Finance dissertation on the trend in competitiveness of banking industry in vietnam from 2012 to 2022

During this time, the change in technology, uncertainty of lending activities, customer’s lifestyle and behavior and the motivation of Covid – 19 pandemics lead to change in the trend o

Dissertation submitted in partial fulfillment of the

Requirement for the MSc in Finance

FINANCE DISSERTATION ON THE TREND IN COMPETITIVENESS OF BANKING INDUSTRY IN VIETNAM FROM

2012 TO 2022

PHAM TIEN DAT

ID No: 22080949 Intake 6

Supervisor: Prof Dr To Kim Ngoc

September 2023

Executive Summary

Banking industry have done a lot in Vietnam by mainly providing funds to households, businesses for many years, hence, become an important part of the country economy Therefore, it’s important to understand more about the banking system in the country The first part of the research is about introducing of the research, showing the rationales, the scope and objectives, methodology, research questions and most important, the literature review which showed the previous academic journal articles about banking industry research in the past

This report aims to research about the banking industry of Vietnam from 2012 to 2022, the time when the sector overcame the financial crisis, grew fast and faced Covid – 19

pandemics During this time, the change in technology, uncertainty of lending

activities, customer’s lifestyle and behavior and the motivation of Covid – 19 pandemics lead to change in the trend of competitiveness of the world and Vietnamese

banking sector During that part, the comparison between State-owned and commercials banks in Vietnam as well as the Porter’s 5 forces are presented

From the macroeconomic change in the world and Vietnam context, this research takes the trend of competitiveness of banking around the world and Vietnam, focus on 3 main

points: Cutting cost, digitalization acceleration and step down from lending activities

To make the change more transparent, there will be a comparison between Vietnamese banks and other banks in the Southeast Asia region, about the assets, the loans, the different type of income in the recent years between them…

Lastly, the research points out the recent issues with Vietnamese banking system, mostly

come from the polices about lending and online lending, as well as low percentage of

high-skilled workers and the recommendations for better competitiveness in the future

Also, I would like to say that the whole work in this research is mine, completed entirely

by myself and not by anyone else

Pham Tien Dat

Table of Content Chapter 1 Introduction

2.1 From global environment context

2.1.1 Uncertainty in bank lending since financial crisis

2.1.2 Impact of new tech-wave from Industrial Revolution 4.0

2.1.3 Changes in consumer’s demand to Banking products &services

2.1.4 High motivation from global Covid- pandemic for changes

2.2 From Vietnamese business environment context

2.1.1 Uncertainty in bank lending in Vietnam

2.1.2 Impact of new tech-wave from Industrial Revolution 4.0 in Vietnam

2.1.3 Changes in consumer’s demand to Banking products & services in Vietnam

2.1.4 High motivation for Vietnamese banks from global Covid pandemic for changes

Chapter 3 Analysis competitive trend of Commercial banks in Vietnam, period 2012-2022 and recommendations

3.1 Changes in competitive trend in banking industry in the world

3.2 Changes in competitive trend in banking industry in Vietnam

Chapter 4 Current issues and recommendations for Vietnam banking system

4.1 Current issues of Vietnamese banking system

4.2 Recommendations

Conclusion

References

Appendices

The competition between banks was high with the pressure from competition forces banks

to change their business models to focus on other ways rather than lending and borrowing The quality of the services of the banking system also improves a lot during

this period This research helps the readers discover the trend of competitiveness in

Vietnamese system based on the macroeconomic factors, points out the current issue and help banks learning from the past and changing their future direction by giving recommendations of their problems

1.2 Objectives and scope

The main objectives of the research are:

+ To understand the macroeconomic factors that influence the competitiveness of banking system and the change competitiveness trend in Vietnam from 2012 to 2022

+ To give recommendations for the banks in Vietnam about the current issues related to the competitiveness trend

The scope of the research is the banking system in Vietnam during the period from 2012

to 2022 There are 14 banks will be selected in the research, including 4 State-Owned Banks (SoBs – Vietinbank, BIDV, Vietcombank and Agribank) and 10 more biggest commercial banks, based on their market value (Military Bank, Techcombank, VPBank, MaritimeBank, ACB, TPBank, Saigon – Hanoi Bank, Sacombank, Eximbank, HD Bank) Those banks are famous in Vietnam, with the products and services are being used by many customers in the country The time span will be separated into 2 main pieces: From

2012 to 2020, when Vietnamese banking system got back from the crisis happened in

2011 and from 2020 to 2022, when the Covid – 19 pandemics appeared and change the way banking system operated

1.3 Methodology

The methodology to be used in this research will be top-down analysis, with the analysis for the macroeconomic and the Porter 5 forces for the industry specific factors The reason for the top-down analysis is that, understanding how the macroeconomics running around the world and Vietnam will give the broader view, then narrow it down by the industry itself The Porter 5 forces will dive deep into specific details of banking system

in Vietnam, including the power of competitors, the new entrants, supplier, substitutes, and customers Those factors directly affect the trend of competitiveness in banking industry of Vietnam, and from that, the recommendations for the industry can be made This research will be breaking down into 4 main chapters:

+ Chapter 1 will introduce the research, include the rationale of the research, the objectives and the scope of the research, the method to do the research, questions need to

be answered and the literature review about the research This chapter will give the first attraction of the research, about what needs to be done, what’s new in this paper and which framework will be used

+ Chapter 2 with the analysis will describe the uncertainty in lending activities in some countries with high impact on the world economy and then narrow it to Vietnam, a developing country with huge jump in economy from 2012 to 2022 and discuss how those factors affect to the banking sector Also, this chapter talks about how changes in the lifestyle of customers will affect the way banks approach their customers Most importantly, the development of technology, with the renovation 4.0 (machine learning, AI…) will change the way banks work and compete This sector will be included in the Porter 5 forces framework, which compares commercial and state-owned banks

+ Chapter 3 will focus on the trends in the world and Vietnam, about development of technology, cutting costs and focusing more on services rather than lending – borrowing activities This chapter will also compare the banking system in Vietnam with other countries in Southeast Asia to make the trend more transparent

+ Chapter 4 will talk about the current policies issues which affect the competitiveness of Vietnam banking system and the recommendations

1.4 Research questions

To do the research on banking industry, the below questions will be asked to be clarified:

- What is the change in the business environment that affect banking industry around the world and Vietnam?

