Khóa luận tốt nghiệp Tài chính ngân hàng: Impact of non-interest incom on business performance of Commercial banks in Vietnam

"4, UNIVERSITY OF ECONOMICS AND BUSINESSFACULTY OF FINANCE AND BANKING Or’ 90O-GRADUATION THESIS IMPACT OF NON-INTEREST INCOM ON BUSINESS PERFORMANCE OF COMMERCIAL BANKS IN VIETNAM TEAC

"4, UNIVERSITY OF ECONOMICS AND BUSINESS

FACULTY OF FINANCE AND BANKING

Or’

90O-GRADUATION THESIS IMPACT OF NON-INTEREST INCOM ON BUSINESS

PERFORMANCE OF COMMERCIAL BANKS IN VIETNAM

TEACHER INSTRUCTION : Dr LUU NGOC HIEPSTUDENT NAME : NGUYEN THUY DUONG

STUDENT CODE : 19050635CLASS : QH2019-E TCNH CLC2

I hereby declare that this graduation thesis is my own work, with the support of mysupervisor, and has not copied the work of others This is my own research work The data andsecondary information used in the thesis are sourced and clearly cited

This statement is entirely my responsibility

Student

(Sign )

Nguyễn Thùy Dương

During the process of making and completing my graduation thesis, I have received helpand support from many sides First of all, I would like to thank my mentor — Dr Luu Ngoc Hiep

He is a person who is always dedicated, enthusiastic to guide and guide me throughout the time

of researching and writing this thesis In addition, through the thesis, I would like to express mydeepest gratitude to the teachers who are teaching at the University of Economics - VietnamNational University, Hanoi, who have instilled in me the passion and knowledge of economics

from basic subjects to specialized subjects The lectures have helped me to have backgroundknowledge about the major in Finance - Banking which I am studying, from which I cancomplete this research topic Finally, I would like to thank my classmates and family, who havealways been by my side and supported me throughout the process of writing this thesis

Sincerely thank

TABLE OF CONTENTS

DECLARATION o G0 0900000000060 00600000000050606008030600800604000080000080708040096 2RECOGNITTIONN G0 Ọ TH 0000000008 0080.01600000100016000.0100090008090098 3LIST OF TABLES cccssssssssssssscesscssssssesssessscssnssscssesssesessssessssssesssssesssessssssesssassssssessseesesees 6LIST OF FIGURES c- G G5 03999.900.000 000000018000016000010001600001808000018686 75/0220 8CHAPTER 1: INTRODUC TIONN c- G5 G5 93.0 900.50 006 0300050086801804600408040886 9

CHAPTER 2: LITERATURE RIEVIEW SG cọ TT TT 000000060010 8006 066 11

2.0 CHAPTER INTRODUCTION - G5 G39 99.0 006001088380680480868080 886 11

2.1 THEORETICAL BASIC OF NON-INTEREST INCOME OF COMMERCIALBANK nọ cọ HT 00 0001000100010 00010008000001000100100010080008040809108048 11

2.2 REVIEW OF RELATED LITERA TURE . <5 << << 5 s£SsEEssSesesseessees 13

2.3 MAIN TRENDS IN CHANGES IN INCOME STRUCTURE AT VIETNAMESECOMMERCIAL BANK - G9 0000000000001001000601008060408000800800080008856 14

2.3.1 THE TREND OF INCOME RESTRUCTURING OF VIETNAMESE BANKS INRECENT TIIMIES G5 cọ 100001800 00000100000180908000018090 804 14

2.3.2 EXPERIENCE IN DEVELOPING NON-CREDIT SERVICES OE SOME

BANKS IN THE WORLD G5 <5 93 09090500960050008001808386688588808010805000086 15

2.3.3 OPPORTUNITIES TO REALIZE THE TARGET OF INCOMERESTRUCTURING csccssscsssscssecssscscsessssscesssssscssssessccsscsessoesssssssosssssessecsssssssoesoes 17

