University of Economics International institute of Social Studies Ho Chi Minh City, Vietnam Erasmus University of Rotterdam The Netherland VIETNAM- THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS ECONOMIES OF SCALE AND INPUT COSTS EFFICIENCY OF COMMERCIAL BANKS IN VIETNAM, 2006-2014 By Dang Tri Dung Supervisor Dr Vo Hong Duc Thesis submitted for the Degree of Master of Art in Development Economics Vietnam - Netherlands Programme, November 2013 University of Economics Ho Chi Minh City, Vietnam VIETNAM- THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS ECONOMIES OF SCALE AND INPUT COSTS EFFICIENCY OF COMMERCIAL BANKS IN VIETNAM, 2006-2014 By Dang Tri Dung A thesis submitted in Partial fulfillment of the Requirements for the Degree of Master of Art in Development Economics Under the supervision of Dr Vo Hong Duc Vietnam - Netherlands Programme, November 2015 DECLARATION I hereby declare that the thesis "Economies Of Scale And Input Costs Efficiency Of Commercial Banks In Vietnam, 2006-2014" was made by myself under the supervision of Dr Võ Hồng Đức I also hereby declare that all the data and the results of this thesis are collected and calculated by me In addition, the conclusions and recommendations are not copied by any research Đặng Trí Dũng The above declaration is affirmed Dr Võ Hồng Đức i ABSTRACT This study is conducted to determine and quantify the performance of the commercial banks in Vietnam in relation to their economies of scale and the possibility of substitute of inputs in their operations Data used in this study were collected from 32 commercial banks in Vietnam for the period from 2006 to 2014 The Iterate Semmingly Unrelated Regression (ITSUR) with the support of STATA software is used in this study The findings from this study provide empirical evidence to confirm that the operation scale of the commercial banks in Vietnam is increasing return to scale This means that increasing the scale of operations from the commercial banks in Vietnam may result in an increase of their profitability This finding appears to be consistent with a merger and acquisition taking place in the Vietnam’s banking system at the moment with the lead of the State Bank of Vietnam In addition, the commercial banks in Vietnam have demonstrated that cost inefficiencies during operations are problematic The three key inputs of commercial banks during their operations are labor, financial capital and fixed assets are all inelastic and as such, they may be substitute for one another As such, controlling labour costs appears to be essential for the efficient operations of the commercial banks in Vietnam Empirical findings from this empirical study are drawn to provide some implications for both the commercial banks and the State Bank Vietnam in relation to the scale efficiency of operations for the commercial banks and the leading roles of the central banks in providing guidance and assistance for the entire banking system to grow further Keywords: Ecnomies of scale; Financial capital; Labor; Fixed assets; Elasticity; Commercial