The practical and theoretical necessity ofevaluating profitability ROAA, ROAE and income diversification stems from the practicaland theoretical necessity of the influence of technology
Regarding the rationale of the Study 5< 5s ưe 9 1.2 Research objectives 1.3 Subjects and Scope of the SEUdẢ sec rrriee 12 1.4 Methods Of Study -s- 5à HH HH HH1 g1 12 1.5 Scientific and practical significance Of study . -ccersexeerrerirerrrrrrrrree 14 1.6 Structure Of a research Paper uu cceessscsessecssessessesseesseeseesseesteseeseesecseestesseeateseesteaeeseeaeess 14
Countries worldwide are experiencing significant integration across various industries, especially in finance and banking, which play a crucial role in the economy The banking sector is essential for both practitioners and regulators due to its impact on macroeconomic factors such as economic growth, entrepreneurship, resource allocation, poverty alleviation, education, and agriculture (Githaiga & Yegon, 2019) Inefficient banking operations can hinder economic growth by limiting capital investment necessary for producing goods and services (Dietrich & Wanzenried, 2014) Furthermore, the monetary stability of most countries is closely linked to banking activities As commercial banks continue to develop, they are adopting competitive strategies regarding service fees and enhancing their technical infrastructure to better meet customer needs promptly.
The Industrial Revolution 4.0 presents banks with significant opportunities to enhance and diversify their banking products and services, thereby supporting the Government's goal of comprehensive financial inclusion The rise of Fintech firms has intensified competition in the banking sector, compelling traditional banks to innovate and adapt to meet evolving customer needs (Tran Viet Dung & Lu Huu Chi, 2020).
In 2018, it was noted that companies participating in the shadow financial market have been able to enhance their financial services at a significantly lower cost This shift not only offers cheaper and more convenient options for consumers but also poses a direct challenge to traditional banks, impacting their profits and market share (Vives, 2019).
Continuous investment in digital technology and the enhancement of e-banking systems have become essential survival strategies for banks, especially in the wake of the financial crisis, despite global cybersecurity threats Over the past few decades, the banking industry has experienced significant transformation and growth, marked by substantial investments in IT and a rise in digital banking processes Information and Communication Technology (ICT) plays a crucial role, with banking activities increasingly permeating various sectors of national economies As banks adopt advanced technologies and modernize their operations, they are also launching a variety of innovative products and services.
Collaboration with fintech companies is transforming the financial market, offering tools such as online savings, e-wallets, and smart banking that encourage customers to conduct transactions via smart devices instead of visiting bank branches This shift presents significant opportunities for commercial banks, as increased investment in technology is expected to enhance bank productivity The digitization of financial services allows for the automation of payment systems, which accelerates the financial intermediation process, ultimately benefiting both banks and their customers.
1999) The global technological revolution allows banks to expand services in a cost-effective manner (Agyekum & ctg, 2016), and to promote financial development through global expansion (Tchamyou & ctg, 2019).
As global banks continue to boost their technology budgets, financial losses persist, prompting a critical examination of the effectiveness of such investments The rise of cybersecurity firms, particularly in Vietnam, highlights the growing concern over financial security in the banking sector This situation leads to an important question: do technological investments truly benefit banks in mitigating risks and enhancing their financial performance?
In the face of rapidly changing market conditions driven by technological innovations, banks must navigate risky decisions to survive (Uddin et al., 2020) This dynamic fosters a mutual relationship between banks and Fintech companies While Beccalli (2007) and Gupta (2018) provide empirical evidence indicating that increased technology spending negatively impacts profitability, Uddin & ctg (2020) present a more nuanced view, suggesting that while technology investment can enhance bank stability, excessive spending beyond a certain threshold can be detrimental Additionally, Ngonzi (2016) warns that over-reliance on technology may compel banks to take greater risks, highlighting the complex interplay between technological advancement and financial stability in the banking sector.