2.3.4 LIMITATION IN THE DEVELOPMENT OF NON-CREDIT SERVICES IN

VIETNAM G0 In 000000000 01800600100008010001000001000800080100008010000000080 19

2.3.5 EXPERIENCE FOR VIETNAMESE COMMERCIAL BANKS 20

2.4 CHAPTER SUMMARY .sscsssssssssscssssessssssesssnssscssessssssesssessssssesssessesssesssessessseseeeses 21CHAPTER 3: METHODOLOOYY << 5< <5 9 99.910.00.00 0.0000000010000 0008009050 22

3.1 DA TẢ 090 0000000000600006000000600060000008006008008060008006008008000008000804000800880 223.2 RESEARCH CONNTIEÌNT - G5 G5 9.99 4 TT T9 000008008000 16090806 223.3 RESEARCH MIETHODS c G0000 0000000060086884088480188040008010886 22

3.3.1 RRESEARCH HYPO THESIS - G5 Ăn HH 0000 008688466886 8856 223.2.2 MEASURE BUSINESS PERFORMANCCE 05G SG 05005 69568056 243.2.3 MEASURE CONTROL VARIA BLLES - <5 <5 Ă5S5319555195556555 15568856 25

3.3 RESEARCH MODELS G5 00.50090000 00060016603004680366838008050068000886 263.4 CHAPTER SUMMARYY 5 G5 3.19 0 10 000001800100006008000804 28

CHAPTER 4: EMPIRICAL RESULTS <5 G5 5 5G 53 598915 69568855669568655 66 29

4.1 DESCRIPTIVE STATISTICS - 5c G5 G59 90.0 00000088380588050888000 886 29

4.2 RESULT OF REGRESSION ANALYSIS co 0G 9 c0 09 60056 32

4.3 DISCUSSING RESEARCH RIESUL/TTS o5 5= 5< 59 9 9 0090 20 34

4.4 CHAPTER SUMMMA RRYY 0 G5 HH TT TT 0 T0 0000000016009 00096 40

CHAPTER 5: CONCLUSION AND RECOMMENDA TION -<ccSS se <ssee 41

5.1 CONCLUSION AND POLICY IMPLICA TIONS 55-55 S25 55225 95 41

5.2 THE RESEARCH CONTRIBUTIONS o5 5= 5< SE 19 190850 30 43

5.3 LIMITATIONS AND RECOMMENDATIONS OF THE RESEARCH 44

REFERENCES G0 cọ TH I0 0 00.004 016006060908 45

References in English o5 5 5 5s 9.9 0 Họ 0 00 000400000 45References in V€{TIAIT€SC - 05 6 G5 5 5 9 9 9 0 0.10 1000000 1004.0609 000049600 006096 45

LIST OF TABLES

Serial Table name Page

1 Table 1: Description of variables in research models 29

2 Table 2: Descriptive statistics of variables 30

3 Table 3: Correlation matrix table of variables in the model 32

4 Table 4: Summary of the results of three models OLS, FEM, REM 33

5 Table 5: Estimation results after fixing model defects 34

LIST OF FIGURES

Serial Table name Page

1 Chart 1: ROE and ROA of commercial banks in the period 2018-2022 29

Chart 2: Growth of non-interest income components to total income of

commercial banks in 2018 - 2022

The bank profit mainly from traditional activities is credit, but credit contains many risksdue to banks in a passive position when granting credit to customers When diversifying types ofservices, expanding non -profit business activities, the bank will use thoroughly and effectivelytechnical facilities and staff of each bank, due to the bank, due to So will reduce managementcosts, operate costs, increase maximum profits for the bank This article uses data from thefinancial statements of 27 Vietnamese commercial banks and the General Statistics Office of

Vietnam for the period of 2018 - 2022 to study the impact of non -interest income on the bank'sbusiness efficiency With the following objectives: income from service activities as a percentage

of total income, income from foreign currency transactions as a percentage of total income,

income from the sale of securities as a percentage of total income, and income from capital

contributions and share purchases on the total revenue, the increase in the bank's total assets, theproportion of loans to customer deposits, and the equity to total assets According to researchfindings, financial metrics relating to non-interest income have an identical impact on how wellcommercial banks operate Since then, investigate and suggest ways to diversify non-interest-generating business ventures to boost financial efficiency and reduce risks for Vietnamesecommercial banks

