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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 DOCTORAL DISSERTATION ACADEMIC ADVISOR: Assoc Professor Dr TRUONG THI HONG Ho Chi Minh City - 2021 ii ACKNOWLEDGEMENT In completing this dissertation, I would like to express my gratitude to the University of Economics Ho Chi Minh City (UEH), which provides an ideal environment and financial support for my research journey At UEH, I have gained valuable academic knowledge and research skills as a lecturer and as a Ph.D candidate My utmost appreciation is to my academic supervisor, Assoc Prof Dr Truong Thi Hong, for dedicated, whole-heartedly coaching and guidance throughout the completion of my thesis My gratitude also goes to my dearest colleagues at the School of Banking and the School of UEH Graduate for their continuously dedicated support, contributions, and guidance, for me in writing this dissertation I want to thank Prof Vo Xuan Vinh for the preliminary research ideas and suggestions My special thanks to Dr Nguyen Huu Huan, Dr Ngo Minh Vu, Dr Phan Chung Thuy, Dr Hoang Hai Yen, and Dr Ngo Minh Hai for their best efforts in helping me with various challenges during my Ph.D candidature Saying thank you is just simply not enough for what they have offered me Finally and most importantly, my beloved family and best friends have always been by my sides, with unconditional love, encouragement, and endless support Without them, this dissertation would have never been written Thank you all for the most profound appreciation Ho Chi Minh City, October 2021 Pham Khanh Duy iii TABLE OF CONTENTS STATEMENT OF AUTHENTICATION i ACKNOWLEDGEMENT ii TABLE OF CONTENTS iii ABBREVIATION LIST vii LIST OF TABLES viii LIST OF FIGURES ix ABSTRACT x TÓM TẮT xi CHAPTER INTRODUCTION 1.1 Research motivation 1.2 Research background 1.3 Research gap identification .11 1.4 Research objectives .12 1.5 Research questions 14 1.6 The scope of research 15 1.7 Research procedure and methodology 15 1.8 Research contributions 17 1.9 Structure of the dissertation .19 CHAPTER LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT 22 iv 2.1 Bank diversification definition 22 2.2 Classification of bank diversification strategies 24 2.2.1 Asset diversification in the banking sector 28 2.2.2 Income diversification in the banking sector .30 2.2.3 Funding diversification in the banking sector .32 2.3 Theories of bank diversification 35 2.3.1 Theories of diversification 35 2.3.2 Theories of bank diversification 40 2.4 Concept and measurement of bank risk and performance 43 2.4.1 Concept and measurement of bank risk 43 2.4.2 Concept and measurement of bank performance .46 2.5 Theoretical overview of banking crisis 47 2.6 The impact of diversification on bank risk and performance 50 Although the concern on the impact of diversification on banks' risks and performance is discussed in various articles, the conclusion of this topic is still unclear .50 2.6.1 Asset diversification, bank risk, and performance .52 2.6.2 Income diversification, bank risk, and performance 56 2.6.3 Funding diversification, bank risk, and performance .60 2.6.4 Combinations of diversification strategies 61 2.6.5 Bank diversification, risk and performance in the financial crisis .62 2.6.6 Role of ownership structure in the nexus between diversification, risk and performance .64 2.7 Summary .67 v CHAPTER DATA AND METHODOLOGY 68 3.1 Data sample 68 3.2 Construction of variables .70 3.2.1 Dependent variables – Bank risk and performance 70 3.2.2 Key explanatory variables - Bank diversification measures 72 3.2.3 Control variables .74 3.2.5 The role of financial distress and bank ownership 76 3.3 Econometric models 79 3.4 Robustness check 83 3.5 Conclusion 86 CHAPTER EMPIRICAL RESULTS AND DISCUSSION 87 4.1 Descriptive statistics 87 4.2 Correlation matrix .89 4.3 Empirical results 91 4.3.1 Diversification strategies, bank’s risk and performance 91 4.3.2 Diversification strategy combination, bank risk and performance 102 4.3.3 Diversification, bank risk and performance during the crisis 105 4.3.4 The role of bank ownership structure 109 4.4 Robustness check results .117 4.5 Conclusion 117 CHAPTER CONCLUSION .118 5.1 Summary of research findings 118 5.2 Contributions 119 vi 5.3 Policy implications 120 5.4 Limitations 122 LIST OF PUBLICATION i REFERENCES ii APPENDIX .xv x ABSTRACT Purpose – This dissertation investigates the impacts of asset, funding, and income diversification strategies and their combinations on the banking system’s performance and risk in Vietnam, especially during the financial crisis The research also evaluates the role of ownership structure upon diversification-risk 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's audited financial statements, obtained from reliable sources Findings – The empirical results indicate that, in general, diversification practices in banking sectors are effective in improving banks’ risk-return profile, especially during the 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: Stateowned banks, domestic private banks, and foreign banks Contribution – This dissertation fills the gap in empirical literature by systematically examining the nexus between diversification strategies, bank risk, and performance, conditioned upon financial crisis and ownership structure 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 xi TĨM TẮT Mục đích - Mục đích luận án nghiên cứu tác động chiến lược đa dạng hóa tài sản, nguồn vốn, thu nhập kết hợp chúng rủi ro hiệu hoạt động ngân hàng thương mại Việt Nam, đặc biệt thời kỳ khủng hoảng ngân hàng Việt Nam Nghiên cứu đánh giá vai trò cấu trúc sở hữu dựa mối quan hệ đa dạng hóa-rủi ro hiệu