Banks face the challenge of investing in costly technology applications that often yield low efficiency and high risks To navigate this landscape, they must adopt effective technology investment strategies or consider mergers with other businesses Additionally, the sophistication of financial crimes has increased, complicating the task of securing customer information during transactions Consequently, it is essential for banks to prioritize investments in advanced security technology to safeguard their operations and protect customer data.
Vietnam's banking system has experienced transformative changes in operational management, technological application, and the introduction of modern financial services The deployment of fintech technology presents both opportunities and challenges, prompting researchers and regulatory authorities to assess the impact of technological investments on banking efficiency and stability Despite the growing importance of information and communication technology (ICT), there is limited research in Vietnam examining its effects on commercial bank operations This thesis aims to explore the relationship between ICT and key performance indicators like ROAA and ROAE, highlighting the necessity of understanding technology's influence on banking practices The findings are intended to inform policy recommendations for the sustainable development of the banking sector, which plays a crucial role in competition and international integration Therefore, the thesis titled "The Impact of Information and Communication Technology (ICT) on Commercial Banks: Empirical Evidence from Vietnam" is of significant relevance.
The thesis investigates the following aims based on the study challenges stated in "The Impact of Information and Communication Technology (ICT) on Commercial Banks: Empirical Evidence from Vietnam":
The primary objective of this study is to analyze the impact of Information and Communication Technology (ICT) investments on the operations of commercial banks in Vietnam Understanding the effectiveness of ICT is essential for bank administrators and policymakers, as it provides crucial empirical evidence to propose solutions that can enhance the stability and growth of Vietnam's commercial banking sector.
Detailed objectives: The thesis delves into the following specific aims from the broad objective:
> Research on the impact of Technology and Communication (ICT) on commercial bank profitability (ROAA, ROAE) in Vietnam.
> Investigating the influence of Information and Communication Technology (ICT) on the income diversification of commercial banks in Vietnam.
To attain the aforementioned goals, the thesis focuses on resolving the following research questions:
1/ What is the impact of ICT on ROAA of commercial banks in Vietnam?
2/ What is the impact of ICT on ROAE of commercial banks in Vietnam?
3/ What is the impact of ICT on income diversification of commercial banks in Vietnam?
4/ What are some policy recommendations regarding the use of technology and communication (ICT) for commercial banks?
1.3 Subjects and Scope of the study
The thesis investigates the following topics: Information and Communication Technology (ICT), profitability (ROAA, ROEE), income diversification, and commercial banks in Vietnam. Scope of study
> Spatial scope: 32 Vietnamese commercial banks.
> Time span: Data on the ICT index and the profitability of Vietnamese commercial banks are available from 2014 to 2020.
This thesis utilizes a quantitative approach, implementing a multivariate regression model on pooled cross-sectional data, alongside descriptive and comparative methodologies The primary objective is to quantify the impact of Information and Communication Technology (ICT) on commercial banks, as highlighted by De Young and Rice (2004).
To identify additional factors affecting commercial banks, the author utilizes various independent variables that represent banking and ICT characteristics These control variables are incorporated into all models to assess their relationship with the dependent variable.
Figure 1 1 Summary of research sequence
Objectives of the study Impact of ICT on profitability of commercial banks Impact of ICT on income diversification of commercial banks Impact of ICT on commercial banks
Research Methods Using quantitative method with multivariate regression model on pooled cross-sectional data, combined with descriptive and comparative methods
Research results ICT has a positive impact on profitability of commercial banks in Vietnam
ICT has a positive impact on income diversification of commercial banks in Vietnam ICT has a positive impact on commercial banks in Vietnam
Suggest policies on ICT for commercial banks and issues related to commercial banks in Vietnam Some limitations and directions for future research are outlined
Source: The author summarizes the research process.
1.5 Scientific and practical significance of study
First, through studying the impact of ICT on commercial banks in Vietnam, the thesis provides a theoretical overview framework on the correlation of ICT to commercial banks.
The study examines the profitability indicators, including ROAA and ROEE, alongside income diversity in Vietnamese commercial banks Its findings provide valuable insights for bank planners and administrators, enabling them to anticipate technological trends in banking and develop effective investment strategies focused on enhancing profit and income diversification.