Keywords: Interest income, business efficiency, commercial banks

CHAPTER 1: INTRODUCTION

Banks are forced to broaden their service offerings as a result of the market economy's

growth, business diversification, and rising demand for financial and banking services The goal

is to offer consumers and the economy a wide variety of financial products in a timely, flexible,

and high-quality manner Banks reduce expenses in terms of human resources and technology

when they increase their activities in commission, fee, investment, business, etc services (Baele

et al., 2007) More data can be gathered concurrently, allowing for the development of moreactivities, the cross-selling of existing items with consumers, and the exploitation of customerrelationships for the marketing of additional existing products in order to boost market share,revenue, and profit

Service fees include money transfer fees, check payment fees, entrustment and consultingfees, card service fees, account management fees, and service usage fees will increase as non-interest commercial activities expand banking online and other sources of revenue In addition tohaving the benefit of supplying a large client base, non-credit activities also assist otheroperations and serve a complementary function, which helps to indirectly profit from theseactivities by, for example, creating new jobs By using a staff payroll service, maintainorganization payment deposit accounts and issue payment cards

In addition to net interest income from traditional business activities of raising capital and

lending, Vietnamese commercial banks now also expand their income sources from serviceprovision and foreign business activities exchange, buy and sell securities, contribute capital andbuy shares of other enterprises These sources of income are collectively referred to as non-

interest income The rapid and uncontrolled expansion of non-interest income sources can put

banks at risk and suffer great losses, especially income sources from high-risk activities such asforeign exchange trading, purchasing sell securities Therefore, studying the impact of non-interest income activities on the business performance of banks in Vietnam is an urgent topic

In recent years, Vietnam's banking industry has gradually shifted the income structure ofbanks between interest income and non-interest income While it is indisputable that this changerepresents a relevant step forward as profits are higher, there is nevertheless some doubt as to theimpact this change will have on commercial banks as a whole So, the fundamental question that

I address in this article is: does this change positively affect risk-adjusted bank profitability Or

The results of the study's empirical analysis suggest a positive answer to that question: thatfor Vietnamese commercial banks, the shift to non-interest income generating activities hasproven to be a helpful In addition, our findings suggest that the diversification benefit associated

with non-profit revenue declines with bank size: small banks gain financial performance from

increasing external income very small profit; performance gains appear to be linked to

non-interest income in general, not to the specific line of business that generates that income

The profitability of commercial banks has been positively impacted by non-interest income,

according to numerous studies conducted worldwide, including those by Smith et al (2003),Chiorazzo et al (2008), Elsas et al (2010), and Gurbuz et al (2013) Researchers Nguyen MinhSang & Nguyen Thi Thuy Trang (2018) and Huynh Thi Huong Thao & colleagues (2021) haveuncovered evidence of the beneficial effect of non-interest revenue on bank profitability inVietnam The aforementioned studies, however, do not examine the effects of each incomegroup, simply the aggregate effect of total non-interest income on bank profitability In-depthanalysis is done in this study to determine how each non-interest income source affects bankprofitability The study's findings then play a crucial role in assisting bank managers inidentifying actions that significantly and favorably affect the profitability and operationalperformance of banks where proper operating and management policies can be established

The study's findings can also be used as a guide to aid securities investors in reading and

evaluating bank financial statements, particularly the information contained in non-interest

income statements, in order to provide a stronger foundation for choosing potential banks' stocks.Academically, this study has aided in the provision of concrete evidence about the effects ofelements affecting the profitability of commercial banks, including income from services, income

from foreign exchange trading, income from securities trading, and income from capital

contribution and share purchase Which of the aforementioned non-interest income categoriespositively affects the profitability of commercial banks?, The research findings help usunderstand What is the relationship between these income components and the profitability ofthe bank? Since then, the study's findings have added to the body of knowledge about how non-interest revenue factors affect Vietnamese commercial banks' operational success

In the next part of the article, we take a brief look at the aforementioned literature andprevious studies on the impact of non-interest income on the risk and profitability of commercialbanks; main trends in income structure at Vietnamese commercial banks Section 3 describes thedata and research methods Section 4 is the result of empirical research and discussion The finalsection is the conclusion and policy implications of the study