suất Phương pháp luận - Sử dụng liệu bảng thu thập từ 34 ngân hàng thương mại Việt Nam từ năm 2005 đến năm 2019, với kỹ thuật kinh tế lượng đại - phương pháp ước lượng GMM hệ thống hai bước mô tả Arellano Bover (1995), sử dụng để đạt mục tiêu nghiên cứu Dữ liệu thu thập theo cách thủ cơng từ báo cáo tài hàng năm ngân hàng, lấy từ Bankscope Kết - Kết thực nghiệm cho thấy, nhìn chung, thực tiễn đa dạng hóa lĩnh vực ngân hàng có hiệu việc cải thiện hiệu rủi ro ngân hàng, đặc biệt khủng hoảng ngân hàng Việt Nam từ năm 2011 đến năm 2014 Tuy nhiên, sử dụng kết hợp chiến lược có hiệu đa dạng hóa thu nhập đa dạng hóa nguồn vốn Những kết rõ ràng sử dụng phương pháp đo lường mức độ đa dạng hóa khác Kết tác động khác loại hình sở hữu ngân hàng: ngân hàng quốc doanh, ngân hàng tư nhân nước ngân hàng nước ngồi Đóng góp - Luận án đóng góp thêm vào nghiên cứu thực nghiệm cách xem xét cách có hệ thống mối quan hệ đa dạng hóa, rủi ro hiệu hoạt động ngân hàng, tùy thuộc vào cấu trúc sở hữu thời kỳ Kết nghiên cứu luận án cung cấp cho nhà quản lý ngân hàng thông tin quan trọng hiệu chiến lược đa dạng hóa nhằm trì ổn định hệ thống ngân hàng thị trường tài CHAPTER INTRODUCTION 1.1 Research motivation “In 1952, Nobel Laureate Harry Markowitz demonstrated mathematically why putting all your eggs in one basket is an unacceptably risky strategy and why diversification is the nearest an investor or business manager can ever come to a free lunch That revelation touched off the intellectual movement that revolutionized Wall Street, corporate finance and business decisions around the world; its effects are still being felt today” Bernstein and Bernstein (1996) The practice of diversification has created conflicting arguments about its impact on the banking sector’s risk and performance On the one hand, a diversification strategy is motivated by certain advantages that focused banks cannot have: (1) gaining from exploiting managerial skills and abilities across products and geographical areas (Iskandar-Datta & McLaughlin, 2007), (2) taking advantage of economies of scale by sharing fixed costs across various products and markets (Drucker & Puri, 2009), and (3) offering a wide range of financial services to clients who require multiple products On the other hand, the ones that prefer the concentration strategy claim that diversified banks can reduce their comparative management advantage when investing in many areas they are not experts (Klein & Saidenberg, 1998) Furthermore, diversification increases competition (Winton, 1999) and creates higher agency costs resulting from diminishing value activities when managers reduce their risk (L Laeven & Levine, 2007) The empirical literature on banking diversification first addresses developed markets, where banks have been fully mature, such as the US market and other developed countries in Europe (Baele, De Jonghe, & Vander Vennet, 2007; Curi, Lozano-Vivas, & Zelenyuk, 2015; Elsas, Hackethal, & Holzhäuser, 2010; Mercieca, Schaeck, & Wolfe, 2007; Stiroh & Rumble, 2006) The research and discussion on this topic in emerging and transition economies are explored (N Chen, Liang, & Yu, 2018; Moudud-Ul-Huq, Ashraf, Gupta, & Zheng, 2018) However, the literature provides different results for different countries and regions (T L A Nguyen, 2018) According to Doumpos, Gaganis, and Pasiouras (2016), diversification can be more beneficial for banks operating in less developed countries compared to banks in advanced and major advanced countries Vietnam is one of the fastest-growing emerging markets with significant reforms in both politics and the economy Nevertheless, Vietnam is still considered a special case study as the country still set itself as a market-driven economy under a socialist regime (Doan, Lin, & Doong, 2018) State-owned enterprises play an exclusive role in the economy, particularly the banking and financial system The banking sector is always one of the most important factors of all economic systems In Vietnam, the role of banks is more critical The Vietnamese financial system has been bankbased, in which the banking industry is considered the bloodstream of the economy (Luu, Nguyen, & Vu, 2019; Vo & Nguyen, 2018) Banks are the main source of short and long-term funding for almost all firms, especially private firms (Tran, Ong, & Weldon, 2015) Typically, the banking system in Vietnam is primarily dominated by State-owned commercial banks , of which the majority shareholder is the State bank of Vietnam, with over 70% of owner equity Besides, State-owned commercial banks account for approximately 50% of the market shares, possessing a large customer base, make them less motivated to improve their profitability or efficiency The core business of There are four biggest State-owned commercial banks, including Vietnam Bank for Agriculture and Rural Development, Joint Stock Commercial Bank for Investment and Development of Vietnam, Vietnam Joint Stock Commercial Bank of Industry and Trade, and Joint Stock Commercial Bank for Foreign Trade of Vietnam ... tài hàng năm ngân hàng, lấy từ Bankscope Kết - Kết thực nghiệm cho thấy, nhìn chung, thực tiễn đa dạng hóa lĩnh vực ngân hàng có hiệu việc cải thiện hiệu rủi ro ngân hàng, đặc biệt khủng hoảng ngân. .. luận án nghiên cứu tác động chiến lược đa dạng hóa tài sản, nguồn vốn, thu nhập kết hợp chúng rủi ro hiệu hoạt động ngân hàng thương mại Việt Nam, đặc biệt thời kỳ khủng hoảng ngân hàng Việt Nam. .. hữu ngân hàng: ngân hàng quốc doanh, ngân hàng tư nhân nước ngân hàng nước ngồi Đóng góp - Luận án đóng góp thêm vào nghiên cứu thực nghiệm cách xem xét cách có hệ thống mối quan hệ đa dạng hóa,
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