- Within the change in business environment, what is the change in competitiveness of banking industry around the world and Vietnam?

- What's recommendations for the banking system of Vietnam?

1.5 Literature Review

The banking system is an important part of the economy, as it is a channel for flowing funds to individuals and businesses In recent years, with the development of technology, the banking system around the world is more innovative and competitive The banks must compete with others, not to mention some financial institutions with same similar functions Therefore, understanding which factors affect their competitiveness is important There are 2 main frameworks will be used in the research: The top-down analysis for the macroeconomic factors but limited to 4 main factors: the uncertainty of lending activities, the improvement of technology and innovation 4.0, change in consumer lifestyle and the motivation after Covid – 19 pandemics The second framework is the Michael Porter’s 5 forces, focus on the specific factors on banking industry in Vietnam during the period of 2012 to 2022

The first thing that should be mentioned is the development of technology: Bikker and Haaf (2002) stated that the innovation of technology was expected to change the banking system in Europe, about the competitiveness and concentration Adoption of fintech (combination of financial and technology to deliver the products and services to customers) influences the competitive between banks in UAE and enhances their performance With the development of technology in finance, the banking industry in this country is expected to be more competitive and growth continuously in the future

(Dwivedi et al., 2021) Hong et al., (2016) said that the technology development may help

improve the quality services of banking system in Malaysia, hence, increase the competitive between those banks in the country Besides technology, the world suspected the uncertainty in macroeconomic, which heavily impacts the competitiveness of the banking system in many countries Banks will have to change their business model to adapt the change of technology in the industry 4.0 era to keep competing in the industry (Mekinjić, 2019) The uncertainty can come from political or economic factors, which is mentioned in some previous research, which affect the lending activities of the banking system Baum et al., (2013) said that the uncertainty in financial plays an important role in

the transmission of banking lending activities The economic policy uncertainty (EPU) also made banks to spread their income stream in many news activities, especially non-interest income and if the EPU linked to the government, it will have the main impact to

the banking system activities (Tran et al., 2021) The EPU also found to have positive impact on the funding structure of the banks (Tran et al., 2021), which is an important

factor for competition in the sectors and hence affect the traditional activities of the banks – borrowing and lending The policy uncertainty also impacts on the loan loss provision

of the banks (Ng et al., 2020), which directly impacts the income and the plan of the

banks, therefore affecting the competitiveness in the systems Lastly, the change in lifestyle and age pyramid will affect the way banks compete with other financial intermediaries Unlike before, people now require the services available 24/7 and the transactions should be made immediately because of mobile phone penetrations Also, the availability of information can help customers compare products and services of the banks, which make them compete for those to keep current and get new consumers (Tinnilä, 2012) With the advancement of technology, people change their lifestyle from checks to debit/ credit cards and automatic payments (Goel, 2013), therefore banks must adapt with this lifestyle and change for competing with others Moreover, the change in demographics, like increasing in young population have impact on banking services (Khandelwal, 2012) From those points, the macroeconomics chapter will focus on the PEST analysis, but concentrate more on the uncertainty of political and economics, as well as the change in demographics, lifestyle, and technology to highlight which factors affect to the competitiveness of banking sector in Vietnam

Porter’s 5-force is a framework that has been used many times in research banking industry in previous articles Mehjabeen (2018) stated that the attractiveness of the banking industry can be assessed by using the Porter’s 5-force in Bangladesh; Mazikana (2023) used this model to illustrate the competition in banking industry of Zimbabwe This model plays an important role in Zimbabwe banking system; therefore, this is chosen

to use in the research Siaw and Yu (2004) also exploit the Porter 5 forces model to demonstrate how the internet affects the competitiveness of banking industry From those points, the Porter’s 5-force is a great choice for the industry analysis and will be used in this research

About banking sectors in Vietnam, Tran et al (2015) did research about this, contain the

history of banking system, profile, performance, recent development at that time, ESG factors and outlooks with Asian banks Nguyen and Nghiem (2020) investigate about the improving of efficiency and competition of Vietnam banking environment in the period from 2000 to 2014 Thuy and Duong (2021) found that the equity to total assets ratios increase the competitiveness of banking industry, while credit loss provision, inflation and bank size reduce this Furthermore, previous research of Le (2014) showed that Vietnamese banking system used to be close to monopoly and high concentration, and stated-owned banks and foreign banks have advantages in competition with other types of

banks Based on those results, this research will aim to make industry analysis research to clarify the competitiveness of banking industry in Vietnam from 2012 to 2022

Chapter 2 Mega trends in business environment for banking industry in period of 2012-2022

2.1 From global context

2.1.1 The uncertainty of lending activities in banking industry around the world

According to Ashraf (2021), the uncertainty in the economic environment can be a reason leading to higher interest rates on lending activities of the bank from 1998 to 2017 in 88 countries in the research Besides that, the political uncertainty also affects bank loan pricing, hence, making the interest rates higher for corporations and individuals

Therefore, the lending activities of the banks become more expensive, as the risk from uncertainty rises over time

After the financial crisis, banks’ lending costs in many areas around the world are more expensive due to stricter regulations, especially Basel 3, which was set up in

2009 The Basel 3 framework tends to make the banking system around the world more soundness, with the lesson from the Global Financial Crisis Under these regulations, the capital of the banking system was increased with better quality The capital ratios went up tremendously higher than before the crisis by 2017 in many countries, as banks reduced the amount of assets with high risk weighted The amount of loans, however, stay uncertain as it was increasing from 2008 to 2012, then fluctuated in the next 4 years and declined by 2017 Also, the procyclicality of bank credit reduced; many countries apply the Basel 3 with higher risk-weighted to home loans with higher loan-to-value ratios and introduced the cap for this ratio (IMF, 2018)

The total credit and bank asset composition of banks around the world after GFC (IMF,

2018)