CHAPTER 2: LITERATURE REVIEW

2.0 CHAPTER INTRODUCTION

This chapter provides an overview of the effect of non-interest income on the performance

of commercial banks and discusses some important theories By looking at both empirical facts

and the econometric techniques used in previous studies, we can better understand how these twovariables interact Finally, the study aims to draw attention to potential directions of investigationfor further exploration

2.1 THEORETICAL BASIC OF NON-INTEREST INCOME OF COMMERCIAL BANK

Peter S Rose (1998) said that commercial banks are the most important intermediary

financial institutions in the market economy, transferring capital from places of excess to places

of shortage However, in terms of the nature of commercial banks as an enterprise, business

activities with the goal of maximizing profits within the allowable level of risk Therefore, the

evaluation of business performance of commercial banks is also based on theoretical foundationssuch as evaluating the business performance of an enterprise, and at the same time it is necessary

to consider the specific characteristics of commercial banks

In a narrow sense, the view on business efficiency of commercial banks is the ability to

generate profits, while ensuring the safety of the bank's operations in accordance with regulations

and limiting risks In a broad sense, Chang et al (2010) in their study of the commercial banking

system in Taiwan, said that business efficiency is not only concerned with profits, but also profitsfrom financial structure liabilities and assets must be reasonable, profit growth trend is stable

The operational efficiency of commercial banks also shows the ability to manage, control costs,and use resources to create outputs Commercial banks use resources such as labor, facilities, andfinancial resources for deposit, lending and investment activities as a basis for determining the

level of efficiency and impact factors

There are many views on the business performance of commercial banks According to

Farrell (1957), efficiency is a commonly used category to assess an entity's ability to maximizeits revenue output given given input costs, or in other words efficiency Results are the benefitsresulting from a particular activity

Evaluating the performance of commercial banks can be divided into two groups,

including:

e The indicators reflecting absolute efficiency (operating efficiency = economic results

-costs to achieve that result) allow to evaluate the performance of commercial banks inboth depth and breadth However, absolute efficiency does not indicate the possibility ofeconomical or wasteful use of inputs

e Indicators that reflect relative efficiency can be expressed in a static form (operating

efficiency = economic result/cost spent to achieve that result, or inverse performance =

cost/outcome) economic efficiency) either dynamic or marginal (operating efficiency =

increase in economic output/increase in costs) These indicators are very convenient in

comparison over time and space as they allow efficient comparison between banks ofdifferent sizes and different periods

Three patterns in revenue diversification in banks were discovered by research by Mercieca

et al (2007): diversification of financial services products, geographic variety, and a mix of

geographic diversification administration and commerce In order to improve the share of interest revenue in total income, commercial banks frequently diversify their income by movingtraditional business activities to non-traditional ones, claim Elsas et al (2010)

non-Non-interest income is the income of commercial banks that is formed from the difference

between revenues from providing products and services other than credit activities, conductingbusiness activities, investing and paying expenses expenses for the implementation of productsand services as well as business and investment activities The higher the ratio of non-interestincome, the greater the diversification of products and services other than credit as well as theeffectiveness of these products and services It also means spreading risks in business activitiesbetween banking products and services

Thus, there are many views on the business efficiency of commercial banks Depending onthe research purpose, the business efficiency at commercial banks can be considered in differentaspects In this study, the author's perspective on the impact of non-interest income on thebusiness performance of commercial banks is considered through ROE and ROA

2.2 REVIEW OF RELATED LITERATURE

Current studies in the world on the impact of non-interest income on financial and businessperformance of commercial banks have come to different conclusions From a theoretical point ofview, the decision to diversify sources of income is desirable for both efficiency and riskmanagement.

