Impacts of digital transformation on the competitiveness of vietnamese commercial banks

Dissertation submitted in partial fulfillment of The Requirement for the MSc in Finance FINANCE DISSERTATION ON IMPACTS OF DIGITAL TRANSFORMATION ON THE COMPETITIVENESS OF VIETNAMES

Dissertation submitted in partial fulfillment of

The Requirement for the MSc in Finance

FINANCE DISSERTATION ON

IMPACTS OF DIGITAL TRANSFORMATION

ON THE COMPETITIVENESS OF

VIETNAMESE COMMERCIAL BANKS

VU HOANG TRUNG ANH

ID No: 17047365 Intake 6

Supervisor: Dr Le Hai Trung

September 2023

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COMMITMENT

I solemnly affirm that this is my own academic research work All the materials used in this research have clear sources The evaluations and conclusions in this work are the result of my own research and efforts

This research has also received the approval of my supervisor regarding the quality of the thesis

Hanoi, 10th Sep 2023

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ACKNOWLEDGEMENT

First and foremost, the author would like to thank the International School of Banking Academy and the University of the West of England, along with the lecturers participating in teaching the “MSc in Finance And Investment program” for always paying attention and creating all conditions in learning and research process for the author to complete the thesis Thank you teachers for giving the opportunity to study and impart valuable experience and knowledge to all students throughout the MSc learning process

My deepest thanks, sincere and profound gratitude also send to my research supervisor, Dr Le Hai Trung - Deputy Head of the Banking Faculty at Banking Academy because of his enthusiastic and careful instruction He always encourages the author to explore and learn more new knowledge as well as make useful and practical criticism so that the author can complete my final dissertation in the best way His comprehensive knowledge

of the banking system and the digital transformation in Vietnamese commercial banks has greatly assisted the author in selecting research topics that meet the theoretical framework required for the author’s research and expand her knowledge on the overall situation of the digital transformation process in Vietnamese banks from a micro perspective

Finally, the author would like to dedicate the results to beloved family and friends who have accompanied, assisted, shared, and encouraged the author throughout the learning process and the completion of this thesis

Hanoi, 10th Sep 2023

Vu Hoang Trung Anh

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ABSTRACT

The primary aim of this paper is to comprehensively assess the influence of digital transformation on Vietnamese commercial banks from 2010 to 2022 Digital transformation has emerged as an inevitable trajectory for the overall economy and, more specifically, the banking industry, especially in the aftermath of the imperative need to adapt to new business operations post the COVID-19 pandemic These banks have embarked on digital transformations to facilitate cost-effective and enhanced-quality services, ultimately enabling easier customer access

This study is conducted based on a dataset comprising 29 Vietnamese commercial banks observed over 12 years, resulting in a total of 375 observations The Lerner index is employed as the dependent variable, while the independent variables includes: ICT Index, Lagged Lerner index, bank size, equity-to-assets ratio, debt-to-assets ratio, and deposit-to-debt ratio Leveraging panel data estimation techniques, the empirical findings highlight the positive impact of these variables on the competitiveness of banks However, the variables of bank size and Debt-to-Assets ratio do not exhibit significance within the model Conversely, the determinants of the Lagged Lerner index, ICT Index, Equity-to-Assets ratio, and Deposit-to-debt ratio exhibit positive significance within this model Consequently, policy recommendations are also explored in light of these pivotal empirical findings, considering the opportunities and challenges inherent in the digital banking landscape

Keywords: Digital transformation, Digital banking, ICT Index, Lerner Index,

Commercial banks, Vietnam

FGLS Generalized Least Squares

NEIO New Empirical Industrial Organisation

POLS Ordinary Least Square

SCP Structure-Conduct-Performance paradigm

DTA

The data utilized in the thesis comprises secondary data collected from the financial reports of 29 commercial banks in Vietnam during the 2010-2022 period

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Primary sources originate from fundamental theories and empirical studies published

by other researchers worldwide, as well as in Vietnam

4 Research Questions

Based on the main objective, this study focuses on exploring:

 What are the effects of digital transformation on the competitiveness of 29 Vietnamese commercial banks in 2010- 2022?

