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The thesis focuses on the study of the restructuring process of the Vietnamese banking system from 2007 to 2015, in conjunction assesses different financial structure of the system before and during the implementation stage in the restructuring. More specifically, it examines how the restructuring measures effect on the performance of the commercial banks and whether the process of restructuring in the sample period increases the operational efficiency of the banks or not. It also explores the effect of reform on Vietnam’s bank structure and performance.
MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY NGUYEN HUU HUAN BANK RESTRUCTURING AND BANK EFFICIENCY THE CASE OF VIETNAM SUMARY OF DOCTORAL THESIS IN ECONOMICS Ho Chi Minh city – 2018 The Thesis was completed in: Scientific guide: Reviewer 1: Reviewer 2: Reviewer 3: The thesis will be protected by the Board of Review in: At The thesis can be found at the library: TABLE OF RESEARCH PAPERS Vo, X. V., & Nguyen, H. H. (2018). Bank restructuring and bank efficiency—The case of Vietnam. Cogent Economics & Finance, 6(1), 1520423. https://doi.org/10.1080/23322039.2018.1520423 Vo, X. V., & Nguyen, H. H. (2015). Does Bank Restructure Lead to Higher Efficiency? An Investigation of the Vietnamese Banking System, Singapore Economics Review, Namyang University, Singapore Vo, X. V., & Nguyen, H. H. (2015). The impact of restructuring on structure and performance – Evidence from Vietnam, Infiniti Conferrence, University of Sydney, Australia SUMMARY OF THESIS Chapter 1. Introduction In this chapter, the author presents the role of banking system and introduces the performance of Vietnamese banking system from 2008 until now; details the motivations, research questions and objectives. In general, under the effect of the global financial crisis, Vietnamese banking system has coped up with many difficulties and challenges to improve the operational efficiency of the entire system and individual banks With the aim of assessing the situation to restructure the banking system in Vietnam in recent years, the subject which is made is based on previous studies on restructuring the banking system The thesis focuses on the study of the restructuring process of the Vietnamese banking system from 2007 to 2015, in conjunction assesses different financial structure of the system before and during the implementation stage in the restructuring. More specifically, it examines how the restructuring measures effect on the performance of the commercial banks and whether the process of restructuring in the sample period increases the operational efficiency of the banks or not. It also explores the effect of reform on Vietnam’s bank structure and performance. The first research question is based on a research gap that there hasn’t been any study discovering the influence of bank restructuring method on bank restructuring process in a small transition economy, especially Vietnam. It is stated as “How the restructuring measures were introduced as government intervention, merger and acquisition of commercial banks and privatization of stateowned commercial banks effect on the performance of the commercial banks in the study period of Vietnam?” To resolve this question, the following hypothesis is tested: H1.1: Government intervention increases the effective of commercial banks' performance H1.2: Merger and acquisition increases the effective of commercial banks' performance H1.3: Privatization of stateowned commercial banks increases the effective of commercial banks' performance The second research question examines the effects of firststage reform on bank structure and performance in Vietnam. It is stated that “What are the effects of reform on Vietnam's commercial bank structure and performance?” With this research question, it is a development of classic hypotheses in restructuring, such as quietlife hypothesis, market power and efficiency structure hypotheses to analyze changes in bank performance and structure before and during restructuring And to address this objective, the following hypothesis is tested: H2.1: The collusive behaviour of dominating firms in the industry influences the price setting process in the market which allowes those firms to gain superior profit over other firms. The relationship between market concentration and firm performance is positive H2.2: Firms with relatively bigger market shares and differentiated product lines have a superior market power and use it to set market price and, thereby, earn an above average profit. Accordingly, the market share and the firm’s performance might have a positive relationship H2.3: This hypothesis is based on ES theory: low costs of production by relatively efficient firms enable them to compete more aggressively, capture a bigger market share and earn higher profits H2.4: Quietlife hypothesis: Banks that have higher market share have lower efficiency Chapter 2. Literature review Chapter reviews the previous literature on restructuring including the literature relating