LLP has a negative impact on NII. Thus, previous year’s non-interest income, capital adequacy ratio and number of branches have a positive impact on current non-interest income. Meanwhile, the credit loss provision ratio will have a negative impact on current non-interest income.
More specifically, first, the research results show that the lagged variable of non-interest income has a positive impact on non-interest income at the 1% significance level. This means that the non-interest income of banks has an impact on each other and a positive correlation between periods. Thus, this period's non-interest income will depend on the results of the previous period's non-interest income because banking business is a continuous process.
The regression coefficient of the ETA variable is 1.0968 with a positive sign at the 1% significance level. Thus, the equity ratio has a positive impact on non-interest income, specifically when the equity ratio increases by 1%, non-interest income increases by 1.0968%. This result is similar to the initial expectation and is explained that banks with a high equity to total assets ratio will boldly invest in non-interest income activities, leading to an increase in non-interest income. This result is also consistent with the theory of economies of scale and the results of studies by Rogers & Sinkey (1999), Shahimi et al. (2006), Hahm (2008), Sang & Hoa (2013).
The regression coefficient of the LLP variable is -31.5597 with a negative sign at the 5% significance level. Thus, the credit risk provision ratio has a negative impact on non-interest income, specifically when the credit risk provision ratio increases by 1%, non-interest income decreases by 31.5597%. This result is different from the initial expectation and can be explained by the fact that commercial banks in Vietnam are too focused on the banking sector's credit granting activities, combined with the characteristics of the period from 2011, when the Vietnamese economy began to be affected by the global financial crisis originating from the US in late 2007 and early 2008, leading to an increase in bad debts in the banking system. The handling of bad debts, especially in the period 2011 - 2015 under the restructuring project phase 1, required banks to concentrate resources from finance to human resources, so they could not focus on developing non-interest income activities, causing non-interest income to decline. This result is contrary to the results of studies by Rogers & Sinkey (1999), Hahm (2008) and Firth et al. (2016), but similar to the results of Hidayat et al. (2012).
Finally, one of the expected results in Table 4.7 is the BRANCH factor. With a regression coefficient of 0.0599 at a significance level of 5%, it shows a positive impact of BRANCH on non-interest income, specifically if the number of branches and transaction points increases by 1%, then the revenue
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Non-interest income of banks will increase by 0.0599%. This result is consistent with the initial expectation, it shows that the author's suspicion about the impact of the number of branches and transaction points on the operation of the State-owned commercial banks is correct. In the context and conditions of Vietnam, only a few banks (commercial banks with the majority of state capital) have a system of branches and transaction points covering all provinces and cities, the remaining commercial banks have a modest number of branches and transaction points. Therefore, when increasing the number of branches and transaction points, State-owned commercial banks in particular and Vietnamese commercial banks in general will reach more customers, bringing in higher non-interest income. This result is consistent with the theory of economies of scale although this factor has not been considered in previous studies such as those of Rogers & Sinkey (1999), DeYoung & Rice (2004b), Hahm (2008), Sang & Hoa (2013) and Firth et al. (2016).
Chapter 4 Summary
In chapter 4, the author estimated the impact model of the banking sector's activities on bank efficiency and the model of factors affecting the banking sector's activities of 13 listed commercial banks in Vietnam. The performance of Vietnamese listed commercial banks is assessed through technical efficiency (TE) obtained from DEA analysis. The banking sector's activities are assessed through the ratio of non-interest income to total income, the ratio of income from foreign exchange trading to total income, the ratio of income from services to total income, the ratio of income from securities trading to total income and the ratio of other income to total income. To estimate these models, the author uses the fixed effects (FEM), random effects (REM) and system GMM (SGMM) estimation methods.
The results of estimating the impact model of the NHPTT activities on bank efficiency show that, in the period 2011 - 2019, non-interest income, previous year's bank efficiency, and loan to total asset ratio all have positive impacts on bank efficiency, while inflation and scale have negative impacts on bank efficiency.
The results of estimating the model of factors affecting the performance of commercial banks show that previous year's non-interest income, capital adequacy ratio and number of branches have positive impacts on current non-interest income while the credit risk provision ratio will have negative impacts on current non-interest income.
Based on the research results of chapter 4, chapter 5 will provide policy implications for commercial banks in Vietnam.
CHAPTER 5: CONCLUSION AND POLICY IMPLICATIONS
5.1. Research conclusions
The general objective of the study is to assess the impact of the NHPTT activities on banking efficiency and factors affecting the NHPTT activities at Vietnamese commercial banks. To achieve this general objective, the study develops into 2 specific objectives including:
(1) assess the impact of public debt activities on banking efficiency at Vietnamese commercial banks, (2) assess factors affecting public debt activities at Vietnamese commercial banks.