Due to economies of scale, the collaborative development of a wide variety of financialservices will boost the bank's efficiency (Klein and Saidenberg 1997) Because activities producerevenue, it is commonly accepted that diversifying income sources—that is, moving from interestincome to non-interest income—will reduce overall risk Diversification will stabilize operationalrevenue and provide a consistent stream of income because non-interest income is thought to be

uncorrelated, or at least imperfectly linked, with activities that generate interest income morecommitted than gain

According to DeYoung and Roland's (2001) research, when an average bank shifts its

product mix away from traditional lending activities and toward fees, its revenue volatility,

operating and financial leverage, and income level all rise This research used data from 472 US

commercial banks for the years 1988 to 1995 Along with that, here are some reasons why

non-interest revenue may make bank income more volatile:

e A bank that got into a fee-based relationship as opposed to a loan-based relationship

is more likely to lose customers

e It might be necessary to make sizable permanent investments in technology and

human resources to transition from interest income to non-interest income.Consequently, operating leverage and earnings volatility have increased

e Since many fee-based operations can be carried out with little to no legal capital

holding, they likely involve a higher level of financial leverage and have moreerratic financial results

U.S Smith et al (2003) examine how interest and non-interest revenue changed throughoutthe years 1994 to 1998 for the banking systems of 15 EU countries Examine the correlation ofincome sources for each nation while taking into account commercial, savings, cooperative, andmortgage banks as well as large and small banks They discovered that, in the majority of

situations, increasing reliance on sources of revenue other than interest helped stabilize

Research by Nguyen, Vo, and Nguyen (2015); Saunders, Schmid and Walter (2014); Singh,Upadhyay (2016); Van Thi Thai Thu (2022) concluded that non-interest income from non-traditional activities helps banks reduce risks and bring higher business efficiency compared totraditional services In addition, many studies on the impact of non-interest income on the

profitability of commercial banks also provide multidimensional conclusions Non-interestincome helps commercial banks improve profitability is the conclusion of Apergis (2014)

research Research by Edirisuriya, Gunasekarage, Dempsey (2015); Maudos (2017) came to the

Commercial banks in the world as well as in Vietnam have undergone significant changes

in recent years, especially after the outbreak of the Covid-19 pandemic During the epidemic,most banks' revenue decreased or went flat, but on the contrary, many banks had a sudden

The distribution between interest income and non-interest income of commercial banks andproduct line towards non-interest income activities is growing strongly The future trend ofbanking in the digital era, combined with the trend of deeper and deeper integration, will create

many opportunities to develop and expand banking services, change income structure, increase

interest rates service income in the total income of banks That context is both an opportunity

and a big challenge for Vietnamese commercial banks Therefore, the formulation of a

development strategy for the banking industry, including the content of income restructuring, is

posed as an essential requirement

2.3.2 EXPERIENCE IN DEVELOPING NON-CREDIT SERVICES OF SOME BANKS

IN THE WORLD

> Thai Bank of Bangkok:

One of the biggest banks in Thailand is referred to as Bangkok Bank Despite having alarge branch network, this bank continues to build up smaller branches to serve individuals, small

and medium-sized businesses, and other clients around the nation To better serve its customers,

Bangkok Bank erected small branches in prominent supermarkets and academic institutions and

kept open seven days a week Small branches generated 7 times more revenue and 60% more

consumers than the original due to network expansion and longer service times Bangkok Bank

continues to reopen branches in significant urban regions in addition to its achievements innetwork development to better meet the needs of its clients 32 additional business centers werealso opened by Bangkok Bank The bank's aim to reach clients with appealing offerings for eachcustomer category includes the opening of new business centers and consumer branches.Bangkok Bank expanded its range of services by providing direct cash services to branches at the

major provincial and municipal levels while also constructing the most modern check processingfacility in Thailand In addition to implementing the check service, Bangkok Bank has alsostarted a massive debit card issuing program in the market This bank therefore controls 22% ofthe domestic debit card market Bangkok Bank also introduced a contemporary banking operationcenter run by phone and other financial services in order to keep improving services and offerconsumers comprehensive services around-the-clock 24 hours

> Standard Chartered Bank Singapore:

One of the top retail banks in Asia, Standard Chartered Bank, generates more than 56% ofits total revenue from customer care and product development Currently, Standard CharteredBank Singapore has expanded its business into many other areas, and the parent bank has offices

in several Asian and global locations When it comes to providing investment services, Standard