to factor impacting to bank efficiency; the theoretical issues and literature pertaining to bank restructuring and bank efficiency; and the previous literature on method of bank restructuring Besides, this chapter discusses the theoretical background and the prior literature on the relative between bank restructure and bank efficiency and the effect of bank reform on bank structure and performance. First is background knowledge about restructuring In this content, the author presents Efficiency theory; the related hypothesis includes Market structure and performance hypothesis, Relative market power hypothesis, Quitelife hypothesis; and literatures involving. Second, the literature review focuses on method of bank restructuring and bank efficiency It discusses the relationship between bank restructuring and bank efficiency; and then the bank restructuring methods and its effect on bank efficiency Third is the literature review about the structure and performance relationship in banking system In a large amount of literature, the author used three main hypothesizes about the structure and performance relationship in banking which is the market power hypothesis and the other is the efficiency structure hypothesis. Chapter 3. Data and methodology Chapter 3 presents the sample data and methodology used to test the hypotheses related to the three research questions. It describes the data sources, the data characteristics, and the necessary to separate revolving from term loans, the sampling selection process, model specifications, estimation methods, and the robustness tests to confirm the main findings Data and sample In this thesis, the data in 26 banks’ financial statements were collected from Bankscope covering the period from 2001 to 2015. The sample includes banks which are influenced by the banking crisis in 2008 then implement restructure. Annual data are used to measure technical efficiencies Unconsolidated financial data obtained from the Bankscope database focus on analysing the changes in banks’ operations during the implementation period of pre, during restructuring Methodology This content describes the estimation methods for RQ1 (Data Envelopment Analysis) and RQ2 (Data Envelopment Analysis and Generalized Least Squares) For RQ1, the author applies DEA 3 steps to calculate how dependent variables were affected by environment variables. For RQ2, instead of investigating the impact of environment variables, the author uses normal DEA for step 1 to solve them Variables and descriptive statistics This content presents the variables and descriptive statistics variables employed in this thesis Firstly, for the bank efficiency from the restructuring methods, three inputs and three outputs under the intermediation approach are specified productivity model The first group of independent variables using to test the impact of restructuring measures on bank efficiency include dummy variables for domestic bank mergers (MER), privatization (COP), and state intervention (SI). Besides, there are the control variables include six country specific factors variable and the control variables include six country specific factors and bank characteristic Secondly, to carry out models for RQ2, the author collects and calculates all of these following variables in this table: No Variable Abr ROA ROA ROE ROE The fourbank concentration ratio The Herfin dahlHirschman Index Market share Xefficiency XEFF XINEFF XINEFF Ownership dummy OWN Time trend TT 10 The ratio of loans to assets LA 11 The ratio of equities to assets KA CR4 HERF MS 12 SCALE SEFF 13 SINEFF SINEFF Model RQ1: The effect of restructuring methods on banking performance The threestep model In this research question, three inputs and three outputs are used in stage 1. It is suggested that the role of a bank is to mobilize funds at the lowest cost; we include deposits (TD), interest expense (IE) and noninterest expense (NE) as the input variables. Three bank outputs capturing both traditional and nontraditional activities of banks consist of total loans (TL), Interest revenue (IR) and Non interest revenue (NR). Environmental variables in step 2 To discover the impact of environmental factors on the validity of the initial efficiency analysis, three bank restructuring measures, six countryspecific factors are included in step 2. In step 2, we carry out the test by following models: = (1) = (2) = (3) =(4) = (5) = (6) After calculating the effect of three restructure method to three inputs: total deposits (TD), interest expense (IE) and noninterest expense (NE) and three outputs: total loans (TL), interest revenue (IR) and noninterest revenue (NR), we continue calculating three inputs and three outputs under effect of six countries specific in table 3.9 And we build six equals following to measure the impact of these control variables to input and output variables: = (7) = (8) = (9) = (10) = (11) = (12) Finally, step 3 is similar to stage 1 using DEA method but replaces three inputs and three outputs adjusted in step 2 RQ2: The effects of reform to structure and performance