Non-traditional banking activities and banking efficiency - The case of listed commercial banks in Vietnam in the period 2011 - 2019

The author of this thesis has a declaration about this scientific work of hers, specifically: My name is: Nguyen Thi Thanh Nhan

Date of birth: June 15, 1981 – In Ho Chi Minh City

Hometown: Tuyen Quang

Currently working at: Banking University of Ho Chi Minh City

Is a graduate student of the XIX course of Banking University of Ho Chi Minh City

I declare that the thesis : “Non-traditional banking activities and banking efficiency: the case of listed commercial banks in Vietnam in the period 2011 - 2019”.

Code: 9.34.02.01

Scientific supervisors: Dr. Le Tham Duong and Dr. Dao Le Kieu Oanh

Thesis was conducted at Banking University of Ho Chi Minh City.

The thesis has never been submitted for a doctoral degree at any university. The thesis is my own research work, the research results are honest, in which there is no previously published content or content done by others except for the quotes fully cited in the thesis.

I take full responsibility for my statements.

Ho Chi Minh City, November 25, 2020

Nguyen Thi Thanh Nhan

ACKNOWLEDGEMENTS

I would like to sincerely thank the teachers of Banking University of Ho Chi Minh City and the Graduate School for their enthusiastic teaching, support, and creating favorable conditions for me during my study, research, implementation, and completion of the thesis.

In particular, I would like to sincerely thank Dr. Le Tham Duong, my supervisor and teacher, who has always wholeheartedly guided, instructed, given valuable suggestions and important and timely encouragement so that I could complete my thesis well.

I also sincerely thank Dr. Dao Le Kieu Oanh, my second supervisor, for her dedicated and enthusiastic guidance and support so that I could complete my thesis.

In addition, to complete the thesis, I have received valuable guidance and assistance from many individuals and groups. I would like to thank the Faculty Board and my colleagues who have helped and created conditions for me to complete this research process.

I would also like to thank my family for creating the most favorable conditions in terms of time, and thank my close friends for always sharing and encouraging me, helping me to focus on research to complete my thesis.

THESIS SUMMARY

In order to enhance the capacity of Vietnam's commercial banking system after the 2007-2008 global financial crisis, the State Bank issued and directed the implementation of two projects to restructure the commercial banking system in two phases, 2011-2015 and 2016.

– 2020. The focus of the two projects, in addition to dealing with bad debts, is also to promote the development of banking products and services, aiming to transform the business model of Vietnamese commercial banks from focusing on credit activities to an operating model that focuses more on non-traditional banking activities, providing a variety of financial products and services. This is also a trend that banking systems in developed countries around the world have initiated since the 1980s.

Through a review of previous studies on the impact of non-traditional banking activities on the efficiency of commercial banks, the conclusions are still different. In addition, the study of factors affecting non-traditional banking activities has not received much attention. In Vietnam, studies on banking efficiency have been conducted since the early 2000s, but there has been no study on the impact of non-traditional banking activities on the efficiency of commercial banks. In addition, in Vietnam, there is only a study by Nguyen Minh Sang and Nguyen Thi Hanh Hoa in 2013 on factors affecting non-interest income of Vietnamese commercial banks, which is a study related to the research direction on factors affecting non-traditional banking activities. In particular, the research project approaches the direction of simultaneously studying the impact of non-traditional banking activities on the efficiency of Vietnamese commercial banks and the factors affecting non-traditional banking activities at Vietnamese commercial banks in the context of implementing restructuring projects that have not been implemented. Therefore, the research topic "NON-TRADITIONAL BANKING ACTIVITIES AND BANK EFFICIENCY: THE CASE OF LISTED COMMERCIAL BANKS"

LISTING IN VIETNAM IN THE PERIOD 2011 - 2019" is necessary to supplement theoretical basis as well as empirical evidence on this issue.

The thesis inherits the research of Akhigbe & Stevenson (2010) and some related studies to build a model on the impact of non-traditional banking activities on efficiency at listed commercial banks in Vietnam. The thesis also inherits the research of Rogers & Sinkey (1999) and some related studies to build a model.

Factors affecting non-traditional banking activities at listed commercial banks in Vietnam, including the number of branches and transaction points, a factor that has not been considered in previous studies. The thesis collects data from 13 listed commercial banks in Vietnam during the period from 2011 to 2019 and uses the two-step SGMM estimation of Arellano & Bover (1995) and Blundell & Bond (1998) to run and test the research model.

The research results show that non-traditional banking activities increase the efficiency of listed commercial banks in Vietnam. Other factors such as the lagged variable of bank efficiency, the ratio of loans to total assets have a positive impact on the efficiency of listed commercial banks in Vietnam, while the factors that have a negative impact are scale and inflation. The study has not found a relationship between variables of return on assets, capital adequacy ratio and economic growth rate with bank efficiency. In addition, the factors that have a positive impact on non-traditional banking activities at listed commercial banks in Vietnam are non-traditional banking activities in the previous period, capital adequacy ratio and the number of branches and transaction points of the bank, while the variable of credit risk provisioning ratio has a negative impact. Based on the research results, the thesis has made a number of recommendations for Vietnamese commercial banks so that banks can promote the development of non-traditional banking activities and further improve banking efficiency in the future.

