Chiến lược đa dạng hóa, hiệu quả và rủi ro của ngân hàng bằng chứng thực nghiệm tại việt nam (diversification strategies, bank risk and performance TT TIENG ANH

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY ***** PHAM KHANH DUY DIVERSIFICATION STRATEGIES, BANK RISK AND PERFORMANCE: EMPIRICAL EVIDENCE FROM VIETNAM Major: Finance and Banking Code: 9340201 SUMMARY OF PHD DISSERTATION Ho Chi Minh City - 2021 The Dissertation is accepted at: University of Economics Ho Chi Minh City (UEH) 59C Nguyen Dinh Chieu St, Dist 1, Ho Chi Minh City, Vietnam Academic advisor: Assoc Professor Dr Truong Thi Hong Independent Reviewer 1: Independent Reviwer 2: The Dissertation is presented to defend at Ph.D Evaluation Committee of University Level at: University of Economics Ho Chi Minh City (UEH) 59C Nguyen Dinh Chieu St, Dist 1, Ho Chi Minh City, Vietnam Time date month year 202 The dissertation can be found at UEH Library, 279 Nguyen Tri Phuong, Dist 10, Ho Chi Minh City ABSTRACT Purpose – This dissertation investigates the impacts of asset, funding, and income diversification strategies and their combinations on the risk and performance of Vietnamese commercial banks, especially during the Vietnamese banking crisis The research also evaluates the role of ownership structure upon diversificationrisk and performance nexus Methodology – Using panel data collected from 34 Vietnamese commercial banks from 2005 to 2019, with modern econometrics technique – two-step system GMM estimator method described by Arellano and Bover (1995), are employed to achieve research objectives The data was collected manually from the bank annual financial statement, obtained from Bank-scope Findings – The empirical results show that, in general, diversification practices in banking sectors are effective in improving banks’ risk-return profile, especially during the banking and financial crisis However, using them in combinations is only effective for income and funding diversifications These results are robust regarding the use of alternative measures of diversification level The results also indicate that this impact varies across different types of bank ownership: State-owned banks, domestic private banks and foreign banks Contribution – This dissertation fills the gap in empirical literature by systematically examining the nexus between diversification, bank risk and performance, conditioned upon ownership structure and banking crisis In this sense, the findings of this dissertation provide bank managers and regulators important information about the diversification strategy effectiveness to maintain the stability of the banking system and financial market Keywords: Diversification strategies, bank performance, bank risk, ownership structure, financial crisis, emerging market CHAPTER INTRODUCTION 1.1 Research motivation After the banking crisis in 2011-2014, Vietnamese banks are reforming to focus more on improving asset, funding and income quality using different diversification strategies However, the unique characteristics of Vietnam banking system post the question about the effectiveness of diversification strategies in improving Vietnamese banks’ performance and risks Therefore, this dissertation would like to address this problem and contribute to the reforming process of the Vietnamese banking system 1.2 Research objectives The first objective of this dissertation is to measure the level of bank diversifications and their impact on the risk and performance of Vietnamese commercial banks in the period from 2005 to 2019 The characteristics of diversification strategies are deeply captured in all three dimensions: assets, funding, and income These three dimensions cover both asset-liabilities sides in the balance sheet and income statement Moreover, we examine the different effects of combining these three diversification strategies to offer optimal diversification models for banks Secondly, this dissertation analyses how diversification could impact banking risk and performance in Vietnam during the banking crisis period (2011-2014), to offer some practical suggestions for bank managers and prudential authorities in emerging markets to adjust bank diversification strategy and monetary policy to improve risk and financial performance of the banking system in the economic turmoil period This dissertation's third objective is to systematically investigate the role of ownership strategy, including state-owned banks and foreign bank’s owned subsidiaries, on the nexus between diversification, risk, and performance 1.3 Research questions Using panel data of 34 banks in Vietnam from 2005-2019 with econometric methods, this dissertation measures the diversification level of banks to analyze the impact of diversification on bank performance and risk in Vietnam, especially during the banking crisis 2011-2014 This dissertation aims to answer the following research questions to implement the research objectives Question 1: Do diversification strategies (asset, income, funding) and their combinations impact bank risk and performance? Question 2: Do diversification strategies (asset, income, funding) impact bank risk and performance in the banking distress period? Question 3: Do bank ownership structures impact the diversification-risk-performance nexus? 