Thesis’s ideas based on love study of Berg (1995) and Fu (2009) to test the hypothesis Quiet life and efficient structure for the period of restructuring the system. By testing out the QLH, thesis can show out that whether the restructuring have direction effective to structure the system or not and how much the impact level is First, according to Berger (1995) and Goldberg and Rai (1996), Eq. (1) is used to test the validity of the hypotheses: + eit (1) Where : a measure of profitability, such as return on assets (ROA), of bank i at time t; : a measure of market concentration, such as fourbank concentration ratio (CR4) or Herfindahl–Hirschman index (HERF) of concentration at time t; : market share (in terms of deposits) of bank i at time t; XEFFit: Xefficiency of bank i at time t; SEFFit: scaleefficiency of bank i at time t; e it: a vector of control variables Under the efficientstructure (ES) hypotheses, causation is assumed to run from efficiency to profits, and to market structure. More efficient banks should have higher profits, so the signs of the coefficients on XEFF and SEFF should be significantly positive, that is, > 0, > 0. Under the marketpower hypotheses, a positive and significant b1 confirms the structureconductperformance; should be positive if the relative marketpower hypothesis holds It is possible that the measures of concentration (CONC) and market share (MS) are endogenous in the ES model However, Berger (1995) argued they can be included as independent variables, since they are correlated with profitability only because they reflect the influences of XEFF and SEFF and/or the control variables in Eq (1) To ensure the absence of a spurious relationship between profitability and market structure, both profits and the market structure variables must be positively related to efficiency. Thus, a necessary condition for the efficientstructure hypothesis to hold is that efficiency has a positive effect on market structure. To establish its presence, two additional equations are estimated: (2) + + eit (3) Like Berger and Hannan (1997), Eqs. (4) and (5) are used to test Hicks’ (1935) ‘quiet life’ hypothesis XEFFit= a + CONt +MSit +CONTROLit + eit (4) SEFFit = a + CONCit + MS + CONTROLit + eit (5) According to the ‘quiet life’ hypothesis, the signs on the coefficients on CONC and/or MS should be significantly negative in Eqs (4) and (5). Thus, banks with greater market power are less efficient due to a relaxed environment and slack management. Note the direction of causation is reversed between Eqs (2)/(3) and (4)/ (5). If both sets of relations are found to hold, then OLS estimation causes simultaneous equation bias (Berger and Hannan, 1997), which is usually resolved by using a twostage least squares (2SLS) procedure. Roburstness test This content discusses the robustness tests used to address methodology concerns related to the different proxies for measures of restructuring method’s effects on the performance and efficiency of the commercial banks They are SFA regression for research question 1 and SFA and and Hausman test for research question 2 Chapter 4. Results and discussion of results The empirical results for the hypothesis testing of the three research questions are reported in Chapter 4. Result of Research question 1 The thesis examines the impact of the measures that the government put forward which are the government intervention, M&As and privatization of stateowned commercial banks The study results show that M&As increase both the input and the output of commercial banks. During the postrestructuring period, it appears to be less in Managing Resources to Produce Efficient output because the banking takeover has merged to bear inefficiency of weak banks as credit and liquidity risk. Thus, banks that have support from the government, usually through recapitalization have to face higher marginal costs to generate revenue and higher inefficiency. This is quite consistent with the reality in Vietnam where banks that receive the government’s support from mostly stateowned commercial banks, and in return, they often have to spend higher expenses for activities to support the government and the community Besides, privatized banks not seem to greatly affect the performance of the commercial banks because the central bank still holds dominant shares of the Commercial Bank, which does not have a significant change on the structure and the operation of the machine Result of Research question 2 From the test results, it can be concluded that the effects of reform on Vietnam's commercial bank structure and performance as follows: In the research period, both stage 1 and stage 2, RMP theory is hold and nothing change the structure in banking system between two states With four stateowned banks, there was no evidence of a significantly negative relationship between the concentration and the efficiency. It means that in the bank restructuring period in Vietnam, banks with higher market share were more profitable and independent of market concentration (RMP). In the first stage, there is a great