The reform of regulations after the financial crisis had some impact on the lending activities in big countries, with some empirical research results From 2009 to 2016, with the data of 621 banks in the US, the loan to assets ratio decreased by 2.7%, suggesting

that the lending activities declined after the crisis (Blau et al., 2022) Naceur et al (2018)

found that the application of Basel III ratios has mixed effects on the growth in lending of banking in the US and the European The capital ratios have negative effect on both retail and other lending growth of European banks while the ratio of the nonrequired amount of stable funding to total assets positively affect the commercial lending but have negative effect on retail lending growth of those banks The US banks all have positive impact of these ratios, regardless of the size Therefore, the new regulations make the lending activities of the banks more uncertain, making it expensive for banks due to ratios satisfaction Also, banks tend to cut or reduce the credit supply to firms that rely on trade finance and be part of the global supply chain as they see those corporations as riskier

lenders during this uncertainty period (Correa et al., 2022) Undercapitalized banks in

Europe after the GFC (from 2010 to 2012) lost more equity and decreased their lending while increased loan-loss provision Moreover, those banks “shifted their assets from

loans to risky sovereign debt and engage in zombie lending” (Steffen et al., 2020) The

change in process of filtering customers costs banks more money and make them to select fewer lender than before

Under Covid – 19 pandemics, the net interest margin of the banks reduces due to the loosening of monetary policy from the central bank To support the country’s

economy, many central banks tried to help with the expanding monetary policies – cutting interest rates, purchasing financial assets and provide short-term liquidity to the banking system Many countries tried to lower their policy rates, some even cut the rates close to

0 Plus, for example, ECB encouraged lending to corporations and individuals by targeting long-term refinancing and applied the emergency purchasing program of 1,850 billion euro The FED also created new swap lines and bought back 120 billion USD

securities per month during the pandemics to support the economics of the US (Rashid et al., 2022)

The policy rates and total assets in major developed country central banks until 2021

(United Nations DESA, 2022)

According to Ҫolak and Öztekin (2021), loan growth around the world reduced during this pandemic period, with 1.04%, 0.69%, and 5.50% in the total, US and non-US sample declined in quarterly growth of lending with sample of banks in 125 countries The more

serious the pandemic, the more credit growth declined Moreover, in those countries with less developed financial systems, the lending activities were heavily affected by the pandemics In China, the second – largest economy in the world, the pandemics caused many people to lose their jobs, which lead to increase their ability to payback their loans Before the Covid – 19 pandemics happens, in 2019, the total credit assets of the six largest commercial banks in China was 72 trillion RMB; 2.69% of them are non-

performing loans (Twum et al., 2022) Although the amount of loans of domestic

commercial banks during the pandemics increased (up 8.63 trillion RMB to 82.67 trillion RMB – 11.65% annual growth), the annual growth rate of non-performing loans also went up to 19.74% (Deloitte, 2021a) That means the lending activity of Chinese banks were relatively uncertain because their non-performing loan kept up with the growth in

credit in the country, hence, increasing cost of self-insurance for them

Book value and non-performing loan of some banks in China (Deloitte, 2021a)

In the US, the lending was quite uncertain before and after the pandemics, as of

2019, the amount businesses borrowed from the banks in went up 3.6% in 2019, but up to 5.1% in only the first half of 2020 – when the Covid – 19 spreading in this country The growth for lending to small and farm business of small banks during first half of 2020 was

about 23.2%, while the number of medium and large banks were 37.7% and 39.8%

(Beauregard et al., 2020) Overall, the pandemics did not have any impact in business

lending in the US in 2020, especially in March and April this year, the amount of loan increased aggressively, especially consumer and industrial loans at small domestic banks

in the US Consumers loans, on the other hand, went down at the beginning of Covid – 19 and remained low over the year while real estate loans did not have any effect However, the credit loss allowances of banks in the US also increased from 124 billion USD in Q4.2019 to 244 billion USD, almost double in Q3.2020 (Ennis and Jarque, 2021)

Type of loans and allowances of banks in the US (Ennis and Jarque, 2021)

In Europe, Dursun-de Neef and Schandlbauer (2021) found that banks in this area decreased their loans aggressively, and the ones with better-capitalized reduced their loan more significantly than those with worse-capitalized The credit loans of Europe significantly decreased after the GFC, with the lending to households and firms going down to minus 4% in 2013 as the graph below shows

Lending for individuals and firms in the Europe over the years (Graham, 2022)

Policy rates in some European countries (Natal and Barret, 2023)

After Covid – 19 pandemics, banks had issue with the raising of interest rate from Central banks to fight inflation From FED, ECB to BOE, they all made the policy rates go higher

after the Covid – 19 pandemics gone, because of high inflation Higher interest rates

make the borrowing cost extremely more expensive with the speed of raising rates from those biggest central banks In Europe areas, the net bank lending was expected

to raise 4.6% in 2022 but will decline to minus 1.8% next years due to the interest raises, energy price, inflations which leads to lower demand from both corporations and individuals Germany and Italia are the two countries with the largest reduction, with -1.7% and -1.8% growth respectively (Graham, 2022) However, in the US, the amount of

USD yoy, auto debt raised 93 billion USD yoy… (NewYork FED, 2023) China – one of a few countries which kept cutting their policy rate this year, saw the growth at 11.3% in June 2023 – the lowest in the last 5 months, and the analyst saw the slowing demand for mortgages in this country this year, despite of low interest rates (Li and Yao, 2023)

From those data and research, the lending of banking sectors is uncertainty across the country and changes a lot before, during and after Covid – 19 pandemics This

may make banks rethink focusing too much on lending, as the cost for it rises too much due to the funding costs, risk arising and customer selection costs

Households Debt and Credit Developments of the US until Q1.2023 (NewYork FED,

2023)

2.1.2 The impact of technology to the banking system

In the last few years, the banking sectors have been transformed due to the improvement

of the internet lead to renovation 3.0 of all industry, including banking sector Tunay

et al (2019) collected data from 2005 to 2015 in 23 countries stated that technology-based

electronic devices such as ATM, POS internet and mobile banking offer significant

benefits for the banking system Using that technology offers banks chances to improve

services quality, productivity and reduce transactions costs; the results of the research

illustrated that the technology used has increased profit and lowered the cost for the companies