The impact of Information and Communication Technology (ICT) on Vietnamese commercial banks can be analyzed through two key models: its influence on profitability and its effect on income diversification By leveraging these insights, banks can adjust their policies and enhance communication strategies to mitigate potential drawbacks while maximizing the positive outcomes of ICT implementation.
Fourth, this study can serve as a premise for future studies on the impact of information and communication technologies (ICT) on commercial banks in Vietnam.
The study is organized into four chapters, complemented by a table of contents, lists of acronyms, tables, figures, references, and appendices.
LITERATURE REVIEW AND THEORIES -c+ecsesseseesesseserssssrsersrs 16 2.1 Literature (2/2 8 2.1.1 Literature review on ICT for commercial banks 2.1.2 Literature review on ICT for the profitability commercial banks
Literature review on ICT for the income diversification commercial banks 2.1.4 Literature related reViCWS Qe eccseecseeseeseesteseeseeseeneesteeseeatesneeaeesseeateseeseesteeseeateeneeaeeees 21 2.1.5 Research ỉ2DS ch HH HH HH HH HH HH 1g 24 2.2 Rationale for information and communication technologies (ICT)
The role of information technology in the banking industry According to Lichtenberg
Investing in IT offers substantial advantages, particularly within the banking sector Research by Mario Castello (2006) highlights that the Indian banking industry has gained a competitive edge across various facets of the economy Banks are leveraging advanced technology to enhance core banking services, and the restructuring of business processes has significantly improved delivery efficiency Furthermore, the integration of IT in banking has led to notable improvements in overall service quality.
Effective communication and connectivity are essential for restructuring regulatory business processes Information technology facilitates advanced product development and enhances market infrastructure It also supports reliable risk-control methods and aids financial intermediaries in accessing remote markets, enabling banks to achieve geographical diversity.
Research by De Young and Hunter (2003) and De Young et al (2004) reveals a contrasting perspective on the role of IT in creating competitive opportunities for small banks in the United States These banks capitalize on individual consumers who lack access to financial markets and electronic financial products, tailoring their offerings to meet this demographic's needs Despite differences in cost and service quality, small banks, including those that do not utilize IT, strive to enhance their diversification strategies by exploiting market gaps.
The study by Huong et al (2019) highlights the significant role of information technology in enhancing income diversification within Vietnam's banking sector IT facilitates the development of modern electronic products and services, aligning with the broader trends of the 4.0 era in finance and banking Additionally, factors such as total assets, asset growth rates, and diverse lending activities also play crucial roles in bank diversification Therefore, to optimize business diversification strategies, it is essential to consider these factors alongside technological advancements.
The authors used the following model:
R-Div;,= Bo +B ,ICT;,+B2Size;,+B3Growth;,+B,Loans;,+ B;Deposits;,.+ E¡: where:
NON (Non - interest income) represents non- interest income
NET ( et- interest income) represents net interest income
NETOP is the bank’s net income calculated as the sum of NON and NET.
Research Models Research subjects Contents and Results
ROA, ROE Independent variables: FOCUS Diversification Index,
Non-interest income expenditure NII
Impact of income diversification on bank risk and return
- Research results show that when banks diversify income, especially expand non- interest activities, reduce risks, and increase profits for banks.
- Research conducted on 23 domestic banks and 16 foreign banks in the Philippines from 1999 to 2005.
Risk - Bank risk Independent variable: diversification of portfolio, assets
- The study was carried out ona sample of 384 listed banks from 56 countries, the data was taken in the period 2001-2007
Table 2 1: Summary of a study on the impact of diversification on bank stability
In Vietnam, a developing country with a relatively small corporate bond market, the profitability and income diversity of commercial banks are crucial topics, particularly regarding the "Impact of Technological Development on Banking Operations." Research by Trung et al (2020) highlights the significant positive influence of technology investment on banks' operational efficiency and stability, demonstrating its beneficial effect on net interest income.
(NIM) ratio However, no evidence of a link between technology spending and bank stability was discovered The authors believe that the study will be beneficial to both bank
21 administrators and regulatory agencies in terms ofbank management and administration, as well as development policy orientation.