Chartered Bank Singapore has emerged as the market leader Currently, this bank manages

investment capital for third parties through more than 200 branches Due to its size, the bank isable to create strong partnerships and provide innovative products It has a market shareadvantage over banks of a similar size as a result Additionally, this bank set up a network ofservice delivery channels, including internet banking, developed a program to automate servicedelivery channels to better serve clients, offered a contact center, mobile computers, etc., andaccepted deposits at branches and internet banks Additionally, Standard Chartered branchesimprove how technology is used in transactions Statistics show that 60% of this bank'stransactions to date have been completed through automated means

> Union Bank Philippines:

The finest retail bank among Philippine commercial banks was deemed to be Union Bank

of the Philippines The amazing and effective transformation of two traditional products into a

multi-product financial services organization and the use of technology in its business operations

are credited with Union Phillipines Bank's success in the retail sector consumer banking UnionBank Philippines initially encountered several obstacles and problems, including a lack of humanresources that prevented it from developing into a bank that could compete with bigger banks.This bank first prioritized growth through methodical growth and brand strategy, concentrating

on client acquisition and retention as well as affiliate network construction As of right now,Union Bank of the Philippines is the only bank in the country that enables customers to accessdeposit balances, make payments online, and use other banking services online Additionally, theBank makes use of various electronic banking services, such as: electronic invoice distributionand payment, which enables buyers and sellers to place orders to hold invoices and makepayments via the website of Union Bank Philippines Another achievement of Union Bank of thePhilippines is its decision to switch from the traditional non-cyclical marketing strategy to a

product-to-market marketing strategy, invest in the bank's construction, and improve customer

service standards

> Citibank Japan:

Citibank Japan branch builds an aggressive marketing strategy combined with strongfinancial potential to do business in Japan Citibank asked Japan to allow the connection ofJapan's financial network with Citibank's ATM system, but was refused by the Government and

only allowed to connect to the old Post Office Savings bank's ATM system Citibank did not miss

the opportunity to exploit these customers while domestic banks could not because the postal

savings bank was no longer connected to the ATM network The number of Citibank's individual

clients grew quickly over a short period of time Citibank is in a unique position to market

investment solutions to customers seeking higher returns than they would otherwise with over atrillion dollars in unique annual postal savings prevailing interest rate

Additionally, Citibank seizes the chance to expand retail services in line with the trend thatJapanese consumers are increasingly seeking for financial options and investment vehicles thatare more diversified than traditional services Citibank provides innovative services such ongoing24/7 ATM operations, regular mobile phone payments, and currency conversion for individualconsumers When Japanese people are concerned about their own banks, Citibank emerges as atrustworthy source

As the most trusted bank, Citibank has eclipsed the financial behemoth Bank of Mitsubishi and developed a business strategy that focuses on more than 15 million high-income

Tokyo-clients When providing information to customers about services such as: Online personalcustomer service, SMS banking service, Apple Iphone service, Citibank net service, e-IPOservice, ebanking security, e-market news, Citibank e-card, package service chains, investmentcapital management services for customers, services, etc., Citibank focuses on developing creditservices with high technology content Customers can access online tax declaration, paymentservices, and counseling at fair prices Customers can access Citibank's online services 24/7 bydownloading free application software The confidentiality of customer data and transactionhistory is a priority for Citibank The growth of insurance services is encouraged by Citibank,particularly long-term insurance services lasting five to fifteen years Citibank receives long-termand comparatively stable funding and fees from insurance products

2.3.3 OPPORTUNITIES TO REALIZE THE TARGET OF INCOMERESTRUCTURING

Income restructuring is a tendency that is unavoidable, and Vietnamese banks have various

Vietnam is a growing nation with an economy that is becoming more and moreintegrated by taking part in numerous free trade agreements (FTAs) at all threelevels: bilaterally, multilaterally, and regionally Demand for financial goods forimport and export such international payments and trade finance is driven by

developed economic activity

Second, given the enormous number of individuals who have yet to use the service,financial services still have a lot of space for growth The number of people whohave a bank account is not very large, and there are currently few banking servicesavailable in rural and isolated locations By the end of 2019, over 63% of adultsover the age of 15 had a bank account, according to the State Bank By 2025, thegovernment wants to see at least 80% of individuals have transaction accounts withbanks or other approved organizations, as stated in the National Financial InclusionStrategy