With the first research objective of assessing the impact of the activities of the NHPTT on the efficiency of banks in Vietnam, the author has conducted a review of the theory of financial intermediation, the theory of modern portfolio diversification, and the theory of economic benefits according to scale. In addition to presenting the theoretical basis, the author also conducts a review of domestic and foreign studies related to the impact of the activities of the NHPTT on the efficiency of banks. The model proposed by the author is based on the analysis and inheritance of the model of Akhigbe & Stevenson (2010).
Based on the results of previous studies, the author uses the Data Envelopment Method (DEA) to measure the efficiency of banks and then regresses the results with the dependent variable being the banking activities (measured by non-interest income) along with a set of control variables representing internal and external factors of the bank to fully assess the impact of banking activities on banking efficiency. The author uses panel data and the two-step SGMM method to get the best estimate. This study aims to provide additional theoretical basis and empirical evidence to conclude on the impact of banking activities on banking efficiency at Vietnamese commercial banks.
The estimation results show that non-traditional banking activities positively affect the banking efficiency of Vietnamese commercial banks in the period of 2011 - 2019. This is consistent with the theory of modern investment portfolios as well as the research results of Akhigbe & Stevenson (2010). When banks develop non-traditional banking activities, they will bring a variety of products and services, which will bring non-interest income, increase profits and thus increase the efficiency of banks. To further examine the impact of non-traditional banking activities on banking efficiency, the author continues to use the components of non-traditional income including the ratio of income from foreign exchange trading to total income (FOREX), the ratio of interest income from foreign exchange trading to total income (FOREX), and the ratio of interest income from foreign exchange trading to total income (FOREX).
service income to total income (SER), securities trading income to total income (SEC) and other income (OTHER) to total income. The results show that all four components of non-interest income have a positive impact on bank efficiency, in which with the same significance level of 5%, other income brings higher non-interest income than foreign exchange trading. Similarly, with the same significance level of 10%, securities trading income brings higher non-interest income than service income.
For the internal variables of the bank, the previous year's bank efficiency and the customer loan ratio both have a positive impact on the bank efficiency, while inflation and size have a negative impact on the bank efficiency. For the external environmental variables, the inflation variable has a negative impact on the bank's business efficiency. The study has not found a relationship between the variables of return on assets, capital adequacy ratio and economic growth rate with the bank efficiency.
With the second objective of evaluating the factors affecting the performance of commercial banks in Vietnam, the author has conducted a review of the theoretical basis and domestic and foreign studies. Based on the research of Rogers & Sinkey (1999) and previous studies, the author has proposed a research model and used the SGMM estimation method to get the best results. The research results show that the variables belonging to the internal factors of the bank such as non-interest income in the previous year, capital adequacy ratio and number of branches have a positive impact on current non-interest income. In particular, the factor of number of branches and transaction points stands out because this is a factor that has not been considered in previous studies on factors affecting the performance of commercial banks. On the contrary, Credit Risk Provision has a negative impact on the performance of commercial banks. The study has not found a relationship between the variables of marginal interest income ratio and deposit ratio with the performance of commercial banks.
5.2. Policy implications
Based on the research results presented in the above section, the author proposes policy implications focusing on the following groups of solutions:
5.2.1. Contents of solution groups
5.2.1.1. Promote the development of non-traditional banking activities by diversifying products and services to increase banking efficiency.
Banks need to implement a strategy to diversify products and services, focusing on each group of banking activities including service activities (non-credit), securities trading, foreign exchange trading and other activities that banks are allowed to perform.
implemented in accordance with the law. For example, with the service group (non-credit), it is necessary to increase both the quantity and quality of payment services, treasury, trust and agency, consulting, business and insurance services, discount, asset preservation, safe deposit box rental and other services (currency brokerage...). In fact, this is the NHPTT activity that has been interested in developing by banks and is bringing in the best revenue compared to the remaining activities. However, most banks have only focused on payment services and since 2015 have promoted cooperation and insurance agency services by becoming agents of life insurance companies. Therefore, there are still many opportunities to diversify in the remaining services.