The Fourth Industrial Revolution is reshaping the banking sector in Vietnam through the integration of technologies such as the Internet of Things, advanced robotics, and cloud computing This technological evolution, which includes artificial intelligence and nanotechnology, significantly influences various fields, particularly banking Digital technology is crucial for Vietnamese banks, as it not only reduces transaction, transportation, and management costs but also enhances financial savings.
Several studies have investigated the impact of income diversification on bank risk within the Vietnamese banking sector Batten and Vo (2016) found that Vietnamese commercial banks engaged in non-interest income activities tend to face higher risks, which contrasts with the conclusions of Nguyen, Vo, and Nguyen (2015), who suggested that such activities may actually lower bank risk, particularly for larger institutions Our research aims to clarify this relationship by utilizing various indicators of bank risk to assess whether income diversification indeed mitigates risk in Vietnam Additionally, we analyze the size effect to determine if the efficiency of capital provision and stability of commercial banks differ between large and small banks, as well as their influence on the development of financial markets.
Vo Xuan Vinh and Tran Thi Phuong Mai (2015) conducted an assessment of the business performance and stability of Vietnamese commercial banks, utilizing two key indicators: Return on Assets (ROA) and Return on Equity (ROE).
+ ROE measures the return a bank generates to its shareholders based on equity.
+ ROA measures a bank's profitability based on its assets.
Measuring profitability and income diversity is crucial for commercial banks to maintain stability and strengthen resilience during challenging times, particularly amid tough monetary policies or economic crises.
In addition to Return on Equity (ROE) and Return on Assets (ROA), key metrics for evaluating a bank's performance include the bad debt ratio, coverage ratio of non-performing loans (NPLs), capital disbursement ratio, credit growth rate, and cost/income ratio These indicators provide a comprehensive assessment of a bank's financial health and operational efficiency.
The evaluation of commercial banks' performance relies on various key indicators, which can be prioritized based on specific investment goals and market conditions.
Income diversification is crucial for commercial banks, as highlighted by a study on Philippine banks from 1999 to 2005, which found that increasing non-interest activities reduces risk while enhancing profitability By diversifying products and services, banks can mitigate risks and improve financial health, ultimately benefiting shareholders This diversification is achieved through the development of new offerings, expanding the customer base, strengthening risk management, and investing across various economic sectors Consequently, both profitability and income diversity are vital for the sustainability of commercial banks and play a key role in boosting confidence among customers and shareholders This significance is why these factors were selected to assess the impact of ICT on commercial banks.
To enhance profitability and diversify income, commercial banks must implement a robust business strategy centered on innovation in products and services, streamlining operations, and investing in promising economic sectors Consequently, the role of Information and Communication Technology (ICT) emerges as a critical lever for commercial banks to stabilize and boost operational efficiency, posing a significant question for the industry.
Numerous studies have explored the profitability and income diversification of domestic commercial banks, with various authors examining the topic from diverse perspectives and research focuses Recent notable research projects in this area highlight the ongoing interest and significance of understanding these financial institutions' performance and strategies.
A study by Vo Xuan Vinh and Tran Thi Phuong Mai (2015) explored the benefits and risks of income diversification in Vietnamese commercial banks, revealing that while diversifying operations can increase income, it also leads to lower risk-adjusted profits The authors concluded that during the period from 2006 to 2013, income diversification did not yield significant benefits for Vietnamese commercial banks.
Literature review of Information and Communication Technology (ICT)
The rapid advancement of information and communication technology (ICT) over the past few decades has transformed the world into an information society, providing individuals, businesses, and governments with unprecedented access to vast amounts of information and knowledge Key ICT infrastructure, including fixed-line telephones, mobile phones, the Internet, and broadband, has improved resource allocation efficiency, reduced production costs, and stimulated increased demand and investment across various economic sectors.