1.4 Research procedure and methodology Research data was collected from the annual financial statements of 34 Vietnamese commercial banks over the period 2005–2019, extracted from Bankscope and BankFocus database, to analyze the transmission mechanism of the impact of diversification on various aspects of bank performance and risk We systematically examine this relationship with multivariate regression analysis and apply the two-step system Generalized Method of Moments (system-GMM) estimation method as suggested by Arellano and Bover (1995); Blundell and Bond (1998) for dealing with panel data with a relatively large number of crosssectional data compared to a relatively short time The two-step system GMM methodology is employed to estimate all our empirical models The most advance of the two-step SGMM is that it can avoid possible endogenous issues that bias the empirical results on the nexus between diversification, bank risk, and performance The research procedures are expressed in figure 1.2 below 1.5 Research contributions This dissertation fills the following gaps in the literature: Firstly, Vietnam is a relatively young emerging market with limited research on the nexus between diversification, risk, and performance in the banking market Therefore, the primary contribution of this dissertation is to enrich the existing body of academic literature by investigating the impact of diversification strategies on bank risk and performance, focusing on asset, income, and funding diversification Our ultimate goal is to find the optimal model for combining bank diversification strategies to achieve the best banking results Second, there still are research gaps in the effect of the financial crisis on this diversification-risk and performance nexus Empirical findings of this dissertation will further provide empirical results on how diversification affects banks' risk and performance differently during the financial crisis Third, the ownership structure factor affects banks' performance through differences in customer service, information, and different products This research raises a question about the impact of bank ownership structure on the nexus between bank diversification - risk - performance Only a few studies examine banking risk and yield under the ownership structure prism through literature review Therefore, we aim to assess the relationship between the bank's diversification and the bank's risk-performance by approaching information on the ownership structure We consider state-owned and foreign-owned structure variables with the macroeconomics variables, industry-specific, and bank characteristics variables 1.6 Structure of the dissertation Chapter 1: Introduction Chapter 2: Literature review and hypotheses development Chapter Data and methodology Chapter Empirical results and discussion Chapter Conclusion CHAPTER LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT 2.1 Bank diversification definition Banking diversification is the combination of various activities to diverse income, assets, and funding (liabilities) to manage risk and improve performance in the bank operations 2.2 Classification of bank diversification strategies 2.2.1 Asset diversification in the banking sector The weakness of banking business models during and after the financial crisis was observed in bank assets Many large US investment banks have been excluded from the game as a result of the crisis For example, Lehman Brothers were bankrupt; Bear Stearns was merged with JP Morgan Chase; Bank of America acquired Merrill Lynch; JP Morgan and Goldman Sachs have become commercial banks Therefore, the US banking sector fully experienced the cycle from the separate coexistence of the commercial and investment banking sectors (under the Glass-Steagall Act of 1933) to the emergence of the universal banking system (under the Gramm-Leach-Bliley Act in 1999), and then to the death of large separate investment banks during the 2008 crisis Around the world, the pros and cons of diversifying bank assets have led to various permissible banking activities However, the rapid recovery of the universal banking model in the face of crisis shocks allows policymakers to believe that the combination of different businesses, e.g., universal banking and bancinsurance, has become the most efficient structure for banks at present 2.2.2 Income diversification in the banking sector There are different types of diversification that every bank can choose for its business strategy The ultimate goal for those decisions is to increase revenue, minimize costs, increase profits, attract more customers and ensure stable development Today, in the face of stringent legal regulations for credit operations and prudence in capital trading, limitation on profit-seeking opportunities and increased measurement set of risks make most banks in the world decide to diversify income (Vo, 2017) Therefore, income diversification is considered an indicator that reflects the results of diversification strategies rather than a form of