021) In the context of the economic crisis and recession caused by the Covid-19 pandemic, the government prioritizes stability Therefore, tight monetary policy is used and expected for the following years and credit activities from banks will be affected Moreover, the requirement to implement the capital adequacy ratio (CAR) in accordance with Basel II standards also puts pressure on banks (Ho and Vo, 2019; Nguyen, 2020) This makes it difficult for credit to increase Therefore, in order to reduce the dependence of bank profits on customer credit, diversification of income sources in the bank is necessary In the world, the system of financial institutions is increasingly improving to come to an effective operation to meet the increasing needs of the actors in the economy The integration of the world trend is inevitable and objective for other countries as well as for Vietnam Along with the world trend, banking activities in Vietnam are transforming and focusing on diversifying products and services, applying advanced technology in addition to traditional services (Dang and Dang, 2020) Because of these characteristics, Vietnam provides an attractive context to investigate the factors that influence the efficiency of banks to improve profitability Therefore, the impact of income diversification on bank profitability with evidence from Vietnamese commercial banks was selected for study 1.2 Research objectives Based on previous theoretical foundations in both Vietnam and other countries around the world, this thesis mainly focuses on the influence of income diversification on the performance of commercial banks in Vietnam In addition, a number of recommendations on income diversification at Vietnamese joint stock commercial banks are also provided in this thesis to increase financial performance for banks, especially in the context of current globalization In particular, this study focuses on the efficiency of joint stock commercial banks based on an important indicators ROA The main objective of this study is to investigate the influence of factors including income diversification, bank size, total equity to total assets ratio, total deposits to total assets, total debts to total assets ratios, GDP and inflation on the financial performance of joint stock commercial banks in Vietnam 1.3 Research questions This study was conducted by the following research questions:  How does income diversification affect business performance at Vietnamese joint stock commercial banks?  What are the effects of income diversification on state-owned banks and private banks and what is the reason behind the differences between the impacts? 1.4 Scope of the study This study analyzes the annual financial statements of 30 banks for the period from 2017 to 2021, using panel data regression to measure the impact of income diversification on business performance of joint stock commercial banks in Vietnam The influence of other independent variables including macro variables and bank-specific factors is also evaluated through a number of econometric methods such as descriptive approach and regression functions 1.5 Research structure This thesis consists of main chapters Chapter introduces the rationale of the topic, the research objectives, the research questions, the research objectives and the scope as well as the importance of the topic An overview of previous studies on the same topic is given in chapter Chapter deals with methodology and data collection Chapter provides interpretation and discussion about descriptive statistics and regression results Chapter provides the final conclusions as well as recommendations Chapter concludes for the final results 1.6 Significant of the thesis Through the discussion of these issues, this study provides contributions and empirical evidence for bank administrators as well as policy makers on investigating the link between income diversification and profits of Vietnamese joint stock commercial banks The thesis has pointed out three methods of income diversification at Vietnamese commercial banks, including: developing products and services using high technology and outstanding features, developing convenient card services for both at home and abroad, develop non-credit services with the additional use of new advanced information technologies The thesis also focuses on clarifying the factors that affect the diversification of income at commercial banks, including subjective factors of commercial banks such as Equity ratio and Deposit ratio; and external factors such as GDP growth On the basis of secondary data sources and research results, the thesis has proved that income diversification is an urgent requirement of Vietnamese commercial banks today On that basis, the thesis proposes suitable solutions for income diversification with the current situation of Vietnam's banking industry Depending on their capacity and service diversification strategy, Vietnamese commercial banks can choose the proposed solutions to apply in practice As a result, they have more basis to come up with ideas to improve the bank's profitability through stable income 10