This wave of technology has changed the way customers use banking services, as the banks are less dependent on their branches to interact with their customers More

than half of EU citizens use online banking to check their balance or transfer money through internet banking in 2018 In the same year, the penetration rate of using internet banking was high in Denmark (90%), while in the Germany, the number of people use this was 59%, up from 35% in 2007 with 40% have the banking application on the phone (Kaya, 2019)

Percentages of adult users of internet banking on population in Europe (Kaya, 2019)

However, the technology development also reduced the advantages of banks, as businesses and individuals can easily access the information more than before Data collection which cost months before can be done in few hours, therefore reduce the advantages of unique information from banking sector (Stultz, 2019)

Renovation 3.0 affected all the industry, but the renovation 4.0 in recent years had a huge impact on the banking sector New technologies were introduced like Artificial

Intelligence, Machine Learning, Big Data… made banks to adapt to the situation and

use those new technologies to keep improving their services The Covid -19 pandemics

did push the digitalization transformation of banking sector faster, as people were in lock – down and needed to stay at home to use the products and services from the banks According to Deloitte (2020), 35% of customers in the US increased their usage of online banking by 35% during the pandemics, with the banks sales going up from 25% digital to 75% digital In China, banks’ traditional model had been affected by the pandemics as the number of bank branches decreased tremendously, promoted the development of fintech

(Yan and Jia, 2022) Banking industry tried to meet customers’ expectations by innovating their products and services through digitalization process (Marcu, 2021)

The new technologies made an impact on the traditional activities of the banks, by providing digital lending The digital lending of the US grew to 41.1 billion USD in

2017 and expected to be 73.7 billion USD in 2022, although it is still relatively small in

comparison with traditional loans outstanding (Plesser et al., 2019) Moreover, they can

improve their price strategies, classify customers for recommending suitable products and services using BigData Also, banks can lower their operating cost using automation chatbot and improve customer’s services and efficiency by digitalization transforming Banks were expected that the operational cost saving from using chatbots will be 7.3 billion USD by 2023 (Moden and Neufeld, 2020) Bank’s transaction can be automatic which enables customers to make transactions through phones and tablets, hence reduce the roles of bank’s employees from making transactions to consultant’s roles The number

of bank personnel will be reduced by 30% (from 2.6 million to 1.8 million) in the US by

2025 and 38% in Europe (from 2.9 million to 1.8 million) thanks to the growing of technology

Besides lending, technology like artificial intelligence will be very important in the future

as its algorithm will help banks to determine customer scores, bank frauds and

classifications of customers (Mărăcine et al., 2020) Besides that, AI can help banks to go

against the cyber-attack – which costs the sector almost 360 billion USD per year, by

providing the information, solutions, and the fee for it (Choithani et al., 2022) In the

future, the incremental value that AI can add to the banks can reach 1 trillion USD

(Biswas et al., 2020) The AI patents positively impact ROA of the banks at significant

level, and described this dependent variable by 7% (Kaya, 2019) Hence, banks are

moving aggressively to apply more technology, as it helps them reduce costs, expand new businesses, and improve their profit

Applications of AI technologies in banking sector (McKinsey & Company, 2021)

However, after all, banks still need to focus on their core system, as it will be the right direction for the long term Many banks are trying to replace the entire core system – which is costly and takes an extremely long time Also, replacing the core brings “risk of creating legacy for the future” Therefore, instead of replacing everything, banks should consider which parts are going to modernize, which one can wait By using cloud vendors, banks can make major changes which fit well to their core for replacement But this process still needs time, so banks should carefully consider their core for the future (Deloitte, 2021b)

With the change of technology, banks faced some new entrants, such as Fintech companies, Big Tech firms and neo-banks By providing financial services based on the

new technology, those companies can provide some new financial services and products;

they can even do better and crowd out traditional banks activities (Hornuf et al., 2021)

With the tighter regulations applied to banks, especially after the GFC and Covid – 19 pandemics, the banking system has some limitations in their services In contrast, Fintech companies are less regulated and can join the excluded field from banks From that, they can take the customers base and hence, decrease banks profitability (Temelkov, 2018) Big Tech companies like Google, Facebook, Alibaba… with their technology and customers base can enter the payment services industry – which banks was dominated for years and causing big trouble for traditional banking system, especially in China- the

biggest market in the world Big Tech mobile payments equal to 16% of China’s GDP,

in comparison with less than 1% in the US and the UK (Carstens, 2019) Hence, banks

must invest and apply more in technology, if not, the Fintech companies are always ready to replace and make them lose their customers

Fintech corporations have been growing up in recent years and got direct into some of the banks most important services, include payments, digital lending, digital banking and so

on The lending sector of the banks has been influenced a lot, as according to S&P, total amount originated from 16 big US Fintech firms was 41.1 billion USD in 2017 With the ability to offer cheaper and better services, Fintech is now challenging the traditional

banks (Stulz, 2019) Bank’s revenue could be lower by 29 – 35% by the influence of

the Fintech firms if they won’t act and improve their services (Drummer et al., 2016)

Besides Fintech, neo – banks also are a part of technological advancement that banks need to face Neo-banks do not exactly challenge the traditional banks; they provide their services to a specific segment of customers on digital channels Some of their services are for customers whose size does not fit the policy of the traditional banks, like tax calculations or withholdings, credit payments…Many neo-banks cooperate with the traditional banks, while some big banks Goldman Sachs created their own digitally originated banks (Bradford, 2020)

2.1.3 Changes in consumer’s demand to Banking products &services

The Covid – 19 pandemics did change the lifestyle of the customers, especially in payment and transactions, as they rely more on technology services from banks instead of traditional ones People had to stay at home for 1-2 years’ period during the

lock-down rules by the government, therefore the digitalization of banking system happened to satisfy the need from customers The customer’s experiences will now be the focus of the banks as they need their providers to provide them the services fast, personalized, and frictionless Increasing customer satisfaction about to get the banks better returns, growth and reduced the cost; the shift in relationship with the customers

will be the trend after Covid – 19 pandemics for the banking sector (Chheda et al., 2023)

The benefit of improving customer’s experiences (Chheda et al, 2023)