diversification in the banking operation (V V Acharya et al., 2006; Baele et al., 2007; Chiorazzo, Milani, and Salvini, 2008) Other than traditional interest income from loans, commercial banks have gradually expanded into feecharged services This means the commission, service charge, net profit from securities, and foreign exchange (Sufian and Chong, 2008) While Chiorazzo et al (2008) shows a positive relationship between bank profits and non-interest margins from diversification, Stiroh (2004b) and Stiroh and Rumble (2006), on the other hand, stated the opposite that broad diversification does not necessarily lead to higher in bank profitability but even cause damage into bank efficiency The trade-off could explain this between interest rate and bank customers going for other services that banks offer, and sometimes those trade-off deals turn for the worse In other words, diversification expands into non-interest income, which is high exposure to systematic risk Income diversification is defined as the fact that banks look for more sources of income in addition to the traditional income from credit and deposit services (Ebrahim and Hasan (2008) Income diversification means mixing various sources of income generated by various banking operational activities (Baele et al., 2007; Kiweu, 2012) In other words, we can say that diversification strategy is mainly based on the switch of traditional interest-based products and services into more innovative non-interest activities (Calmès and Théoret, 2012; Doumpos, Gaganis, and Pasiouras, 2013; Elyasiani and Wang, 2012; Stiroh, 2004a) According to previous researches (Stiroh and Rumble, 2006; Tabak, Fazio, and Cajueiro, 2011), income diversification can be estimated by the Herfindahl-Hirschman index and the Entropy Index that takes into account changes in the distribution of interest income and non-interest income 2.2.3 Funding diversification in banking sector As mentioned in the previous part, the financial crisis of 2008 highlighted the strengths and weaknesses of various banking models in the sector In terms of debt, the bank model highly dependent on wholesale funding after the crisis entails many potential risks The significant increase in interbank interest since August 2007 has led experts to think about partnership risk growth (Caprio, Demirguc-Kunt, and Kane, 2008; Taylor and Williams, 2009) Then, a year later, starting in October 2008, interbank lending activities in the US and European banking system seemed to shut down virtually Governments worldwide have decided to offer ample liquidity to prevent a banking liquidity crisis in this perilous context It was an unprecedented action The main content of the decision is that the government has secured the customer the deposit and the loan with an interbank guarantee or blanket guarantees When banks want to decide on implementing a funding diversification strategy with the best balance between deposit and non-deposit funds, information acquisition is one of the key actions that they need In theory, bank-owned capital in the financing structure is necessary for the bank to get sufficient motivation to improve itself in monitoring and overseeing all its activities and projects (Diamond, 1984) In addition, the portion of debt in a bank and its capability to self-finance on the wholesale funding markets can help experts draw an idea on bank creditworthiness and potential bank customers of deposit Subordinated debt holders can observe and track a bank when their debt is reliably removed from deposit insurance (Calomiris (1999) Therefore, the combination of various funding liquidity could minimize the vulnerability of the bank via supervision However, each of these two types of funding has a diverging liquidity risk probability Taking an example from Ratnovski and Huang (2010), the authors present the negative aspect of banks' dependence on the wholesale funding markets Whenever wholesale investors see cheap and loud signals of the quality of bank assets, they tend to take their money out of this bank, which may cause solvency problems In general, however, wholesale financiers contribute to growing social welfare, and the model they report is only significant under some constraints The assumption of these previous study models is the maximization of company value If banks fail to maximize their value due to deficiencies in corporate governance, research results will not be precise, which means that the effect of credit market regulations on banks' operations and performance will be poorly estimated Additionally, there are differences between deposit funding and non-deposit funding in terms of speed and size fluctuations in financing costs The level of bank risk can be reflected through a more rapid adjustment of the volume and price of wholesale financing, especially when customer deposits are generally protected by deposit insurance Rajan, Servaes, and Zingales (2000) compare informed and arm’s-length debt and find that wholesale financiers have the right to exclude a business if its projects have a present negative value but still require a high-interest expense 2.3 Theories of bank diversification 