Theory and Related Empirical Studies

from traditional activities (focusing on credit granting) to a multi-functional banking model, capable of performing a variety of non-traditional banking activities, first of all to achieve the goals set by the State Bank in the two restructuring projects as well as the strategy and development plan for the Vietnamese banking industry to 2025, with a vision to 2030 that have been announced, and then to be able to compete with non-bank financial institutions and foreign banks in Vietnam and further to reach the regional and global levels.

Third, the two restructuring projects, together with the plans, circulars and directives issued during this period, are the solid legal bases for commercial banks to confidently develop their banking activities more strongly than in the previous period.

1.5. Research method

To achieve the objectives and research questions, the thesis uses qualitative research methods combined with quantitative research methods, specifically as follows:

To build research models, the thesis conducts a review of previous studies to provide appropriate variables and relationships for the research model applied in Vietnam.

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Specifically, with the first research question, how does the NHPTT activity affect the efficiency of banks at Vietnamese commercial banks, the author developed a regression model with dynamic panel data from the study of Akhigbe & Stevenson (2010), with the dependent variable being the technical efficiency of commercial banks, measured by the Data Envelopment Method - DEA, the independent variables being non-interest income (representing the NHPTT activity), bank size, capital adequacy ratio, return on assets ratio, bank lending ratio, economic growth rate and inflation.

For the second research question, what factors affect the performance of commercial banks, the author develops a regression model with dynamic panel data from the study of Rogers & Sinkey (1999), with the dependent variable being non-interest income (representing commercial banks' performance), the independent variables include the interest margin ratio, deposit ratio, equity ratio, credit risk provision ratio and the number of branches and transaction points.

To estimate the proposed models, the thesis uses the two-step System Generalized Moments (SGMM) estimation method of Arellano & Bover (1995) and Blundell & Bond (1998) because this estimation can handle some defects of the model including autocorrelation, heteroscedasticity and especially endogeneity.

other models cannot handle (Greene, 2003).

In addition, the author also uses traditional qualitative methods such as document analysis (content-analysis), statistical description, analysis and synthesis, induction and deduction, generalization, abstraction to analyze individual phenomena and then combine them at a new level, summarize specific events into general conclusions and prove hypotheses with practical events and data.

1.6. Contributions and novelties of the thesis

Contributions of the thesis:

In terms of theoretical basis, this study contributes empirical evidence to the theories of financial intermediation, Harry M. Markowitz's modern portfolio diversification theory, the theory of economies of scale and the theory of economies of scope when the research results show the positive impact of the activities of the central bank on the efficiency of commercial banks.

In practice, the research results provide empirical evidence, helping bank managers see more clearly the impact of the NHPTT activities on bank efficiency as well as identify which factors have positive impacts, which factors have negative impacts on the NHPTT activities, thereby making better decisions in the process of operating and managing banking business activities as well as building strategies and roadmaps for developing appropriate NHPTT activities to help improve future operational efficiency, transform business models, and improve the competitiveness of banks. For policy makers, the research results help provide more empirical evidence to have a basis for proposing regulations and guidelines for the development of NHPTT activities to successfully implement the restructuring process of the banking system and strategies for developing the banking industry in the future. Besides, the study also provides useful information for researchers in the banking field to continue to research more deeply and widely on related issues.

The new points of the thesis include:

Firstly, based on data from 13 Vietnamese commercial banks, the thesis analyzed the impact of NPL activities on bank efficiency. The research results show that when banks increase NPL activities, the technical efficiency of banks also increases. Specifically, all four groups of NPL activities, which are non-credit service activities, securities trading, foreign exchange trading and other activities, increase bank efficiency. Regarding this research direction, most of the previous studies analyzed the impact of NPL activities.

The results also show that the previous year's operating efficiency, bank lending rate, and non-interest income have a positive impact on bank performance while the inflation rate and bank size have a negative impact on bank performance.

Second, the thesis also analyzed the impact of some factors on the performance of the NHPTT. The research results showed that the previous year's non-interest income, capital adequacy ratio and number of branches have a positive impact on the current non-interest income while the Credit Risk Provision has a negative impact on the performance of the NHPTT. Notably, the study found a positive impact of the number of branches and transaction points on the performance of the NHPTT of Vietnamese commercial banks. This is a factor that has not been considered in previous studies on this research direction.

Third, the thesis conducts simultaneous research on the impact of non-performing loan activities on bank efficiency along with factors affecting non-performing loan activities of Vietnamese commercial banks in the period 2011 - 2019 to provide a comprehensive view of non-performing loan activities. Meanwhile, previous studies in the world (on developed countries or emerging economies) only focus on analyzing the impact of non-performing loan activities on bank efficiency or factors affecting non-performing loan activities, but there has not been a comprehensive study combining both issues. In Vietnam, up to now, there have been no studies analyzing the impact of non-performing loan activities on bank efficiency and only a few studies analyze factors affecting non-interest income of banks (often used as a proxy for non-performing loan activities).