In recent years, a survey conducted by EY showed that 27% of the participants changed their primary financial relationships (PFRs) from traditional banks to neo banks; most of them are 25- to 34-year-old (20% of the respondents) People choose this kind of digital bank for deposits and payments, which have been the main services of traditional banks for years The market shares of traditional banks will be affected by neo banks in the future, even with the services that they provided for consumers for a long time Moreover,

to maintain the relationship with customers, banks need to personalize their services to

meet consumer’s needs, with 81% of gen Z care about this feature (Bellens et al., 2021)

That means even before the Covid – 19 pandemics, the change to digitalization banks was growing, due to change in lifestyle of the consumers, especially younger people

The percentages of gen Y (born within 1980 – 1994) and gen Z (born within 1995 – 2010) which are the main customers of banks increasing over the years, because they were

growth in the booming decade of internet and mobile phone In 2022, Gen Y and gen Z

consisted of more than 45% of world population and become an important segment that banks need to focus on Gen Z is quite different from other generations, as besides

fee and rates considerations, they demand better services and experiences from the banks The transactions should be efficient, better accessing information and more personalized services and products; therefore, Internet-Only Banks become a convenient choice for them The outcome and interaction quality of the services will be the main factors that

keep the gen Z customers loyal to the IOB (Kaabachi et al., 2022) Hence, the trend in

competitiveness around the world moved to customer centric instead of product centric like before

The change in behavior makes banks change their strategy as they move to the digital channels, with focus is the trust building with consumers Digitalization will be the primary focus of the banks; hence banks need to re-evaluate multiple channels – especially the online ones to interact better and satisfy customers preferences (Mistrean, 2021) Customers are now seeking digital convenience services and faster response time from the banks; therefore, banks should adapt new technologies to serve customers better based on their change in demand The innovation of banks benefit customers due to cost-effectiveness services and products they provided, hence, they are more likely to stay and keep using this bank Therefore, banks need to provide innovative services and products, improve digital banking experiences and interactions to meet customer demand With the positive interactions, consumer will use more services and benefit the banks for a long time as the bank fulfill their demand (Tiwari, 2023)

The age pyramid of the world until 2022 (Source: https://www.populationpyramid.net/world/)

Also, customer loyalty depends on how the banks act to fulfill the change in customers’

lifestyle Rahi et al (2017) stated that internet banking is the key for customer’s loyalty;

the e-customers services and perceived values also play an important role to keep customers staying at the bank Therefore, the banks should focus on improving the e-

customers services and internet banking to get brand loyalty from their consumers, adapt with the change in consumer behaviors

2.1.4 High motivation to change from Covid – 19 pandemics in banking industry

Due to the Covid – 19 pandemics, banks had high motivation to change to adapt with the situation, especially in the lock – down period where most of the transactions are done online In China, 100 million adults first use digital transactions while 80 million do this

in India More than 65% of adults around the world were making digital transactions (World Bank, 2022) According to Deloitte (2021c), in their survey, many services of banks have been using more during the pandemics, including the consumer loan online with highest raise (16%)

Deloitte survey about people changing their behavior towards internet banking during the

in both emerging and advanced economy That motivates the banks to transform to support more cashless transactions, for instance, they increased the limits for card payments (BIS, 2021) Therefore, the Covid – 19 pandemics pushed the digitalization of

banks, making them to change for more online and cashless services, which may serve customers better and be more convenient

Due to the increasing of using online services from customers, banks can have the motivation to not keep or open new branches; also, the number of tellers will be reduced and more agents for specialized products will be hired (Saka and Aksoy, 2022) Moreover, banks are motivated to train their employees to be consistent in working with new technology The process of the banks must be straightforward, agile, responsive, efficient, quicker, and flexible in response to the demand of customers The operating process of the banks and how they maintain the relationship with customers changed Covid – 19 pandemics boost the way banks use digitalization for their activities and services; therefore, the challenge will be how bank combine the strength of human and technology By going through digitalization process, banks can reinvent themselves and can self-protection against future pandemics (Romdhane, 2021)

The increasing of credit transfer and contactless card in 2020 (BIS, 2021)

The digital platforms of banks were growing fast during the pandemics because people were using online services to purchase things, which made the traditional activities of banks shift away with the pressure from non-banks providers Consumers no longer need

to print and sign the documents for the banks, they only need to confirm the transactions and receive an email The digitalization transformation was growing further, pushing the bank outside the safe zone to compete with other new competitors like fintech companies Also, banks spend more money on cyber risks, which have become a serious threat since digital services are growing On the other hand, Covid – 19 pandemics motivate the banks

to cut costs by allowing employees to work from home instead of going to the offices

The improvement of technologies allows banks to do that when most of the people are told to stay at home The cost of transportation, cleaning, electricity… were no longer exist, help the banks save large amount of money However, allowing employees to work from home may be inefficient and increases the cyber risks for banks (Resti, 2021)

2.2 From Vietnamese business environment context

2.2.1 Lending uncertainty in Vietnamese banks

Banking is an important sector in Vietnam, as most firms and individuals view this as the only sources of financing in credit market Until 2014, there were 47 commercials banks

in Vietnam with 5 State-Owned Banks, 5 foreign banks and 4 joint ventures with other 33 private commercial banks and 52 branches of foreign banks The total assets held by banks in Vietnam were double the GDP at that time, with the amount of 180.5 billion USD, but the quality was questionable The growth in lending of Vietnam was significant from 2005 to 2013, with the average of 28% but slowing down since 2011, because of SBV control (Canh and Hien, 2015)

The first thing was uncertain related to lending activities in Vietnam is the cost The

customers of Vietnamese banks are households and businesses But the corporations in Vietnam consist of 96% of SME in 2016, which account for 22% of total bank lending

with 50% of SME’s loans came from State-owned banks (OECD, 2021), which create

high risks for the banks due to the unprofessional on how they manage their business In the late 2012, 67% of the bank’s assets in Vietnam, on average, was loan and

large percentages of investing in stocks or real estate’s make the system become risky The non-performing loans of the sector grew strongly from 2009 and reached 4.67% in

April 2013 (Vo and Nguyen, 2014) Hence, the costs for lending to risky businesses in

Vietnam was high, and the uncertainty comprise part of this expenses

Percentages of SME in Vietnam (Source: OECD, 2021)