 How do digital transformation's effects contribute to Vietnamese commercial banks' overall competitiveness in 2010-2022?

 What recommendations should be taken on the process of digital transformation to increase the competitiveness of Vietnamese

commercial banks?

5 Research Structure

This article is structured into 6 main sections Chapter 1 presents the research rationale, scope and research methodology, research questions, and thesis structure Chapter 2 discusses the theoretical framework and relevant literature, highlighting the relationship between digital transformation and competitiveness, and introducing some empirical studies conducted by other researchers The content of Chapter 3 illustrates variable descriptions as well as the models of the paper and the technical estimation methods employed Chapter 4 is focused on presenting estimation results and key findings to arrive at the final inferences derived from data analysis Chapter 5 explores the conversation surrounding the potential advantages and obstacles related to the digital transformation within the banking sector, while

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also presenting certain policy considerations Chapter 6 summarizes the findings and provides concluding remarks on the thesis

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CHAPTER 2 LITERATURE REVIEW

2.1 Digital Transformation

2.1.1 Overview of the Digital Transformation

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business management especially in the areas of strategic management The SCP paradigm appears to be the most pertinent and long time used approach to assess industry structure studies It basically attempts to look at the market structure of industries and determine their conduct and performances Various theories that challenged the SCP are also witnessed including the efficient hypothesis, contestable market theory and quiet life hypothesis etc Even in recent period, a reverse approach

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of firms has emerged In other words, the new wave of research like NEIO set out to understand the institutional details of particular industries and use this knowledge to test specific hypotheses about specific firm behavior Nevertheless, NEIO appears to

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structure metrics, primarily those related to concentration levels such as the number

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To compute the Lerner index, one must first construct a cost function dependent on output and various types of input costs In the banking sector, studies typically incorporate three types of costs: management costs, employee costs, and capital costs Consequently, the total cost function is determined as follows:

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Peria, 2010)","plainCitation":"(Demirguc-Kunt and Peria, 2010)","dontUpdate":true,"noteIndex":0},"citationItems":[{"id":87,"uris":["http://zot ero.org/users/local/CZtSCnxJ/items/XWS667R8"],"itemData":{"id":87,"type":"articl e-journal","abstract":"This paper proposes a framework to analyze competition in the banking sector using Jordan as an example In particular, the paper pursues a multi- pronged approach to analyze competition including (i) an examination of the extent to which the market is contestable (that is, has low barriers to bank entry and exit), (b)

an evaluation of the behavior of bank spreads, and (iii) an assessment of structural and direct measures of bank competition such as the H-statistic and the Lerner Index This approach provides a more comprehensive framework to examine competition in the banking sector, compared with the commonly used alternative of looking only at bank concentration figures In the case of Jordan, the analysis indicates that although concentration has declined, competition in the country is low and has decreased over time.","collection-title":"Policy Research Working Paper Series","container-title":"Policy Research Working Paper Series","language":"en","note":"number: 5499\npublisher: The World Bank","source":"ideas.repec.org","title":"A framework for analyzing competition in the banking sector : an application to the case of Jordan","title-short":"A framework

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characterized by either price or quantity competition It is found that increasing the number of firms tends to reduce R&D effort, whereas increasing the degree of product substitutability, with or without free entry, increases R&D effort–provided increases R&D effort and has ambiguous effects on the number of varieties while decreasing the cost of entry increases the number of entrants and varieties but reduces R

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Fungáčová, Pessarossi and Weill (2012) used the Lerner index to assess

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2.4 Research Gap and Contribution

In this dissertation, the research gap resides in the need for a comprehensive and updated analysis of the impact of digital transformation on the competitive landscape of the banking sector in Vietnam While the topic of the effects of digital innovation on businesses has garnered attention, there might be a limited number of in-depth studies specifically examining the Vietnamese banking context within a certain time frame This gap highlights the necessity to scrutinize the specific ways in which digital transformation initiatives have influenced the competitive positions of banks in the Vietnamese market

Furthermore, this dissertation contributes by providing empirical insights into the ramifications of digital transformation on bank competitiveness within the distinctive