Information and Communication Technology (ICT) is recognized for its pivotal role in driving economic growth, yet empirical studies reveal mixed outcomes regarding this relationship While some research indicates that ICT diffusion significantly enhances economic growth, particularly in developed nations, other studies suggest a negative impact in various regions Investigations into developing countries have employed diverse econometric models, but results remain inconclusive, leading to ongoing debates among experts about ICT's growth-enhancing potential in poorer nations Recent scholarly focus has shifted towards the effects of ICT on economic growth in the Middle East and North Africa (MENA) and Sub-Saharan Africa (SSA), spurred by a notable rise in ICT adoption in these regions.
25 telephone and mobile cellular subscriptions, the number of Internet users, and the number of broadband subscriptions (World Bank 2017; International Telecommunications Union 2017).
Research highlights a strong positive link between Information and Communication Technology (ICT) and economic growth, supported by modern theories like neo-Schumpeterian and neoclassical growth theory These theories suggest that ICT enhances the economy by acting as a form of capital that improves production processes, leading to advancements in technology and labor quality Consequently, ICT contributes to value creation at both business and sectoral levels, ultimately driving productivity and fostering national economic growth.
Research on ICT in the MENA and SSA regions is still in its early stages compared to developed and Asian countries There is a need for further exploration and discussion to better understand the impact of ICT diffusion on economic growth in these areas.
Vietnam has embraced the rapid advancement of information technology and the Internet, leveraging them to enhance economic competitiveness and bridge the gap with developed nations On November 1, 2022, the Central Propaganda Department held a conference in Hanoi to review a decade of implementing Resolution No 20-NQ/TW The country is experiencing significant impacts from the Fourth Industrial Revolution, with notable progress in various scientific and technological fields Vietnam ranks among the leaders in ASEAN for basic sciences, including mathematics, physics, and satellite technology, while certain disciplines like natural science, computer science, and engineering at some universities have achieved advanced levels.
The study "Impact of Technology and Communication on Economic Growth in Vietnam" by Ha Thanh Cong highlights the need for increased investment in ICT infrastructure to drive economic growth It emphasizes that policymakers should implement key policies to foster the development of the financial sector, creating a supportive regulatory and institutional environment.
26 institutions, strengthen the economy, increase government priorities, and develop infrastructure.
The study "Impact of Technology and Communication on Vietnam's Economy" by Dang Thi Viet Duc evaluates the effects of Information and Communication Technology (ICT) on Vietnam's economy across macroeconomic, industrial, and business levels The findings reveal that ICT has significantly contributed to the positive growth of Vietnam's economy.
Technology and Communication (ICT) for the banking industry
In Vietnam's banking industry, information and communication technology (ICT) significantly influences bank development, prompting substantial investments in financial technology innovations Over the past decades, banks have adopted various technologies such as electronic point of sale (EFTPOS), automatic teller machines (ATMs), the SWIFT system, electronic data interchange (EDI), mobile banking, peer-to-peer lending (P2P), crowdfunding, mobile payments, and blockchain banking As highlighted by Wonglimpiyarat (2017), ongoing investment in digital technology and enhancements to e-banking systems have become essential strategies for banks, particularly following the global financial crisis, while also acknowledging the vulnerabilities to cybersecurity threats.
Figure 2 1: The development of digital-based innovation
EFTPOS/ Debit card Electronic money transfer at the point of sale
ATM/Cash Plus network card,
Cirrus/Meatro a mm Visa Debit
Smart card (with chip technology) |
Bank payment via mobile banking, M-PESA
Digital payment system - Digital currency like Paypal,
Google Wallet, Apple pay, Alipay, LINE pay, WePay
Source: Compiled from the authors
Despite global banks increasing their technology budgets over time, losses persist, particularly in cybersecurity, which has surged in places like Vietnam This situation prompts a critical question: does investing in technology truly benefit banks?
Researchers advocate for increased spending on digitization in financial services, arguing that it enhances bank productivity through system automation and economies of scale Studies by Chemmanur (2002) and Hancock et al (1999) highlight the role of advanced payment systems in accelerating financial intermediation The global technological revolution allows banks to expand their services cost-effectively, fostering financial development through worldwide growth (Agyekum & ctg, 2016; Tchamyou).