banks; Vietnam ii ACKNOWLEDGMENT I sincere thanks to my supervisor Dr Vo Hong Duc He was enthusiastically helped and gave me advice during the research process Dr Vo Hong Duc suggested useful ideas for my research In addition, I am also wish to thank to all the lecturer of the VietnamNetherlands program The lecturers helped me to get the knowledge of development economics Furthermore, the teachers helped me to know the research methods in the economic field iii CONTENTS DECLARATION i ABSTRACT ii ACKNOWLEDGMENT iii CONTENTS iv LIST OF TABLES vii LIST OF FIGURES viii ABBREVIATIONS ix CHAPTER INTRODUCTION .1 1.1 Problem Statements .1 1.2 Research Objectives .2 1.3 Research Questions 1.4 The Scope of this Research 1.5 Methodology 1.6 The Structure of the Study CHAPTER LITERATURE REVIEW 2.1 Overview of the Commercial Banking System in Vietnam 2.2 Studies On The Scale Economies Of Commercial Banks .6 2.3 Studies On The Price Elasticity Of Inputs In Banking 2.4 Translog Cost Function Theory .8 2.5 The Estimation Method Of The Scale Economies and The Elasticity 10 2.5.1 Estimation Method Of The Scale Economies .10 2.5.2 The Own-Price Elasticity And Cross-Price Elasticities .11 CHAPTER RESEARCH METHODOLOGY 14 3.1 The Hypothesis Testing .14 3.2 Identification Of Variable 14 3.1.1 The Dependent Variable .17 3.1.2 The Independent Variable 17 iv 3.3 Data Collection And Expected Results 20 3.4 The Research Methodology 23 3.1.1 The Model 23 3.1.2 The Estimation Method .25 CHAPTER EMPIRICAL RESULTS 32 4.1 4.2 Descriptive Statistical Analysis 32 4.1.1 The Data Description 32 4.1.2 The Summary Statistic 32 4.1.3 Correlation Matrix .33 Regression Results .35 4.2.1 The Results From Translog Cost Function 35 4.2.2 Empirical Finding .39 4.2.3 The Result Of The Scale Economies 41 4.2.4 The Own-Price Elasticity and Cross-Price Elasticity 44 CHAPTER CONCLUSIONS AND POLICY IMPLICATIONS 51 5.1 Conclusions 51 5.2 Policy Implications 52 5.3 Limitations And Future Research 53 REFERENCES 54 APPENDIX A 59 APPENDIX B 66 APPENDIX C 72 APPENDIX D 73 APPENDIX E 74 APPENDIX F 75 APPENDIX G 76 APPENDIX H 77 APPENDIX I 78 v APPENDIX J 79 APPENDIX K 80 vi LIST OF TABLES Table The Variables Of Equation System That Analyzes The Relationship Between Financial Capital And Labor .15 Table The Variables Of Equation System That Analyzes The Relationship Between Financial Capital And Fixed Assets 16 Table The Variables Of Equation System That Analyzes The Relationship Between Labor And Fixed Assets .16 Table The Dependent Variables 21 Table The Independent Variables .22 Table Statistics Of Variables In The Equation System (9) 32 Table Statistics Of Variables In The Equation System (10) .33 Table Statistics Of Variables In The Equation System (11) .33 Table The Correlation Matrix Of Variables In The Equation System (9) .34 Table 10 The Correlation Matrix Of Variables In The Equation System (10) 34 Table 11 The Correlation Matrix Of Variables In The Equation System (11) 35 Table 12 The Results Of The Equation System (09) .36 Table 13 The Results Of The Equation System (10) .37 Table 