2.3.1 Theories of diversification According to Montgomery (1994), firms can diversify to seek market power, find solutions to agency problems; or apply their resource bundles to reach competitive advantages These conclusions are derived from three theories: the market power theory, the agency theory, and the resource-based view theory The market-based view theory and the resource-based view theory are intended to answer the question's normative components and explain the drivers of diversification based on profit maximization Adding to the above three theories, the Modern portfolio theory also supports diversification strategy to avoid risk in portfolio management 2.3.2 Theories of bank diversification The theory of bank diversification stems from the theory of diversification in finance and a strategic approach based on analyzing costs and benefits achieved Why would managers and banks choose a diversification strategy? We can answer this question by two approaches: managerial and normative components In terms of management, we wonder why bank managers decide to implement diversification as their strategic orientation In terms of prescriptive components, we clarify the benefit of diversification for banks A good answer should be both managerial and normative There are various motivations for diversifying Banks can achieve synergy, financial advances in portfolio theory, market power, resources, agency motives caused by management decisions According to M Nguyen, Skully, and Perera (2012), some primary factors encourage the bank to diversify: competition, interest expense, banking technology, market share, default risk, and macroeconomic factors 2.4 Hypotheses development 2.4.1 Asset diversification, bank risk, and performance Asset diversification strategy and bank risk The role of diversification in bank risk reduction is well-considered in previous empirical studies (when the income from various activities is not ideally linked) Researchers also investigate how diversification could prevent and solve banking problems (Kashyap and Stein, 1995) Inconsistency with portfolio theory, some authors encourage banks to diversify their loans to eliminate credit risk, such as Tabak et al (2011), examining the impact of the credit portfolio concentration of Brazilian banks suggests that diversification can reduce risk In practice, the Basel Committee on Banking Supervision (1991) reported that many banking crises over the past three decades have been caused by concentration, suggesting that the risk is closely linked to diversification Empirical studies in Argentina and Austria support this view (Bebczuk and Galindo, 2008; Rossi et al., 2009) However, by investigating the effect of credit portfolio concentration on credit risk, some other studies suggest that the banks that are specialized in lending to a certain sector will have lower credit risk than the average credit risk of the banking system, and that standard deviation of the loss of credit has been less in most concentrated banks (Hsieh, Chen, Lee, and Yang, 2013; Jahn, Memmel, and Pfingsten, 2013; C.-C Lee et al., 2014; Rossi et al., 2009) Some authors suggest that asset diversification does not necessarily lead to higher security for the banks, or there is no evidence to prove this link (V V Acharya et al., 2006) Currently, banks tend to shift their activities to more risky industries or business lines, which limits the benefits of the diversification strategy Stiroh (2015) This author believes that risk-taking is made internally, as managers are often motivated to diversify into riskier assets to achieve greater profitability For this reason, the correlation between diversification and banking risk remains unclear Boot and Ratnovski (2016) proposed a model recognizing that the conjunction between long-term relationship banking and short-term transactional banking can harm the former, meaning limited risk benefits from diversification Hypothesis 1a: Asset diversification strategy reduces bank risk Asset diversification strategy and bank performance Concerning bank performance, some authors report the positive impact of diversification on bank performance and efficiency Classical studies of banks consider banking institutions to be unique types of companies capable of collecting and using customer information On this basis, the delegated follow-up argument suggests that banks should diversify, as it is optimal for them to so from the point of view of financial intermediaries Diversification may increase the quality of bank income by strengthening the role of intermediation and reducing information asymmetries (A N Berger, Hasan, and Zhou, 2010; Boyd and Prescott, 1986; Diamond, 1984) It has also been shown to drive competition and financial innovation (Lepetit et al., 2008) Moreover, diversification allows credit institutions to benefit from cheaper monitoring, greater efficiencies, and more effective management skills (Drucker and Puri, 2009; Iskandar-Datta and McLaughlin, 2007; Moudud-Ul-Huq et al., 2018; Tabak et al., 2011) Conducted research in Asian countries reports that banks with greater foreign-owned asset diversification have