Thus, the thesis has made certain contributions. In terms of theoretical basis, the thesis contributes empirical evidence to confirm and supplement the theoretical basis on the impact of non-traditional banking activities on banking efficiency and factors affecting non-traditional activities of commercial banks in the context of listed commercial banks in Vietnam in the period 2011 - 2019. In terms of practice, the thesis provides empirical evidence, along with policy suggestions from the study to help bank administrators make better decisions for the process of operating and managing banking business activities to improve operational efficiency in the future.

LIST OF ABBREVIATIONS

Acronym

English phrases	Vietnamese phrases
OBS	Off – Balance Sheet	Off-balance sheet activities
ROA	Return On Assets	Return on assets
ETA	Equity To Assets	Equity to total assets ratio
NIM	Net Interrest Margin	Marginal Interest Rate
LLP	Provision for loan losses	Credit risk provision
DEA	Data Envelopment Analysis	Data envelopment analysis method
TE	Technically Efficient	Technical efficiency
AE	Allocative Efficiency	Allocative efficiency
CE	Cost Efficiency	Cost effective
SE	Scale Efficiency	Efficiency of scale
DMUs	Decision Making Units	Decision making units
CRS	Constant returns to scale	Constant returns to scale
VRS	Variable Returns to Scale	Efficiency varies with scale
PTE	Pure Technical Efficiency	Pure technical efficiency
FEM	Fixed Effects Model	Fixed effects model
REM	Random Effects Model	Random effects model
GMM	General Method of Moments	Generalized moment-scale regression method
SGMM	System Generalized Method of Moments	General system moment method
Commercial Bank		Commercial Bank
Commercial Bank		Listed commercial bank
NHPTT		Non-traditional banking
Business performance report		Business performance report

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INDEX

COMMITMENT i

ACKNOWLEDGEMENTS ii

THESIS SUMMARY iii

LIST OF ABBREVIATIONS v

TABLE OF CONTENTS vi

LIST OF TABLES ix

LIST OF IMAGES x

CHAPTER 1: INTRODUCTION 1

1.1. Research reasons 1

1.2. Research objective 4

1.3. Research questions: 4

1.4. Research object and scope 4

1.5. Research methods 6

1.6. Contributions and new points of the thesis 7

1.7. Thesis structure 8

CHAPTER 2: THEORY AND RELATED EMPIRICAL STUDIES 10

2.1. Efficiency of commercial banks 10

2.1.1. Concept of commercial bank efficiency 10

2.1.2. Classification of bank efficiency 11

2.1.3. Methods of measuring commercial bank efficiency 12

2.1.4. Factors affecting the efficiency of commercial banks 20

2.2. Non-traditional banking activities 26

2.2.1. Concept of non-traditional banking activities 26

2.2.2. Classification of non-traditional banking activities 34

2.2.3. Measuring non-traditional banking activities 36

2.2.4. Causes leading to the development of non-traditional banking activities...37

2.3. Theoretical basis of the impact of NHPTT activities on banking efficiency 41

2.3.1. The Intermediation theory of banking 41

2.3.2. Modern Portfolio Theory 42

2.3.3. Theory of economies of scale 43

2.4. Impact of NHPTT activities on banking efficiency 44

2.4.1. Positive impact 44

2.4.2. Negative impacts 47

2.5. Summary of related research works 48

2.5.1. Studies on the impact of non-traditional banking activities on banking efficiency 48

2.5.2. Empirical studies on factors affecting non-traditional banking activities 61

2.5.3. Empirical studies on banking efficiency in Vietnam 66

2.5.4. Research Gap 73

Chapter 2 Summary 74

CHAPTER 3: RESEARCH METHODOLOGY 75

3.1 Research process 75

3.2. Research model on the impact of non-traditional banking activities on bank efficiency 76

3.2.1. Proposed research model 76

3.2.2. Description of variables in the research model 78

3.3. Research model of factors affecting non-traditional banking activities ...84 3.3.1. Proposed research model 84

3.3.2. Description of variables in the research model 86

3.4. Research data 90

3.5. Estimation method 91

3.5.1. Methods of measuring bank efficiency 91

3.5.2. Regression method 95

Chapter 3 Summary 98

CHAPTER 4: EXPERIMENTAL RESEARCH RESULTS AND DISCUSSION 99

4.1. General assessment of banking efficiency and non-traditional banking activities of listed commercial banks in Vietnam in the period 2011 - 2019 99

4.1.1. General assessment of effectiveness 99

4.1.2. General assessment of non-traditional banking activities 101

4.2. Descriptive statistics of sample 105

4.3 Experimental research results 109

4.3.1. Research results on the impact of non-traditional banking activities on bank efficiency 109

4.3.2. Results of model estimation of factors affecting non-traditional banking activities 123

Chapter 4 Summary 128

CHAPTER 5: CONCLUSION AND POLICY IMPLICATIONS 129

5.1. Research conclusions 129

5.2. Policy implications 130

5.2.1. Contents of solution groups 130

5.2.1.1. Promote the development of non-traditional banking activities by diversifying products and services to increase banking efficiency 130

5.2.1.2. Improving the quality of traditional banking operations 133

5.2.1.4. Continue to increase equity capital 135

5.2.1.5. Supplementary solutions 135

5.2.2. Feasibility of solutions 139

5.2.3. Implementation roadmap 140

5.3. Recommendations on supporting solutions to improve the operational efficiency of listed commercial banks in Vietnam from the Government and the State Bank 142

5.4. Limitations of the study and future research directions 143

REFERENCES 145

APPENDIX................................................................................................................................................ clv

Non-traditional banking activities and banking efficiency - The case of listed commercial banks in Vietnam in the period 2011 - 2019 - 1

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