14 The Results Of The Equation System (11) .38 Table 15 The scale economies of Vietnam Commercial banks in 2006-2014 41 Table 16 The scale economies of Joint stock commercial banks and State commercial banks in 2006-2014 41 Table 17 The Own-Price Elasticity And Cross-Price Elasticities From Two Outputs Model 44 Table 18 The Own-Price Elasticity And Cross-Price Elasticities From Models Including Loan .45 Table 19 The Own-Price Elasticity And Cross-Price Elasticities From Models Including Deposits 46 Table 20 The Relationship Between The Inputs .47 vii LIST OF FIGURES Figure Total Assets And Return On Total Assets Of Commercial Banks In Vietnam 2013-2015 viii APPENDIX B Bank ACB ACB ACB ACB ACB ACB ACB ACB ACB ABB ABB BID BID BID BID BID BID BID BID BID CTG CTG Year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2012 2013 2006 2007 2008 2009 2010 2011 2012 2013 2014 2007 2008 Loan and deposit outputs Loan output Deposit output The own price The cross price The own price The cross price The own price The cross price elasticity elasticity elasticity elasticity elasticity elasticity price of price of fund- capital- price of price of fund- capital- price of price of fund- capitalfund capital capital fund fund capital capital fund fund capital capital fund -0.0763 -0.6817 0.6009 0.0867 -0.076 -0.6817 0.5869 0.0847 -0.0861 -0.6935 0.6113 0.0882 -0.0654 -0.6609 0.5752 0.0683 -0.0651 -0.6609 0.5584 0.0663 -0.0751 -0.675 0.5875 0.0698 -0.0475 -0.6578 0.5912 0.067 -0.0472 -0.6577 0.5741 0.0651 -0.0569 -0.6722 0.6039 0.0685 -0.0752 -0.6729 0.5844 0.0772 -0.0749 -0.6729 0.5691 0.0752 -0.0851 -0.6858 0.5956 0.0787 -0.0412 -0.646 0.5807 0.0608 -0.0409 -0.6459 0.5623 0.0589 -0.0506 -0.6615 0.5942 0.0622 -0.0228 -0.5925 0.5315 0.0427 -0.0225 -0.5924 0.5081 0.0408 -0.0319 -0.6122 0.5488 0.044 -0.0825 -0.6825 0.5955 0.0876 -0.0822 -0.6825 0.5816 0.0855 -0.0924 -0.6942 0.6058 0.0891 -0.1084 -0.6929 0.598 0.1104 -0.1081 -0.6929 0.5865 0.1083 -0.1188 -0.7026 0.6065 0.112 -0.1324 -0.6939 0.5782 0.1178 -0.132 -0.6939 0.5674 0.1156 -0.1431 -0.7031 0.5862 0.1194 -0.1208 -0.694 0.5968 0.1227 -0.1204 -0.694 0.5862 0.1205 -0.1313 -0.7029 0.6045 0.1243 -0.1172 -0.694 0.6028 0.1247 -0.1169 -0.694 0.5924 0.1226 -0.1277 -0.7028 0.6105 0.1263 -0.0305 -0.6281 0.5682 0.0535 -0.0302 -0.6281 0.5481 0.0516 -0.0397 -0.6451 0.5831 0.0549 -0.0275 -0.6576 0.6141 0.0677 -0.0272 -0.6576 0.597 0.0658 -0.0367 -0.672 0.6268 0.0691 -0.042 -0.6773 0.6319 0.0829 -0.0417 -0.6773 0.6172 0.0809 -0.0514 -0.6897 0.6427 0.0843 -0.0839 -0.6918 0.6218 0.1068 -0.0836 -0.6918 0.6099 0.1048 -0.0939 -0.7019 0.6306 0.1083 -0.0684 -0.6799 0.6063 0.0847 -0.068 -0.6798 0.592 0.0827 -0.0781 -0.6919 0.6169 0.0862 -0.0319 -0.6229 0.5596 0.0515 -0.0316 -0.6228 0.5389 0.0496 -0.0411 -0.6403 0.5748 0.0529 -0.2932 -0.6526 0.4233 0.2114 -0.2927 -0.6526 0.4169 0.2083 -0.3085 -0.6579 0.4279 0.2138 -0.2686 -0.6673 0.4519 0.1902 -0.2681 -0.6673 0.4449 0.1873 -0.2829 -0.6732 0.457 0.1924 -0.0692 -0.6688 0.5841 0.074 -0.0689 -0.6688 0.5683 0.072 -0.079 -0.6822 0.5957 0.0754 -0.0718 -0.6451 0.5436 0.0591 -0.0714 -0.645 0.5251 0.0571 -0.0815 -0.6606 0.5572 0.0606 -0.0904 -0.657 0.5394 0.0648 -0.0901 -0.657 0.5222 0.0628 -0.1005 -0.6715 0.5521 0.0663 66 CTG CTG CTG CTG CTG CTG DongA DongA DongA DongA DongA DongA DongA DongA EIB EIB EIB EIB EIB EIB EIB EIB EIB Giadinh Giadinh Giadinh Giadinh Giadinh 2009 2010 2011 2012 2013 2014 2006 2007 2008 2009 2010 2011 2012 2013 2006 2007 2008 2009 2010 2011 2012 2013 2014 2008 2009 2010 2011 2012 -0.1799 -0.1083 -0.0579 -0.077 -0.0999 -0.1111 -0.1017 -0.0708 -0.0318 -0.102 -0.0922 -0.0734 -0.0702 -0.102 -0.0804 -0.1072 -0.0386 -0.1266 -0.0466 -0.0163 -0.0352 -0.0713 -0.09 -0.1686 -0.1685 -0.0865 -0.046 -0.0204 -0.694 -0.6759 -0.6442 -0.6697 -0.6824 -0.6892 -0.694 -0.6824 -0.6537 -0.6933 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0.0607 0.0758 0.0882 0.0994 0.1223 0.0894 0.0666 0.1143 0.1079 0.0812 0.0944 0.1087 0.0895 0.0998 0.0647 0.1106 0.0563 0.0331 0.0493 0.0808 0.0956 0.1519 0.132 0.0926 0.079 0.0596 Giadinh HBB HBB HDB HDB HDB HDB HDB Kienlong Kienlong Kienlong Kienlong Kienlong MBB MBB MBB MHB MHB MHB MSB MSB MXB MXB MXB MXB Nam A Nam A Nam A 2013 2010 2011 2008 2009 2010 2012 2013 2008 2009 2010 2011 2012 2012 2013 2014 2006 2007 2009 2006 2007 2010 2011 2012 2013 2006 2007 2010 -0.0187 -0.0143 0.0201 -0.0057 -0.0671 -0.0353 -0.0284 -0.0531 -0.1254 -0.1305 -0.0507 -0.0652 -0.115 -0.0692 -0.096 -0.1095 -0.0768 -0.0935 -0.0572 -0.0517 -0.0343 -0.0549 -0.1772 -0.3185 -0.3533 -0.0926 -0.0578 -0.0444 -0.6357 -0.593 -0.5349 -0.574 -0.6786 -0.6442 -0.6579 -0.608 -0.689 -0.686 -0.652 -0.6766 -0.6892 -0.6762 -0.688 -0.6912 -0.6621 -0.6572 -0.6579 -0.6761 -0.6512 -0.6282 -0.6885 -0.5738 -0.5521 -0.6733 -0.6182 -0.6278 0.5923 0.542 0.513 0.5289 0.6052 0.585 0.6136 0.5156 0.5611 0.5462 0.5786 0.6034 0.6278 0.5978 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NVB PGB PGB PGB PGB PGB PNB PNB PNB PNB PNB PNB PNB SCB SCB SCB SCB 2011 2012 2013 2006 2007 2008 2009 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2006 2007 2008 2009 2010 2011 2012 2008 2009 2010 2012 -0.024 -0.0354 -0.0941 -0.363 -0.1207 -0.0457 -0.0231 -0.0562 -0.0433 -0.1146 -0.1377 -0.1105 -0.0789 -0.0657 -0.1264 -0.1393 -0.1627 -0.0447 -0.0702 -0.0113 0.0022 0.0127 0.0359 0.0416 -0.0049 0.0034 0.0164 -0.02 -0.6057 -0.6567 -0.694 -0.6843 -0.5952 -0.6571 -0.6069 -0.6638 -0.6332 -0.6926 -0.6839 -0.6938 -0.6868 -0.6863 -0.6926 -0.6918 -0.6879 -0.6402 -0.6774 -0.5069 -0.5317 -0.4661 -0.3427 -0.1677 -0.5044 -0.5549 -0.4278 -0.6618 0.5465 0.6036 0.6269 0.1696 0.419 0.5923 0.5491 0.5908 0.5601 0.6176 0.6095 0.6151 0.6105 0.6249 0.6031 0.5907 0.5714 0.5684 0.5989 0.4457 0.4889 0.4284 0.3243 0.1515 0.4504 0.5169 0.3916 0.6295 0.0462 0.0668 0.1219 0.0558 0.0393 0.0667 0.0466 0.0707 0.055 0.1382 0.1663 0.1296 0.0944 0.0941 0.1374 0.141 0.1538 0.058 0.0818 0.0271 0.0312 0.0229 0.0132 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-0.7015 -0.7026 -0.703 -0.672 -0.6494 -0.5247 -0.686 -0.702 0.5918 0.5097 0.5827 0.6878 0.6032 0.5946 0.6102 0.5859 0.6196 0.6297 0.6132 0.6204 0.6329 0.5854 0.5677 0.5589 0.5323 0.5791 0.6094 