The growth in economics of Vietnam created the bubble in real estate market, which

heavily depends on banks loan created the crisis in the country and showed that they

were kind of accept high risk for high return; SBV and the government had to take

actions In 2013, the lending rates in Vietnam were extremely high, with 19.7% of the loans have the interest rates higher than 13% and 6.3% of them higher had the rate larger than 15% Later, due to SBV actions, the percentages of loan had interest rate higher than 13% and 15% reduced to 13% and 5.6% one year later, respectively Also, the VAMC (Vietnam Asset Management Company) was established to resolve the non-performing loans issue, with 45,000 billion VND of bad loans were bought for restructuring,

recovering and sell from commercial banks (SBV, 2014) However, the costs were still a

problem for Vietnamese banks, as the deposits rates in the country are higher in comparison with some nations Vietnamese bank’s deposit rates are higher than most of

the countries selected from 2002 to 2022 (China and other 4 countries in Southeast Asia

region), only trailed to Indonesia from 2014 until now That makes the lending rates in

Vietnam are higher, hence, rising the credit and default risks for the banks and increase the level of uncertainty for lending activities

Deposits rate in Vietnam and other comparable countries (Data Source: World Bank)

Because of the high costs of funding, banks with better sources will have extraordinary competitive advantages About the competitive rivalry in Vietnamese banking system, they can be separated into 2 groups: commercial banks and state-owned

banks (SoBs) (include 4 banks BIDV, Agribank, VCB and Vietinbank) In recent years, banks in Vietnam compete through CASA ratios, which help banks lower their funding costs, hence, provide better lending costs to the customers Also, this ratio illustrates the ability to attract customers to use other services in current account of customers rather than just lending Techcombank and MBBank were the 2 banks in lead of CASA ratios in

2022, while in SoBs, Agribank had relatively low of this ratio (around 10%) and Vietcombank had far better number of 30% That means the SoBs have the advantages over commercials banks in absolute numbers, based on their assets

Data Source: FiinPro

While commercials banks get their funding from deposit of customers and other banks in secondary markets, the SoBs can get extra funds from Vietnamese Treasury, which have the interest rate less than deposits Also, the CASA mentioned above of some commercial banks are high in term of percentage, but the absolute numbers of SoBs are better Moreover, the deposit rates of SoBs are less than those of commercial banks due to the

reputation of them as the government of Vietnam is their biggest shareholder That

creates a problem about the competitiveness in banking sector of Vietnam because rising the CASA ratio is not easy, it takes years of continuous growth in products and services for MBBank and Techcombank to get the high ratio, not to mention the reputation of the banks

The second thing is uncertain about Vietnamese banking sector is the lending activities In 2013 and 2014, the growth rate target of Vietnamese credit was much lower

than before with only 12 to 14%; the growth rate of 2018 was in this range with 13.3% In long term, the growth in credit and GDP are negatively correlated; therefore, that coincident that the credit growth of Vietnam fluctuation and decreased in comparison with the period before while GDP keep going up That means the credit quality have been improved with the new policies from SBV, with tighten policy for real estate loan, while structured to lend out for other sectors like manufacturing, agriculture and SME increased (+7.7%, +7.2% and + 3% in 2018, respectively) (Pham and Nguyen, 2020)

Credit growth in some Asians countries (Pham and Nguyen, 2020)

Lending amount of some types of banks in Vietnam from 2009 to 2013 (Canh and Hien,

2015)

The lending activities of Vietnamese banking system kept on uncertainty after the fast-paced period after 2013 According to Fitch Ratings (2019), the leverage of

consumer on Vietnam banking system increased to 58% of GDP in 2018 from 31% in

2013, much higher than countries in the same region as Indonesia or Philippines The amount of retail loans also rose to 44% in 2018 from 32% of 2013 with the data from 11 largest domestic banks, secured by property Because of the risk from property loans, SBV increased the risk-weighted in calculation for CAR of Basel for real estate loan to 150-200%, making banks be more careful when making housing loans to customers and increase their cost for lending out to customers

Retail loan growth and loan composition in Vietnam (Fitch Ratings, 2019)

As mentioned above, with cheaper sources of funding, SoBs can provide lower interest

rates to lenders and have competitive advantages over commercials banks To

contrast, the total assets of SoBs had risen about 2 to 4 times from 2012 to 2022, with BIDV having the fastest growth and the most assets in 4 banks in 2022 (around 90 billion USD, 4 times higher than that of 2012) In comparison, the total assets of the 10 commercial banks selected in this research have been growing from 60 billion USD to

more than 200 billion USD, less than the combined of 4 SoBs about 105 billion USD

Data Source: Orbis

Around 90 billion USD differences between their loan’s amounts shows that, with the advantage of lower funding rates, the SoBs can lend out better and get profit BIDV were also the leader of net loan, with the amount in 2022 was 62.85 billion USD Net interest incomes of SoBs are showing that they take their advantages, with those incomes of SoBs combined to more than 9 billion USD in 2022, with Agribank earning the most from lending out to customers (2.55 billion USD) The income of commercial banks has

changed over the years; until 2022, Techcombank, MBBank and VPBank were the leader, with net interest income at 1.28, 1.53 and 1.74 billion USD, respectively The differences

between them are constant over the years, showed that despite the improvement in

marketing, improving services in the traditional activity, the SoBs still manage to be better, hence, the trend of competitive in lending still unchanged over the year

Data Source: Orbis

Data Source: Orbis

The advantages of SoBs, however, were not shown through the NIM were lower than those of commercials banks; however, the non-performing loans (%) of them were

better Techcombank, MBBank, VPBank had much higher NIM than all 3 of SoBs,

especially the case of VPBank when they have FE Credit – the biggest consumer financial company in Vietnam Their NIM in 2022 was more than 7.5%, far better than other commercial banks and SoBs However, their non-performing loans were also high and was one of 2 banks exceed threshold of 3%, besides Maritimebank (3.01%) The NPL of SoBs were all quite low, with Vietcombank only having about 0.68% of NPL in 2022, showed that they care about the quality of the loan more than just growing the lend

outstanding The cost for higher NIM of commercial banks is much larger than those

of SoBs

Data Source: Orbis

Data Source: FiinPro

Normally, SoBs have lower deposit rates because of their reputation, especially when the case of Saigon Commercial Bank appeared last year Hence, their amount of customer’s deposit has been growing over the years and much larger than those of commercial banks, with more than 100 billion USD difference in 2022 Agribank had the highest amount of deposit, with almost 70 billion USD in 2022, almost triple the number 10 years ago Not only CASA of SoBs is higher, but overall, they got more deposits from customers than commercial banks, which makes the trend of competitiveness in lending stable