Fourthly, the thesis proposes a number of policy implications and recommendations to promote the development of public financial activities, contributing to stabilizing and increasing efficiency, profit, competitiveness as well as accelerating the process of business model transformation for state-owned commercial banks in particular and Vietnamese commercial banks in general.

1.7. Thesis structure

To achieve the proposed research objectives, the thesis is structured into 5 chapters: Chapter 1: INTRODUCTION

This chapter presents an overview of the research problem including the reasons, objectives, objects and scope of the research as well as the methods, contributions, novelties and structure of the research.

Chapter 2: THEORY AND RELATED EMPIRICAL STUDIES

This chapter will analyze the theoretical overview of the NHPTT activities and banking efficiency, the impact of NHPTT activities on banking efficiency. This chapter also reviews previous studies to find research gaps.

Chapter 3: RESEARCH METHODOLOGY.

This chapter specifically presents the research method, research process and research model, which will describe in detail the variables and how to measure the variables in the model. At the same time, this chapter also clearly presents the method of data collection of the study.

Chapter 4: RESEARCH RESULTS AND DISCUSSION.

In this chapter, the thesis analyzes the research results as well as presents empirical evidence on the impact of NHPTT activities on bank efficiency and factors affecting NHPTT activities at Vietnamese commercial banks in the period 2011 - 2019.

Chapter 5: CONCLUSION AND POLICY IMPLICATIONS.

Based on the research results of chapter 4, this chapter presents the conclusions drawn from the research and suggests some solutions and policy implications to promote the development of NHPTT activities to help increase banking efficiency. In addition, chapter 5 also presents the limitations of the research and future research directions related to this topic.

CHAPTER 2: THEORY AND RELATED EMPIRICAL STUDIES

Chapter Introduction

In this chapter, the author presents the theoretical basis for the topic, including related theories on banking efficiency, banking operations and theories on the impact of banking operations on banking efficiency. In addition, the author also conducts a review of relevant domestic and foreign studies as a basis for developing the topic.

2.1. Efficiency of commercial banks

2.1.1. Concept of commercial bank efficiency

Based on the theory of the Production Possibilities Frontier (PPF), efficiency is understood as the ability to convert input factors into output factors or in other words, the ability to generate profits through saving input costs to increase profits, thereby contributing to increasing competitiveness in the process of providing products and services.

According to the definition in the book "Dictionary of Economic Mathematics, Statistics, Econometrics English-Vietnamese" page 255 by Minh (2004), "efficiency" in economics is defined as "the correlation between the input of scarce factors and the output of goods and services" and "the concept of efficiency is used to consider how well resources are distributed by markets." Thus, efficiency can be understood as the level of success that businesses or banks achieve in allocating usable inputs and the outputs they produce, in order to meet a certain goal.

According to Bhattacharyya et al. (1997) bank efficiency is the ability to transform more resources into more services.

According to Berger & Mester (1997), the efficiency of commercial banks is reflected in the relationship between revenue and cost of using resources or the ability to turn input resources into the best output in business activities. A bank is considered to operate effectively if it reaches the maximum level of output results under the condition of optimal use of given input factors.

Thus, efficiency represents the correlation between the results obtained (output) and the total cost incurred to achieve those results (input). Efficiency reflects the quality of economic activities. The larger the difference between these two quantities, the higher the efficiency. In a market economy, efficiency is one of the criteria to evaluate the success of enterprises in general and banks in particular. In addition, for commercial banks, the efficiency of commercial banks is also used to consider the level of safety and soundness of the bank compared to the entire banking system in close relation to the stable development of the economy. The reason is that commercial banks are considered financial intermediaries with the role of catalysts, connecting the sector.

savings and investment sectors of the economy, according to Rose (1996). Therefore, small fluctuations in the banking system can sometimes have a huge impact on the operations of businesses as well as the stable development of the entire economy.

In this thesis, based on the research purpose, banking efficiency is approached from an economic perspective, showing the optimal relationship between the economic results achieved and the costs incurred to achieve those results, or in other words, the efficiency that the thesis focuses on in evaluating the performance of commercial banks is understood as the ability to turn inputs into outputs in the business activities of commercial banks.