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context of Vietnam Given that this context could present unique challenges and opportunities, these findings could offer valuable, context-specific knowledge for Vietnamese banks Additionally, the research results may yield deep-seated insights relevant to policymakers, regulatory bodies, and stakeholders in the industry in Vietnam The analysis could illuminate the efficacy of digital transformation strategies and provide guidance for formulating policies that enhance the competitive capacity of the banking sector

2.5 Conceptual Framework

Conceptual Framework

In summary, the research sample comprises 29 banks with 375 observations from 2010 to 2022 Consequently, the panel data used in this study is strongly balanced

3.2 Research Methods

To understand how digital transformation impacts a bank's competitive capacity along with other relevant factors, this thesis employs a quantitative research method with the support of Microsoft Excel and STATA 14 Specifically, a multivariate regression model will

be applied for analysis The data processing sequence is as follows: univariate analysis, including descriptive statistics, correlation matrix analysis, and multivariate analysis, encompassing model selection, assessment of regression process suitability, and explanatory variable selection The steps are carried out in turn as:

3.2.1 Data Description

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After collecting and processing the data through Excel and STATA 14, descriptive statistics were conducted in tabular form, presenting the collected data according to their specific characteristics This method portrays fundamental attributes and statistical measures

of the data, such as minimum, maximum, mean, standard deviation, skewness, and kurtosis Analyzing the data in descriptive format facilitates a comprehensive overview of the business landscape and certain common features within the operations of Vietnamese commercial banks

3.2.2 Correlation Matrix

Correlation matrix analysis involves creating a matrix of correlation coefficients for variable pairs, evaluating the correlation coefficients between independent and dependent variables, as well as between different independent variables (Dr Mohamed, 2015) Correlation coefficients serve to identify relationships between variable pairs and indicate the degree of linear correlation between them Generally, these coefficients range between -1 and

1 A correlation coefficient of zero implies no connection between the variables; conversely,

a higher absolute coefficient suggests a stronger correlation Nonetheless, excessively high correlation between variables can lead to multicollinearity issues When this value surpasses the range of approximately (-0.8, 0.8), the regression equation could encounter a significant multicollinearity problem Thus, in the analysis conducted for the thesis, if the correlation coefficient between two independent variables exceeds this range, certain less significant variables will be eliminated from the model

3.2.3 Estimation Technique

During the process of selecting a data method, when dealing with balanced panel data, the commonly utilized techniques for estimating regression models encompass the subsequent approaches: Pooled OLS (POLS), Fixed Effects Model (FEM), and Random Effects Model (REM) Each technique possesses its own set of advantages and disadvantages

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As outlined by Gil-García and Puron-Cid (2014), the implementation of Pooled OLS assumes a regression model where coefficients remain constant across both time and space This entails performing regular OLS regression estimations while considering overlapping observations of each cross-sectional unit In other words, the effect of each observation and the consistent nature of the data are taken into account Nevertheless, a drawback of this method lies in the potential for manipulation of the relationship between dependent and independent variables Furthermore, it can lead to the emergence of positive autocorrelation Consequently, both FEM and REM offer solutions to mitigate these challenges

The FEM presents an avenue for researchers to overcome the limitations of Pooled OLS When estimating the FEM regression model, the assumption is that each observation possesses its distinctive characteristics Consequently, the principal advantage of the FEM model lies in its appropriateness for scenarios where the underlying coefficient of each observation is correlated with one or more other independent variables Hence, this model can address the shortcomings of Pooled OLS Nonetheless, FEM is not without its drawbacks; it can lead to a reduction in degrees of freedom in instances where the data comprises a substantial number of observations

Another strategy to mitigate the drawbacks of Pooled OLS is the REM REM is developed under the premise that the observations in the sample are randomly drawn from a larger population, implying a lack of correlation between random errors and independent variables (Gil-García and Puron-Cid, 2014) Consequently, when analyzing panel data, the researcher must choose between FEM and REM to achieve an unbiased estimate

In this study, strongly balanced panel data is employed Consequently, regression models employing POLS, FEM, and REM will be estimated Subsequent tests will be conducted to determine the most suitable model and expound on the research findings The selection between models will involve examining F-tests and Hausman tests Additionally, Variance Inflation Factor (VIF) coefficients will be computed to detect multicollinearity