The key issues for diversifying non-credit services are: in terms of quantity, diversification does not mean uncontrolled increase, creating as many services as possible, but it is important to have enough services that meet the needs and desires of customers. Because offering too many services will be very costly and cannot bring profits because they are not accepted by customers. In terms of quality, all services, in addition to being able to meet the financial needs of customers, also need to be consistent at a level of service throughout the process of customers using the service. For example, a customer, whether withdrawing cash at the counter or at an ATM, feels satisfied with the fast, professional, and dedicated service of bank staff or with the stable operation of the ATM. This can be achieved thanks to the following solutions:
Firstly, developing banking products and services based on modern technology platforms to meet customers' needs quickly and conveniently. Currently, with the development of information technology and the popularity of the use of the Internet as well as mobile phones and smart devices in Vietnam, developing products and services based on this platform will help banks provide products and services to many customers more quickly and conveniently. The issue of concern is that the quality of products and services provided in these modern ways depends on the server system as well as the quality of the Internet connection. In addition, the issue of security and safety when conducting transactions via the Internet is not only of great concern to customers but also a very important issue for banks. Processing speed, accuracy, security, ease of use, understanding and transparency of transactions will be competitive advantages for banks in attracting and retaining customers as well as encouraging customers to use and form the habit of using banking services in daily life.
Second, develop flexible, simple and easy-to-understand microfinance products that meet the needs of the majority of people, especially people in rural areas - customers who have not been or are rarely served by banks. Vietnam is in the process of building and implementing a national strategy on financial inclusion, so developing products and services to meet the needs of those who have not been or are rarely served by banks is a strategy that is in line with the State's policies and guidelines. Therefore, banks will have great support from the Government to successfully implement the strategy of developing diverse banking products and services.
Third, developing products and services creates a chain of added value to serve customers. Customers' financial needs are not only limited to traditional, single banking services such as loans or deposits, but customer needs will change and increase over time, income, life stage (single, married, having children), specifically using payment services, financial consulting, financial management, investment, business, asset management, etc. Therefore, banks can create and develop products and services that maximally, promptly, and flexibly meet customers' needs arising during the process of using banking services. For example, when customers want to borrow money to buy a house or invest, they will need to search for and evaluate real estate, or when customers start a business, they will need to use cash management services, payment services, credit, consulting, etc. In addition, with the increasingly high level of development of society, the economic and spiritual life of customers is increasingly improved, so the needs of customers are also increasing. Therefore, banks need to clearly understand the needs of customers, promptly grasp the changing trends of customers to quickly meet the needs, create customer satisfaction to be able to attract and retain customers, bring a stable source of non-interest income, and increase bank efficiency.
Fourth, develop joint products and services, and implement cross-selling. Banks need to further promote their association with businesses inside and outside the industry to better cross-sell products. With these agreements, the parties will give each other priority in providing products and services to each other's customers in the spirit of ensuring mutual benefits and mutual development. This helps increase the convenience of banking products and services, while expanding the product distribution network and the number of customers. Currently, the common partner of banks is insurance companies with bank-insurance joint products.
(bancassurance). In addition, the bank also expands its links with real estate companies through home loan products, links with post and telecommunications companies through savings deposit products or home money transfers, especially overseas remittances, links with supermarkets, shopping malls, travel companies, restaurants, hotels through card products, links with schools, educational centers through tuition collection services, etc.
5.2.1.2. Improving the quality of traditional banking operations
Traditional banking activities that need to continue to improve in quality are lending activities in particular and credit granting activities in general of banks because research results show that increasing the customer lending rate also increases bank efficiency, while also reducing credit risk provisions and this will have a positive impact on the activities of the NHPTT. To improve the quality of lending and credit granting activities, banks need to strengthen their capacity to monitor the implementation of lending and credit granting processes as well as evaluate and adjust existing processes in an increasingly better direction, in line with reality. Improving lending quality, reducing bad debt, and reducing credit risk not only helps improve business efficiency but also makes customers more confident in the business capacity of the bank, eliminating potential concerns about bankruptcy and dissolution of the bank, giving customers peace of mind in transactions, boldly using many other services provided by the bank, and NHPTT activities. It is undeniable that banks have a large number of customers thanks to their operating history with deposit taking and credit granting activities. With the complex nature of financial services, customers often have a psychological attachment to the bank they have had transactions with to avoid having to start a lot of procedures again when switching to a new bank. This is the advantage that helps banks retain customers so that they can cross-sell and provide new services. And if done well, these customers will be the source of promotion and propaganda for the bank's products and services to many new customers.
On the bank side, when the credit risk provision ratio is reduced, the bank will be more confident, have more resources to focus on developing credit activities, increase non-interest income and vice versa when the credit risk provision ratio is high, banks must focus resources on credit activities so they cannot develop credit activities. And in fact, the research results at Vietnamese commercial banks in the period 2011 - 2019 showed that the credit risk provision ratio has an inverse relationship with activities.