impact and influence of bigfour stateowned commercial banks. They have advantages to mobilize money from state agencies, state treasuries as well as the favour from the government. Therefore they create a high market share and bring big profits. At the second stage, although stateown commercial banks were privatization, but statebank still covered the majority shares and the monopoly still exists. While there is no evidence show that low costs of production by relatively efficient firms enable them to compete more aggressively, capture a bigger market share and earn higher profits as ES theory. In comparison with some previous papers, the result of this test in the Vietnamese economy is different from the Chinese one. Ye, Xu and Fang (2012) showed that during the period of 1998–2007, neither the SCP nor ES hypotheses were held in China; In the Chinese reform period, only XEfficiency Hypothesis was held. There is a difference between them because the banking restructuring in two countries are different In Vietnam, the main factors in restructuring resolve bad debt focus on M&A and privatization Meanwhile in China, beside normal restructuring methods, they strengthen banking administration including organizational and human resource, banks are also allowed to increase their capital and use new mobilized capital to increase investment in technology system and risk management to improve the efficiency of banking operations Results Research questions, related hypotheses Stage 1 Stage 2 How the restructuring measures were introduced as government intervention, Panel A RQ1 merger and acquisition of commercial banks and privatization of stateowned Stage 1 Stage 2 commercial banks effect on the performance of the commercial banks in the study period? H1.1: Government intervention increases the effective of commercial banks' performance H1.2: Merger and acquisition Hypotheses increases the effective of commercial banks' performance Not Supported Not Supported H1.3: Privatization of stateowned commercial banks increases the Not effective of commercial banks' Supported performance What are the effects of reform on Panel B – RQ2 Vietnam's commercial bank structure and performance? Hypotheses Stage 1 Stage 2 (2001 (2007 2006) 2015) H2.1: This hypothesis, based on SCP, suggests that the collusive behaviour of dominating firms in the industry influences the price setting process in the market which allowed those firms to get high profit over the other firms SCP Insufficien t Insufficient supposes that there is a positive relationship between market concentration and firm performance H2.2:This hypothesis is based on RMP It suggests that Firms have bigger market shares and well differential products will have Supported Supported higher market power and can achieve more profit than usual firms do H2.3: This hypothesis is based on Not Not ES theory: low costs of production Supported Supported by relatively efficient firms enable them to compete more aggressively, capture a bigger market share and earn higher profits H2.4 Quiet life hypothesis Banks have higher market share would Insufficient Insufficient have lower efficiency Chapter 5. Conclusion Chapter 5 concludes the thesis Review Of Research Questions, Hypotheses And Findings The table below presents a summary of the thesis’ two research questions and their associated hypotheses and findings The research questions are raised in Chapter 1 and their hypotheses are developed in Chapter The data and methodology to test these hypotheses and variable selections and measurements are documented in Chapters 3. The findings are discussed in Chapter 4. Contributions First, the thesis’ contribution is to point out the overall picture of the restructuring process in Vietnam at early stages This research indicates that the first period of banking restructuring in Vietnam was not effective because the government still hold the majority of shares, which did not change much the operational structure of the commercial banks Besides, banks were strongly affected by the environment factors. Upon that, a system of solutions for this issue can be built This investigation is consistent with prior studies of Hsiao et al (2010), Thoraneenitiyan (2009) which showed that the bank efficiency dropped during the restructuring period due to transitioning cost. Moreover, the bank efficiency was also affected by the environment variables, such as financial crisis or weak domestic economy. Second, in the context of the bank restructuring initiated during this period, the objectives are to identify which model, if any, best described the competitive structure of Vietnam’s banking sector and the impact of the bank size/ownership. The results indicate that the banking system structure changes towards higher profits, higher efficiency score but the sensitivity and vulnerability also increase. These activities affected banks from the crisis of the world recession is higher than the prerestructuring period. This indicates that in an open economy such as Vietnam, a side benefit to increase the competitiveness of