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among variables Moreover, in panel data regression models, autocorrelation and

heteroskedasticity can introduce bias in estimates To address this, the Woolridge test will be

used to detect autocorrelation, while the Wald test will identify heteroskedasticity If

violations are detected, the Feasible Generalized Least Squares (FGLS) method will be

employed to rectify the issue due to its superior advantages over the conventional OLS

method

The Research Model Framework

3.3 Model Specification

3.3.1 Research Variables

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of foreign banks in Vietnam both in terms of market and market shares is an issue that needs to be addressed The study calculates the competitiveness of Vietnamese commercial banks under the influence of factors, which is meaningful to help bank managers to make decisions and development goals for the future Experimental research on measuring competitiveness uses Lerner index (variable dependent), the main impact factors (independent variable) based on analytical CAMELS and a set of financial health indicators according to IMF standards The data uses the results calculated and aggregated from the World Bank (set of indicators), IMF, and annual reports of 31 commercial banks in Vietnam Based on the results, the article proposes some suggestions for policy makers and banks managers in order to help banking

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agged Lerner Index

The Lerner Index is a quantitative measure of market power for a company, indicating its ability to set prices above marginal cost (Grandi and Bozou, 2018) When considering the Lagged Lerner Index, it signifies evaluating the market power of a bank in the preceding period and assessing its impact on the bank's competitiveness in the subsequent period The historical market power of banks, as measured by the Lagged Lerner Index, could influence their current competitive capabilities Banks with a higher historical market power might have a more secure position within the industry, potentially affecting their current effective competitive abilities On the other hand, banks with lower-lagged Lerner Index values might exhibit weaker competitive positions due to their historical pricing behaviour

Utilizing the Lagged Lerner Index to explore its correlation with the Lerner Index provides insights into how the presence of market power influences the competitive landscape of the banking industry This approach has the potential to offer a deeper understanding of strategic decisions and market behaviour of banks So, the first hypothesis is:

CTIndex

The hypothesis concerning the “ICTIndex” and “Lerner Index” is built upon the recognition that the application and integration of ICT can hold significant relevance to both competitive behaviour and market power within the banking sector (Nassar and TVARONAVIČIENĖ, 2021) The implementation of advanced technological solutions can potentially exert influence over various facets of a bank's operations, customer engagement, service provisioning, and overall efficiency As banks adopt more advanced technological solutions, they are likely to streamline their services, enhance customer engagement, and optimize overall efficiency This heightened technological capability can empower banks to better shape their pricing strategies and effectively utilize their market power Consequently,

ank Size

The proposed hypothesis suggests the existence of a statistically significant correlation relationship between "Bank Size" and the "Lerner Index." This is similar to U-Din, Tripe and Kabir (2022) and Thuy (2021) This implies that the operational scale of a bank may influence its ability to shape pricing strategies and leverage market power A positive correlation would indicate that larger banks are more likely to exert a higher influence on pricing, potentially due to advantages related to scale, enhanced resources, or a stronger market position If larger banks possess a better position to independently set prices

in response to market forces, they could achieve higher values of the Lerner Index, signifying greater market power

quity-to-Assets Ratio

The fourth hypothesis posits that there exists a statistically significant correlation between the "ETA" and the "Lerner Index." This ratio also known as the leverage ratio or capital adequacy ratio, reflects the proportion of a bank's total equity (shareholders' equity or capital) in relation to its total assets (Motley Fool Staff, 2016) It provides insights into the financial health and risk-taking capacity of a bank This ratio can play a pivotal role in

However, a positive signal can also be reflected through a positive relationship, indicating a direct connection between the owner's ETA ratio and the Lerner Index In this scenario, a higher owner's ETA ratio could signify financial strength, as the bank possesses the capability to self-fund its operational activities (CFI Team, n.d.) This circumstance can create favorable conditions for implementing more flexible pricing strategies to achieve a strong competitive advantage Consequently, a higher owner's ETA ratio could be linked to a higher Lerner Index value, highlighting increased market power due to a robust financial outlook

H4: Equity-to-Assets Ratio has a statistically significant impact on the Lerner Index of the banking industry