Technological deregulation has enabled major US banks to enhance their production, marketing, security, and customer service in consumer loans As noted by Hunter (2003) and De Young et al (2004), advancements in information technology are expected to lower interest rates for customers and reduce sales costs by facilitating faster financial transactions.
Excessive reliance on technology may lead banks to take greater risks, particularly as they navigate rapidly changing market conditions driven by technological innovations (Ngonzi, 2016; Uddin et al., 2020) This creates a complex relationship between banks and fintech companies Furthermore, empirical evidence suggests that increased spending on technology can negatively impact profitability (Beccalli, 2007).
A study conducted by PGS, Dr Nguyen Duc Trung, Dr Tran Viet Dung, and Lu Huu Chi examined the effects of cyber technology spending on the performance and stability of 12 commercial banks in Vietnam from 2011 to 2019 The findings indicate that while technological investments enhance the efficiency of banking operations, the impact is not statistically significant.
To harness the potential of information technology, Vietnam and its banking sector must become "E-ready," meaning they should be prepared to develop and apply ICT effectively This readiness will enable them to capitalize on the advantages offered by these technological tools.
"E-readiness," which refers to the preparedness for the development and implementation of IT and ICT, serves as a valuable assessment tool not only in Vietnam but also in other Southern countries.
The Vietnam ICT Index, developed by Harvard University in collaboration with the Vietnam Informatics Association and the National Steering Committee on IT, evaluates the development and application of information and communication technologies (ICT) in Vietnam This index encompasses various communication tools, including computers, the Internet, radio, and telephones, along with essential software It aims to provide insights into the current state of IT development and assess the readiness for further advancements in the sector.
The ICT index in the banking sector is measured by four groups of indicators (29 indicators):
IT-IICT technical infrastructure IT-IIT human resources infrastructure
Organizational environment and policies for
Table 2 2: Component of ICT index
These indicators are collected directly from the reports of commercial banks These reports are prepared according to the form provided annually by the Vietnam Informatics Association.
2.2.5 Data of Information and Communication Technology (ICT)
The author analyzes the ICT Index data, sourced from the Vietnam Informatics Association and the Office of the National Steering Committee on IT, covering the period from 2014 to 2020.
Profitability is a number that indicates a company's ability to generate profits over a long period of time under constant operating conditions.
Measuring bank performance is a complex process that utilizes accounting and market data to evaluate an institution's financial condition at a specific time and its management effectiveness over a period Profitability serves as a key performance indicator, with common measurement methods including returns on assets (ROA) and returns on equity (ROE) Additionally, Laeven and Levine (2007) propose an alternative measure using Tobin’s Q, which compares the market value of equity and preferred shares to the book value of total assets.
Ahmed and Khababa (1999) assessed bank performance in Saudi Arabia using three key ratios: Return on Equity (ROE), Return on Assets (ROA), and the percentage change in earnings per share According to Sinkey (1992), ROA serves as a comprehensive measure of overall bank performance and reflects managerial efficiency in converting assets into net earnings Conversely, Rose and Hudgins (2006) argue that ROE effectively measures accounting profitability from a shareholder's perspective, indicating the net benefits stockholders gain from their investments Additionally, Akintoye (2004) identified net profit margin (NPMARG), return on capital employed (ROCE), and ROA as proxies for organizational performance, highlighting the importance of information and communication technology cost efficiency (ICTCE) in evaluating performance through both resource-based and sociotechnical perspectives.
The ICT capability of an organization refers to its ability to effectively gather, integrate, and utilize valuable resources, enabling it to establish or maintain a competitive edge within its industry (Russo and Fouts, 1997).
2.3.2 Theoretical basis of bank profitability
Research on banking business or profitability mostly focuses on two main theories: Market Power Theory (MP) and Efficient Structure Theory (ES)
MP theory encompasses two main approaches: structure-behavior-efficiency (SCP) theory and relative market power (RMP) theory The SCP theory posits that the structure of a market influences company behavior, which in turn affects market outcomes like profitability, innovation, and growth Specifically, a more concentrated banking market leads to higher lending rates and lower deposit rates due to diminished competition Additionally, as noted by Berger (1995), firms with significant market shares and unique products can leverage their market power to generate non-competitive profits For instance, large banks with strong brand recognition and high-quality offerings may raise their prices to enhance profitability.