Data Source: Orbis

Another type of income that banks compete in is trading income, which some commercial banks have been rising over the years However, this income is relatively small in comparison with net interest income and fluctuated over the years, depending on the trading skill in some specific years

After stabilizing the credit growth rate in many years, the lending activities of Vietnam banking system faced uncertainty one more time with the appearance of the Covid – 19 pandemics During the pandemics, the growth of credit kept the pace in

2020, 2021 despite the lock down from the government Between 2020 and 2021, SBV supported the economy by reducing the policy rates several times and allowing banks to extend payment times Therefore, the credit growth in 2020, 2021 were 12.17% and 13.61%, respectively Those numbers are aligned with the target of SBV; in the next year when Covid – 19 pandemics ended, the credit growth in Vietnam was 14.18% However, the credit risk rising due to the huge amount of debt extended during the period

- 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 AGRIBANK

BIDV VIETCOMBANK VIETINBANK VPBANK MBBANK TECHCOMBANK ASIA COMMERCIAL BANK

SACOMBANK HDBANK SAIGON - HANOI BANK

TIEN PHONG BANK MARITIME BANK EXPORT IMPORT BANK

Total customer deposits (billion USD)

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Credit to the economy of Vietnam from 2020 to 2022 (State Bank of Vietnam, 2023b)

In addition, foreign banks in Vietnam appeared in 2011 and compete, but not in the lending activities The number of foreign banks went up to 9 with about 50

representatives’ offices in Vietnam from 2015 to 2019, and they were outperformed the domestic banks The NIM of foreign banks in the period 2010 – 2018 was average at

3.78%, higher than domestic banks, based on their cheap sources of funds from base countries, diversification in products and services, the technology, and skilled employees Also, they dominated in ROA (ranged from 0.81% to 2.59% in the period of 2010 – 2018) while many banks in Vietnam struggle with the Basel 2 in this time range, but not the ROE due to the restriction in branches and transaction points, the discourage from expansion and infrastructure limited, hence, they are difficult to expand their market shares in Vietnam However, foreign banks have not been affected the main activities of domestic banks, as they only had 8.6% in deposit and 6.9% in lending, much less than SoBs and commercial banks of Vietnam They focus mostly on non-interest income and total operating income as they have many innovative products rather than Vietnamese

banks (Huong et al., 2022) Therefore, the threat of new entrants - foreign banks are

small for banking industry in Vietnam now, as the main activities of them are not

affected much

Deposit and Lending of banks in Vietnam from 2014 to 2017 (Huong et al., 2022)

2.2.2 Technology development in Vietnam banking system

Vietnamese banking sector had already invested and upgraded the technology years ago to compete, with the renovation 3.0 Before the Covid – 19 pandemics, Vietnam

banking industry have already invested in technology According to Austrade (2020), in

2019, there were 19,000 ATM and 270,000 POS in Vietnam with 78 banks offer the

internet payment to customers Among the banks, 47 provided mobile banking and

29 others have QR code payments, make customers easier to use their services

Like the world, Vietnamese banks had been adopted the digital transformation to improve the efficiency in operating, cutting the cost by innovation in products and services in the renovation 4.0 This also helps to enhance the customer experiences and

have competitive advantages in the markets 60% of Vietnamese banks had the digital transformation creativities at the end of 2019; the services that digitally transformed including e-know your customer (e-KYC), QR code, chatbots… (Austrade, 2020) However, the change in Vietnam is not significant, due to the limited in policies and regulations that prevent the banks to expand their products and services The asynchronous of policies make banks have many difficulties applying the new technology

to their products

ATM, QR code and mobile banking in Vietnam (Austrade, 2020)

In the Covid – 19 pandemics years, the digital transformation of Vietnam was strongly

developed The renovation 4.0 changes the face of the banking industry, hence, banks

stayed focused on this for many years Many banks were preparing or in progress of

developing their own digital transform with three basic approaches: front-end channels developments, internal process and combine both those two approaches to form a new entity – digital-only banks Promoted by the Industrial Revolution 4.0, the banking sector

is going into strong wave of digital transformation, with 40.6% already approved the digital transformation plan, 31.9% are in implementation phase and 20.3% have plan to

do this strategy Only 7.2% are not doing anything about digital transformation Moreover, 70% of financial institutions are willing to use the technology such as Data

Analytics, Open API… for products and services (Ha and Nguyen, 2022) Because of the

need for digital transformation, Vietnamese banks need to recruit high quality employees, which they lack The demand for high-skilled employees is extremely strong for the banking sector (Nguyen and Dao, 2021) Banking sectors in Vietnam

short of employees in IT departments, with 20% increase in job postings in 2022 in comparison with 2021 This sector will need about 45,000 people to work as IT staff in the next 5 years and started recruiting For instance, Techcombank recruited 700 out of 4,300 people to work in digital transformation in 2021 (16%); and they tend to increase their IT department’s employees from 500 to about 1,400 at the end of 2022 (Le, 2022)

That means the banks are now looking to improve their products through new technologies and gain a competitive advantage

The level of technology availability in Vietnam (Ha and Nguyen, 2022)

Besides applying new technology, banks in Vietnam also upgrading their heart of the digitalization, the core banking system With the upgrading of the core banking system,

banks have a chance to provide better services for the customers, reducing waiting time and serving them with a wide range of products In 2018, Sacombank, one of the largest commercial banks in Vietnam, upgrade their core banking system with the collaboration with Temenos Since upgrading their core banking, Sacombank have cost efficiency, centralizing the database, and leveraging real-time data management With 2.2 million e-banking customers in 2020, the upgrade brings Sacombank many benefits in the future Besides Sacombank, Techcombank is also Temenos’s customers, with the relationship from 2001 until now Techcombank constantly upgrading their core with the help from Temenos, which helps them improve their efficiency, risk management and customer’s services (Temenos, 2021)