Third, there is a high demand for financial services such asset management,

consulting, and insurance due to Vietnam's rising per capita income, particularlyamong the middle class According to the World Bank (2018), over 70% ofVietnam's population may now be categorized as having a secure economic future,with 13.3% of that population currently belonging to the global middle class (upfrom 7.7% in 2010), among other statistics

Fourth, as technology continues to advance, banks have been creating contemporaryfinancial goods, enhancing product quality and customer satisfaction, andimplementing new technologies Banking services become increasingly practicaland necessary in socioeconomic life as a result

Fifth, the Government has made numerous recommendations and encouragingpolicies that have helped the bank's income structure change for the better, includinginitiatives to develop non-cash payments, a worldwide financial strategy, and afinancial strategy Developing a Decree that specifies a method for controlledtesting of financial technology operations in the banking sector, with the approval ofthe pilot Mobile Money implementation

Changes in the regulatory framework also have an important impact on the functioning ofthe market The project on restructuring the system of credit institutions in 2012 and 2018 on thebanking industry development strategy has content related to income diversification in order to

gradually transform the business model of banks in the direction of: gradually reduce dependence

on credit activities and increase income from non-credit service activities

One of the major areas of improvement in the business performance of many banks in 2022

is the substantial growth in service income In the final year of 2022, when interest revenue wasgreatly impacted by rising interest rates, the significance of non-interest income was furtherdemonstrated The bank will be able to diversify its revenue streams and see longer-term, morestable, and stable growth if it has an income structure that has a significant amount of non-interestincome The financial statements for 2022 of many banks show that the impressive growth innon-credit business, or non-interest income, has largely contributed to positive business results

2.3.4 LIMITATION IN THE DEVELOPMENT OF NON-CREDIT SERVICES IN

services, and paying attention to customer care However, the development of non-creditservices in Vietnam still faces some limitations prepared as follows:

Firstly, the development of the non-credit service market is not commensurate with itsinherent potential and the competitiveness is not high In 2022, 72.1 million Vietnamese peopleuse the internet The number of internet users accessing by smartphone is 95.8% Average dailyinternet usage time is 6 hours 38 minutes, of which social media usage is more than 2 hours Despite the impressive growth numbers, e-payment in Vietnam is still underdeveloped full

potential

Second, credit service is still the main service type of Vietnamese commercial banks.Compared with commercial banks in countries in the region and in the world, it can be seen thatthe proportion of revenue from credit services of Vietnamese commercial banks is still quite

large, about 70%

banking system in the market are still mainly traditional services such as mobilizing capital andproviding credit to the economy This shows that net interest from credit activities alwaysaccounts for about 70% or more of operating income of Vietnamese commercial banks The

proportion of income from other types of banking services in the service revenue of Vietnamese

commercial banks is therefore much lower than that of foreign bank branches in Vietnam and

even lower than that of foreign bank branches in Vietnam countries in the region and around theworld

Fourth, the distribution channel of non-credit services is not really effective Currently,with the network of commercial banks spread across the country, especially in developed cities,

the infrastructure for digital payment has developed strongly in recent times but is still notsynchronized

Fifth, banking technology has made progress, but it is not really synchronous andcompatible and there are still many loopholes in ensuring security and confidentiality

The above limitations stem from two groups of reasons, which are:

- Objective reasons: The country's economic potential is not yet strong; There is no

clear and sufficient legal corridor to create the best conditions for the development

of non-credit services of the bank; The level of international economic integration inthe banking sector is still limited

- Subjective reasons from commercial banks: The interbank electronic payment

system is still limited and not strong enough to change people's cash consumptionhabits; Marketing solutions have not been paid due attention by commercial banks;

The quality of human resources is not high; The quantity and quality of distributionchannels are not diversified enough to meet the needs of customers; The pricingpolicy for non-credit services is not really reasonable