ES theory posits that the interplay between market structure and firm performance is largely influenced by the performance of individual firms According to Olweny and Shipo (2011), banks achieve higher profitability through enhanced efficiency The theory can be viewed from two perspectives: X-efficiency and scale efficiency Muharrami and Matthews (2009) highlight that firms with higher X-efficiency tend to realize greater profits and market shares by minimizing production costs across various outputs Conversely, Olweny and Shipo (2011) emphasize scale efficiency, indicating that larger banks benefit from lower production costs, which in turn leads to increased profits due to economies of scale.
Data of Information and Communication Technology (ICT)
The author explores the ICT Index, derived from the Vietnam Informatics Association's report and the Office of the National Steering Committee on IT, by conducting experiments using data sets spanning from 2014 to 2020.
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Profitability is a number that indicates a company's ability to generate profits over a long period of time under constant operating conditions.
Measuring bank performance is a complex process that relies on accounting and market data to evaluate an institution's financial health at a specific moment and its management effectiveness over time (Jianu et al 2017) Profitability serves as a key performance indicator (De Andres and Vallelado 2008; Liang et al 2013), with two primary methods for assessment: return on assets (ROA), which reflects returns on average total assets, and return on equity (ROE), representing the ratio of returns to equity Additionally, Laeven and Levine (2007) introduced a different approach using Tobin’s Q, calculated as the sum of the market value of common equity and the book value of preferred shares divided by the book value of total assets.
Ahmed and Khababa (1999) assessed bank performance in Saudi Arabia using three key ratios: Return on Equity (ROE), Return on Assets (ROA), and the percentage change in earnings per share According to Sinkey (1992), ROA serves as a comprehensive measure of bank performance and managerial efficiency, reflecting the bank's ability to convert assets into net earnings In contrast, Rose and Hudgins (2006) argue that ROE effectively gauges accounting profitability from the shareholders' perspective, highlighting the net benefits received from their investments Additionally, Akintoye (2004) identified net profit margin (NPMARG), return on capital employed (ROCE), and ROA as proxies for organizational performance, influenced by both resource-based and sociotechnical views, particularly regarding the efficiency of information and communication technology costs (ICTCE).
The ICT capability of an organization reflects its ability to gather, integrate, and utilize valuable resources effectively, enabling it to establish or maintain a competitive advantage within its industry (Russo and Fouts, 1997).
2.3.2 Theoretical basis of bank profitability
Research on banking business or profitability mostly focuses on two main theories: Market Power Theory (MP) and Efficient Structure Theory (ES)
Market Power (MP) theory encompasses two main approaches: Structure-Conduct-Performance (SCP) theory and Relative Market Power (RMP) theory SCP theory posits that the structure of a market influences company behavior, which in turn affects outcomes like profitability, innovation, and growth Specifically, in a concentrated banking market, lending rates tend to rise while deposit rates fall due to diminished competition Additionally, as noted by Berger (1995), firms with substantial market shares and unique products can leverage their market power to secure non-competitive profits For instance, prominent banks with strong brand recognition and high-quality offerings may raise prices to enhance their profit margins.
ES theory posits that the interplay between market structure and firm performance is fundamentally shaped by the performance of the firms themselves Olweny and Shipo (2011) argue that banks achieve greater profitability through enhanced efficiency This theory can be examined from two perspectives: the X efficiency approach, as discussed by Muharrami and Matthews (2009), which indicates that more efficient firms tend to secure higher profits and larger market shares by minimizing production costs across various outputs Conversely, Olweny and Shipo (2011) highlight the scale efficiency perspective, suggesting that larger banks benefit from reduced production costs, thereby leading to increased profits due to economies of scale.