the system on the one hand would bring challenges to domestic banks for further integration into the international financial system. Comparing with prior studies in China (Fu and Heffernan, 2009), the economy shares consistent characteristic with Vietnam: the emerging market, the transitioning and socialist economy This investigation shows that Vietnam’s banking system is more vulnerable and sensitive than China’s banking system during the transition period; the difference is the scale as Vietnamese economy’s is quite small. So, this finding shows the small economy has to face more pressure and instability than big economy during the transition and the integration process, which is consistent with the economies of scale theory (Silberston, 1972) Theoretically, this is the first time that the marketpower, the quiet life and the efficientstructure hypothesisare extended to be included in the test on the impact of the banking restructuring on the performance of Vietnam banking system as well as the small open transition economy, then this gap was filled with this hypothesis. Implications Regarding to the effect of restructuring methods, it was shown that the change of the bank ownership of the stateowned commercial banks did not have a significant change on the operational structure of the commercial banks Additionally, the government should reduce its intervention in the market, actively allow privatization of stateowned commercial banks as well as maintain integrative policies to enhance the competition and the transparency of the banking system These results have provided us with a partly comprehensive restructuring of the banking system in Vietnam as the implementation process of the restructuring to integrate in the international financial markets A major problem arises as the opportunity to take advantage of is connected with the financial system to raise capital and capital exchange, but the financial system in small emerging countries will face an edgy pressure of huge competition from foreign banks, and the instability of the banking performance will also increase not only during the global economic crisis that cover early stages of the integration process. Instead of accepting such rapid integration, the government needs to build a strategy and a plan to engage in the international financial system to ensure the system stability during and after the transitioning period. Finally, governments should prepare fully and consider carefully about the right time that they choose to integrate into international financial markets, avoid integration at the time of the world financial crisis Limitations Nevertheless, this thesis has some limitations. In terms of its data’ characteristics, the main sources of data used for this thesis were obtained from Orbis Bank Focus and State Bank of Vietnam. There were some missing numbers which caused difficulty for the variable statistics. Besides, the banking restructuring still took place, so the research could only be carried out with the first stage of the restructuring in the period from 2007 to 2015 Regarding to the research method, there were quite a few research methods for this issue but there was no method better than the others and suitable for all cases Thus, the methods were combined together properly to solve the research’s issue Future Research Directions These results have provided an overview of the comprehensive restructuring of the banking system in Vietnam and the conclusions are quite similar to the previous studies on emerging markets well as the implementation process of the restructuring to integrate in the international financial markets Whether Vietnamese commercial banks can maintain the market share, stand out in the market and benefit the competitive advantage with commercial banks in foreign countries that have been increasingly involved in the financial system in a sweeping Vietnam or not, or become trend follower of another economy, remain small and open with less competitiveness , obsolete technology and management skills, lose market share to the foreign banks, be subject to distribution from them and major financial institutions of the world. Besides, the author also intends to investigate why some banks can overcome the restructuring process and the impact of the world financial crisis, and continue to develop, while other banks cant do it. That would be the next research direction for the following topics ... subject which is made is based on previous studies on restructuring the banking system The thesis focuses on the study of the restructuring process of the Vietnamese banking system from 2007 to 2015, in conjunction assesses different financial structure of the ... on the performance of the commercial banks and whether the process of restructuring in the sample period increases the operational efficiency of the banks or not. It also explores the ... quiet life and the efficientstructure hypothesisare extended to be included in the test on the impact of the banking restructuring on the performance of Vietnam banking system as well as