However, the digital transformation of Vietnam banking industry has some challenges, especially because of incomplete legal framework The government of

Vietnam support the digitalize transformation but there are many new products and services associated with distributed ledger technology like smart contracts, assets, crypto currencies… that need clear legal framework to work on; however, the regulation in Vietnam still unfinished Those laws should be accelerated to complete for banks to use those new technologies to improve the products and services Besides that, the rises of Fintech companies and neo-banks make the banking system faced many new competitors which can provide many of their traditional services, but linked with convenient technologies (Ha and Nguyen, 2022)

Throughout the years, besides traditional banks, neo-bank, and Fintech companies (like Timo, VPBank Neo, Yolo, Tnex) have been developing and become partnership with the traditional banks According to Fintech Singapore (2020), the number of

Fintech companies jumped from 39 to 123 in 2020; most of them worked on payment and

P2P lending However, most of the Fintech companies cooperate with the banks to

develop their customer base For instance, Momo – the payment application united with

24 banks to provide their services, attracted 10 million customers in 2018 By working together with Fintech companies, banks can apply the new technology on finance and banking fields, hence, improve their productivity, services quality and decrease the cost Cooperation has been increasing in recent years, as it enhances the ability to reach more customers of banks For instance, the partnership with a Fintech company helped Viettinbank to reach 15,000 companies in 113 countries, or MBBank got 45,000

customers in 1 year after working with Viettel (Lien et al., 2020) From that, the threat

from Fintech – the new entrant company is low, because they cooperate with banks to

get the customer base and grow together

Number of fintech start-up in Vietnam (Lien et al, 2020)

The neo banks entering the banking system can be a risk for profitability of traditional banks Timo, Cake, Ubank and Tnex are the 4 neo-banks currently operating in Vietnam but need to coordinate with banks They provide most of the basic services of banks, and focus mostly on young and low-income customers, quite limited in comparison with traditional banks For example, most of Timo customers’ ages ranged from 18 to 35, only 10% of them are older than 35 Due to limited segmentation, the neo-banks in Vietnam have to customs their products and services to fit with their targeted customers (Hoang and Tran, 2023)

The cyber risks arise from the technology development for the banks will make them more difficult in digitalize transformation: A report from Ministry of Public Security of

Vietnam showed that bank suffered from 4000 cyber-attack with the loss of 100 billion VND, including one bank with 44 billion VND The targets of cyber-attack are stealing or breaking the data or damaging the assets of the banks and customers Banks, their customers and partners are placed at high risk from cyber-attack, which becomes the challenge for the digital transformation of the sector (UEH, 2022)

Another threat for banks in the technology development environment of Vietnam is the independent P2P companies In recent years, besides the rising of fintech companies

collaborating with the banks, there are many of those kinds that have been trying to provide P2P lending services Started from 2016, the P2P lending in Vietnam have 40 companies, mostly come from foreign countries They worked in 4 models, one offer recommendations for the fee, one works together with the banks to provide products and services, another mobilization of capital through their website or applications and the last

model is they create their own apps for lending (Nguyen et al., 2021)

P2P companies in Vietnam (Nguyen et al, 2021)

Those companies have attracted many customers that are not satisfied with the bank requirements for lending In 2019, Vaymuon – biggest P2P platform in Vietnam had 2 million consumers and 400,000 investors; Mofin have half a million users at the same time… Most of them provide short-term loans with relatively low interest rates with small amounts to get more customers using their services (Fintech News Vietnam, 2019) However, until now, the effect of P2P companies in Vietnamese banking sectors is unclear and if it has, the impact is dramatically small and therefore, the threat from them

to banks is low Shadow banking is also a substitute for incumbent banks, but there is not

much information about this type of bank and their customers are in different segmentation in comparison with those of banks, so they are not a threat for the bank Crypto currency – another substitutes, still banned in Vietnam and post no threat to the banks

Banks are still the main source of funding for many individuals and corporations in many

years to come; it’s difficult to replace their products and services soon, hence, the threat

of substitutes is low

2.2.3 Changes in consumer’s demand to banking products & services in Vietnam

In Vietnam, the number of people who are accept the new technology increasing, especially younger and tech-interest person However, the number of people who doesn’t have a bank account was still large, about 41% don’t have formal bank account, and the percentage of non-cash transactions was only 4.9%, much lower in comparison with

Thailand (59.7%), Malaysia (89%) … (Le and Tran, 2020) Hence, unlike other banks

in the world, the change in Vietnam should be consider older age people, who are willing to use bank’s services at the branches and don’t want to change to online banking

In 2022, the percentage of GenZ was only than 20% of Vietnamese population Although the percentage was low, Gen Z will be the main labor force in the next 10 years, they were born in the era of explosive in technology, mobile and social networks Gen Z are the type of customers that can be very innovative, not dare to change and want the digital transformation from the banks Moreover, as gen Z care about approach and attraction from the banking applications, therefore banks should focus on some features like personalized services, attractive theme and account numbers, marketing more about the

mobile banking products… (Nguyen et al., 2023) The focus shifted from product

centric in the past to customer centric in the future According to KPMG (2020),

customer centric are the core strategy of many financial services companies, including banks to transform from product centric – which they were doing at that time due to limited in ability TCB was at the top of implementing customer-centric tactics, while Vietcombank considered this strategy as core value of growth

Because the banks in Vietnam’s income now rely mostly on lend out, so the power of customers in the banking sector of Vietnam is high Without customers, banks cannot

possibly do anything to make profit, hence, they must satisfy their customers, especially the wealthy individuals and corporations With the technology change and the change in demand from customers as mentioned above, banks need to adapt with the change and support the customers Consumers now have many choices of banks, and if they are not feeling satisfied with the services of the banks, they are likely to change to use products

and services from another financial institution Tien et al (2021) stated that to improve the

satisfactions of customers, banks need to care about the demand of customers, make them trust, improving features, shorten the transactions times and bring more convenience to