Bank profitability is influenced by both market factors, as suggested by MP theory, and internal efficiency and management decisions, as argued by ES theory and portfolio theory Numerous studies, including the work of Olweny and Shipo (2011), incorporate a variety of internal and external variables into bank profitability measurement models To further elucidate changes in bank profitability, internal factors are examined using the breaking framework, Camel product, and the IMF's Financial Soundness Indicators (FSIs).
Evaluating a bank's profitability involves various criteria, as empirical studies indicate that economists adapt these criteria to meet their research objectives (Jianu et al 2017) Profitability serves as a key performance indicator, summarizing financial health (De Andres and Vallelado 2008; Liang et al 2013) Common methods for measuring performance in businesses, particularly banks, include Return on Assets (ROA) and Return on Equity (ROE), which assess returns based on average total assets and equity, respectively This thesis focuses on fundamental indicators such as ROA, ROE, Average Return on Assets (ROAA), and Average Return on Equity (ROAE) (Ariss, 2010; Uhde and Heimeshoff, 2009), which are widely utilized in empirical studies and practical management of Vietnamese commercial banks (Chiaramonte and Casu, 2017; Chen et al., 2018; Sahyouni and Wang, 2019).
Average Assets Average Common Stock Equity
In the banking sector, the pursuit of higher profits often leads to heightened risks Consequently, alongside profit maximization, it is essential for banks to diversify their activities to effectively mitigate and distribute these risks (Chiorazzo et al 2008; Stiroh 2004a, 2004b).
2.4 The theory of bank income diversification
Diversification is crucial for banking activities as it optimizes competitive strategies and enhances stability By leveraging economies of scope, banks can achieve cost savings through the joint production of diverse services while increasing revenue through cross-selling fee-based financial products alongside traditional lending services This approach enables banks to explore new sectors, seize profitable opportunities, and ultimately boost their income.
Banks enhance the stability of corporate operations by addressing information asymmetry, allowing them to gather valuable insights about their customers This strategic service provision not only gives banks a competitive edge in offering additional services but also helps mitigate overall banking risks.
Diversification in banking, while expanding the size and scope of activities, can lead to increased complexity (Rajan et al., 2000) More diversified banks often leverage this complexity to engage in riskier investments, capitalizing on the minimal regulatory capital requirements associated with various fee-based services This trend is increasingly evident in the corporate strategic planning of commercial banks amid international economic integration.
Diversification of content is prevalent across various sectors such as finance, banking, science, and technology In a business context, diversification involves creating new products or services, as defined by the Cambridge Dictionary The term "diversity" originates from the Latin word meaning "to make dissimilar," highlighting the different applications of diversification in various industries In finance, diversification refers to investing in a wide range of assets to maximize returns while minimizing risks In the banking sector, it entails developing new products and services, expanding business areas, or increasing territorial reach to gain a competitive advantage and enhance income and profits.
Banks can adopt various diversification strategies in their business plans to enhance income, reduce costs, and attract more clients, ensuring long-term stability and growth Increasing bank revenues is a key performance indicator, especially as regulatory pressures on credit activities and capital safety limit profit opportunities while posing significant risks Consequently, many global customers are increasingly turning to diversification as a means to explore new revenue streams through innovative products and services.
2007; Campa and Kedia, 2002), income diversification is regarded as the best indicator reflecting the results of diversification strategies.
The concept of bank income diversification
Diversification of bank income refers to the increase in non-interest income as a proportion of total income, contrasting with a concentration strategy characterized by high credit income According to Mercieca et al (2007), this diversification manifests in three main trends: financial products and services, regional diversity, and a blend of geographic and commercial diversification By enhancing non-interest income, banks can improve their overall net income, making the diversification of financial goods and services a crucial strategy for financial growth.
Income diversification in banking refers to the increasing proportion of non-interest income relative to total income This strategy is particularly effective for banks with a high return on credit The concept encompasses both interest and non-interest revenue streams Since the late twentieth century, this trend of diversification has gained global traction, as noted by Rose and Hudgins.
(2008), banking income diversification is the shift from traditional credit activities to non- traditional companies such as service fees, commissions, and other enterprises.