2.3.5 EXPERIENCE FOR VIETNAMESE COMMERCIAL BANKS

It is possible to generalize and draw some reference experiences for Vietnamesecommercial banks based on the strategies used by banks in some of the aforementioned countries

to develop banking services as well as the constraints on income structure transformation thatexist in Vietnam:

e First, it is important to build the infrastructure required for the growth of financial

services, particularly the instruments and systems based on and connected toinformation technology

e The second step is diversifying the range of goods and services, linking the

modernisation of conventional with contemporary offerings

e Third, give the network the attention it deserves and logically expand it The

development of banking services is based on and requires a reasonable networkexpansion

e The right consumer policy is the fourth step Focusing on the increasingly complex,

varied, and specialized needs of customers in an increasingly evolving economy isparticularly important This calls for collecting and improving customer information

in order to increase client base and deliver safe and effective financial services

e Fifth, emphasize the public relations and advertising of the advantages of banking

services Making the public aware of the benefits and security of utilizing financialservices is required in order to promote and expand banking services

2.4 CHAPTER SUMMARY

Chapter 2 presents an overview of transmission channels related to the impact of interest income on the business performance of commercial banks Then present an overview ofexisting domestic and foreign studies on the positive, negative and non-linear effects of non-interest income on business performance as well as interest rate risk of commercial banks inVietnam Vietnam From there, it is possible to detect gaps in the literature as well as potentialcontributions of this study

non-CHAPTER 3: METHODOLOGY

3.1 DATA

Empirical study on data of 27 Vietnamese joint stock commercial banks in the period

2018-2022 Data sources are compiled from audited annual reports published by commercial banks.Data were collected at the end of each year for the period 2018-2022 so the study consisted of atotal of 135 observations This study excludes state-owned commercial banks, joint-venturebanks, banks with 100% foreign capital, representative offices of foreign banks, banks in theprocess of merger and consolidation, and banks with foreign capital non-disclosure orincomplete information

3.2 RESEARCH CONTENT

Research content includes:

e Propose a research model, collect data and quantify variables representing the

internal components of non-interest income of a joint-stock commercial bank(TMCP), the variable representing the bank's profitability and control variables

e Descriptive statistics and regression analysis with appropriate testing procedures to

find out the trend of the effects of the explanatory variables on the dependentvariable

e Discuss research results, propose suggestions for bank managers and investors in

the stock market

3.3 RESEARCH METHODS

3.3.1 RRESEARCH HYPOTHESIS

Studies by Smith et al (2003), Chiorazzo et al (2008), Elsas et al (2010), Gurbuz et al.(2013), Nguyen Minh Sang & Nguyen Thi Thuy Trang (2018), and Huynh Thi Huong Thao et al.(2021) both showed proof of the beneficial effect of non-interest revenue on the operationalperformance of commercial banks Profitability of the bank is increased by non-interest income,which is made up of income from services, income from foreign exchange trading, income fromsecurities trading, income from capital contributions, and income from the acquisition of shares

So, the following are the study's proposed hypotheses:

e H1: The profitability of joint stock commercial banks listed on HOSE is positively

impacted by income from services, according to hypothesis 1

e H2: The profitability of joint stock commercial banks listed on HOSE is positively

influenced by income from the foreign exchange activity.

e H3: The profitability of joint stock commercial banks listed on HOSE is influenced

favorably by income from trading in securities

e H4: The profitability of joint stock commercial banks listed on HOSE is positively

impacted by income from capital contributions and share purchases

Based on Huang & Chen (2006), De Young et al (2003), and Vu Xuan Dung & Doan VietHung (2018), the authors’ model was developed This study draws on research from authors likeHakimi et al (2012), Emongor et al (2020), and researchers in Vietnam like Doan Viet Hung(2020), Nguyen Thi Diem Hien et al (2016), and Nguyen Minh Sang et al (2013) to proposeresearch factors that affect non-interest income related to business activities of the Vietnamesecommercial banking system The study explicitly assesses models in the following ways based onthe aforementioned model and explanation of the variables from the data:

Model (1): considers the correlation of the dependent variable ROA and the independentvariable ICONON and other independent variables that play a controlling role

ROE = a+ d;SERVI,,+ a3FOREX;,¢+ a4SECUR;~+ œ;CONT,¿+ œSIZE +a7 LDRip+ œyEQUITY,¿+ it

SECUR;; : Income from securities trading of bank i at time t

CONT;, ` : Income from capital contribution, share purchase of the bank i at time t

SIZE; t : Size of total assets of bank i at time t

LDRit : Loan to deposit ratio of customers of bank i at time t