2.1.2. Classification of bank efficiency

Originating from efficiency in production and business, the types of banking efficiency used in many studies include:

Firstly, technical efficiency, which reflects the ability to minimize the use of inputs to produce a given output vector, or the ability to obtain maximum output from a given input vector) according to Koopmans (1951). According to Yannick et al. (2016), technical efficiency is divided into two types: pure technical efficiency (PTE) and scale efficiency (SE), in which PTE reflects the way the production unit manages its resources and SE indicates whether the production unit operates at the optimal level of scale or not. The optimal level of scale is understood as the best situation that the production unit achieves by increasing all its factors in a balanced way.

Second, allocative efficiency, the component that reflects the ability of producers to choose the right input-output vector that is technically efficient based on current input and output prices, according to Farrell (1957). This led Farrell to propose a definition of overall production efficiency (OTE), also known as economic efficiency, including technical efficiency (TE) and allocative efficiency (AE).

In addition, (Berger & Mester, 1997) argued that cost efficiency, profit efficiency, and alternative profit efficiency are types of efficiency that should be of interest to banks. Specifically, cost efficiency provides a measure of how close a bank's costs are to the best-practice bank's costs to produce the same bundle of output under the same conditions, standard profit efficiency measures how close a bank's profits are to the maximum possible profit for a particular price of input and output prices (and other variables). And alternative profit efficiency is measured by how close a bank is to maximizing its profits based on its output level rather than its output price.

In short, the view on effectiveness is diverse, depending on the research purpose, effectiveness can be considered from different aspects.

2.1.3. Methods of measuring commercial bank efficiency

There are two general approaches to measuring bank efficiency: structural and non-structural approaches Hughes & Mester (2008). The structural approach is based on the theoretical model of banks and the idea of optimization. The structural approach in measuring bank efficiency focuses on minimizing costs, maximizing profits and maximizing managerial benefits . The non-structural approach assumes that there are many factors other than structure and market concentration that influence the behavior of banks. Therefore, this approach uses a range of financial indicators reflecting different aspects of efficiency to compare efficiency between banks and considers the relationship between efficiency and investment strategies and other factors such as management characteristics.

2.1.3.1. Unstructured orientation

The non-structural approach to measuring bank performance typically focuses on the performance achieved through measuring a range of financial indicators. The non-structural approach also explores the relationship between bank performance and the bank's own characteristics and operating environment, including the bank's investment strategy, location, management structure, and control environment.

According to Wozniewska (2008), these financial ratios can be divided into four

group:

One is the group of profitability indicators including indicators such as: income on total assets

Average assets (Return on Total Assets - ROA), Return on Equity (ROE), Return on Sales (ROS); ROS or Cost to Income (C/I). These are indicators reflecting the effectiveness of the use and management of investment capital and asset management of commercial banks. ROA and ROE are two commonly used indicators to measure the business performance of commercial banks. In which, the average total assets indicator is usually the total of the bank's profitable assets, determined according to the bank's deposits at the State Bank, at credit institutions (CIs), loans to other CIs, loans to customers, and investment securities. Through this ratio, banks can effectively manage profitable assets and evaluate which funding source has the lowest cost.

The second is a group of indexes on margin ratios with two main indexes: net interest margin (NIM) and interest spread (the difference between average earning assets and the average cost of earning debt assets).

The third group of weighted performance indicators includes indicators such as: the ratio of results taking into account reserves and the ratio of operating costs to results.

The fourth is the group of indicators on labor efficiency including indicators such as: asset ratio per number of employees (calculated by job positions) and result ratio per number of employees.

The main advantages of the unstructured approach through financial indicators are: simplicity and ease of application; global applicability; the measured parameters are certain values that can be used for evaluation, comparison, ranking and available data. Therefore, supervisors, owners, administrators and even bank customers who are interested in bank efficiency can apply this approach. However, the limitation of this approach is the large number of indicators that need to be calculated because using too many measures will easily lead to disagreement in comparison, while using too few measures will not reflect the overall picture of bank efficiency because each group of indicators only represents a separate piece of information. In addition, according to Sherman & Gold (1985), financial indicators aggregate many areas of bank activities such as finance, marketing and operations, so the bank can still be effective even if one area is weak as long as the efficiency in other areas is enough to compensate. Because of the above limitations, the non-structural orientation is less suitable than the structural orientation in measuring bank efficiency.

2.1.3.2. Structural orientation (marginal efficiency analysis) – Data Envelopment Method - DEA

Structural orientations are often based on the economics of cost minimization or profit maximization when the efficiency function is expressed in terms of a cost function or a profit function. Estimation of these functions can tell us whether a firm is technically efficient, that is, if its managers organize production so that the firm maximizes output for a given amount of input (i.e., the firm is operating on its production frontier).

Marginal analysis technique seeks marginal efficiency or also known as X-efficiency, a term used to describe all technical and allocative efficiencies of inputs.

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