greater profit efficiency (T L A Nguyen, 2018) In addition, it is suggested that asset diversification has a positive impact on banks' long-term performance (Baele et al., 2007) However, some other studies report a negative impact of diversification on bank performance and support the focused strategy Corporate finance theory states that firms will enjoy additional benefits resulting from the reduced cost if they concentrate their activities on specific sectors with expertise or are familiar (V V Acharya et al., 2006) A concentration strategy can support a company to eliminate potential agency phenomena and use management expertise (P G Berger and Ofek, 1995; Jensen, 1986) Moreover, some companies hesitate to implement the diversification strategy because it can lead to greater competition (Winton, 1999) Various research on Italian, German, Brazilian banking sectors and small European banks did find out significant evidence to demonstrate this point of view (V V Acharya et al., 2006; Mercieca et al., 2007) Elyasiani and Wang (2012) report the negative relationship between asset diversification and the technical efficiency of foreign banks operating in a financial center A N Berger, Hasan, and Zhou (2010) find that product diversification in Chinese banking leads to great costs and lower profits Laeven and Levine (2007) find that diversification generates significantly large negative excess values Although diversification at the asset can decrease banks’ performances, once banks’ screening and monitoring abilities are controlled for, the effect of diversification/focus either gets weaker or disappears (Vazquez and Federico, 2015) In addition to research with a negative or positive conclusion on the relationship between asset diversification and bank performance, many authors find no evidence for this relationship (Hsieh et al., 2013) Some other researchers conclude mixed or unclear results, or the sign of this relationship depends on the period, and specific banks studied Maudos (2017) concludes that the positive impact of diversification on banks' profitability is not always correct The level of this effect can then vary depending on the institution and the way it drives diversification That is why the conclusions of previous studies have been mixed and cannot reach a general agreement Even similar studies of an author can also have different results (A N Berger, Hasan, Korhonen, and Zhou, 2010) Researchers argue that the relationship between the bank's performance and the implementation of the diversification strategy is not monotonous It is not a matter of diversification or concentration, but the more important is how the bank operates and manages the diversification strategy to determine its future profitability Furthermore, the researcher also found that asset diversification only helps banks grow instantly but lacks long-term efficiency (T L A Nguyen, 2018) Curi et al (2015) add that asset diversification can increase bank performance only during the consolidation period and not in the crisis period This result is in line with the findings for US banks (Stiroh, 2004b), and for a worldwide sample of banks analyzed up to 2008, positive effect is not supported throughout time (Beck, Demirgỹỗ-Kunt, and Merrouche, 2010) The studies prove that this relationship changes the sign in the before crisis period Despite the positive correlation between asset diversification and banking performance, this result is not statistically significant during the economic crisis We can thus observe the differences in foreign bank profitability when they implement asset diversification in a period of consolidation and before the crisis, but not in a crisis period The authors find no evidence of the influence of asset diversification on the performance of foreign banks in times of crisis Hypothesis 1b: Asset diversification strategy improve bank performance 2.5.2 Income diversification, bank risk, and performance Income diversification strategy and bank risk Based on portfolio theory, diversification by trying different non-correlated activities, such as interest and non-interest, can benefit banks and eliminate the risk Banks that operate a large percentage of non-interest activities as a source of income will experience fewer income fluctuations/volatility The non-interest income can make up the volatility of interest income, while the latter is more easily influenced by any interest rate events or economic shocks (Froot and Stein, 1998b; Goddard, McKillop, and Wilson, 2008; Sanya and Wolfe, 2011) ... Bank performance and risk? ??explained variables are formulated as follows: ROA= NET INCOME NET NCOME and ROE= TOTAL ASSETS EQUITY SDROA=σROAROA and SDROE=σROAROE E TA ZSCORE= o ROA ROA + 3.2.3 Characteristics... diversification on bank risk and performance are different between Stateowned banks and private banks Hypothesis 6b: The effects of diversification on bank risk and performance differ between foreign and domestic... bank risk, and performance Asset diversification strategy and bank risk The role of diversification in bank risk reduction is well-considered in previous empirical studies (when the income from