0.6021 0.589 0.562 0.5465 0.5754 0.58 0.4654 0.6126 0.6091 0.0469 0.0362 0.0809 0.1632 0.0839 0.1088 0.0799 0.0541 0.1147 0.0976 0.0681 0.0734 0.0989 0.0611 0.1107 0.0755 0.0466 0.0862 0.0842 0.0881 0.1053 0.1099 0.1149 0.0674 0.0564 0.0275 0.0794 0.1081 Techcom VCB VCB VCB VCB VCB VCB VCB VCB VIB VIB Vieta Vieta Vieta VNCB VNCB VPB VPB VPB WEB WEB WEB WEB WEB WEB WEB 2014 2007 2008 2009 2010 2011 2012 2013 2014 2013 2014 2008 2009 2010 2010 2011 2012 2013 2014 2006 2007 2008 2009 2010 2011 2012 -0.1079 -0.0429 -0.0297 -0.1232 -0.1097 -0.055 -0.0699 -0.0915 -0.2598 -0.1459 -0.1523 -0.033 -0.0959 -0.0713 -0.0337 0.0151 -0.0651 -0.1224 -0.1557 -0.1412 -0.0938 -0.0723 -0.0287 -0.0566 -0.03 -0.0363 -0.6881 -0.6626 -0.6416 -0.6862 -0.6828 -0.6508 -0.6732 -0.6839 -0.5784 -0.6916 -0.6935 -0.6212 -0.6882 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0.552 0.5552 0.5562 0.1176 -0.1382 0.5951 0.5827 0.5812 0.0935 0.0684 0.0572 0.0892 0.0845 0.0608 0.0756 0.087 0.3124 0.1395 0.1276 0.049 0.0944 0.0818 0.0495 0.0158 0.0851 0.1282 0.1276 0.1139 0.0787 0.0052 -0.004 0.0779 0.0617 0.0634 -0.1183 -0.0523 -0.0389 -0.1338 -0.1201 -0.0645 -0.0796 -0.1016 -0.2738 -0.1569 -0.1634 -0.0422 -0.106 -0.0811 -0.0429 0.0064 -0.0747 -0.133 -0.1669 -0.1521 -0.1039 -0.0821 -0.0379 -0.0662 -0.0392 -0.0456 -0.6989 -0.6765 -0.6574 -0.6974 -0.6945 -0.6658 -0.686 -0.6954 -0.5822 -0.6994 -0.7019 -0.6387 -0.699 -0.6914 -0.6402 -0.4418 -0.6934 -0.7021 -0.7019 -0.7031 -0.6897 -0.3457 -0.0802 -0.6876 -0.6657 -0.6689 0.5889 0.0972 0.6166 0.0718 0.6016 0.0605 0.5655 0.093 0.5737 0.0882 0.5849 0.0642 0.6024 0.0791 0.598 0.0906 0.5026 0.3174 0.5901 0.1434 0.5733 0.1315 0.5714 0.0523 0.6039 0.098 0.6121 0.0853 0.5727 0.0528 0.399 0.0189 0.6244 0.0885 0.6093 0.132 0.5693 0.1316 0.5742 0.1178 0.5818 0.0823 0.1964 0.0087 -0.0241 -0.0007 0.6212 0.0813 0.6138 0.065 0.6116 0.0667 APPENDIX C The result of The equation system (9) for two outputs 72 APPENDIX D The result of The equation system (9) for Loan output 73 APPENDIX E The result of The equation system (9) for Deposit output 74 APPENDIX F The result of The equation system (10) for Two outputs 75 APPENDIX G The result of The equation system (10) for Loan output 76 APPENDIX H The result of The equation system (10) for Deposit output 77 APPENDIX I The result of The equation system (11) for Two outputs 78 APPENDIX J The result of The equation system (11) for Loan output 79 APPENDIX K The result of The equation system (11) for Deposit output 80 ... .38 Table 15 The scale economies of Vietnam Commercial banks in 2006- 2014 41 Table 16 The scale economies of Joint stock commercial banks and State commercial banks in 2006- 2014 41 Table... of Economics Ho Chi Minh City, Vietnam VIETNAM- THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS ECONOMIES OF SCALE AND INPUT COSTS EFFICIENCY OF COMMERCIAL BANKS IN VIETNAM, 2006- 2014. .. operation scale of the commercial banks in Vietnam is increasing return to scale This means that increasing the scale of operations from the commercial banks in Vietnam may result in an increase of