Tác động của đa dạng hóa và cạnh tranh đến sự ổn định của ngân hàng thương mại nghiên cứu tại việt nam tt tiếng anh
MINISTRY OF EDUCATION AND TRADING UNIVERSITY OF ECONOMICS HO CHI MINH CITY
NGUYEN TU NHU
THE IMPACT OF DIVERSIFICATION AND COMPETITON ON THE STABILITY OF COMMERCIAL BANK: A RESEARCH IN VIETNAM
Major : Finance – Banking Code: 93.40.201
SUMMARY OF ECONOMIC DOCTORAL THESIS
Ho Chi Minh City – 2019
The research was completed at: University of Economics Ho Chi Minh City Research Supervisors: Assoc.Prof.Ph.D. Tram Thi Xuan Huong Assoc.Prof.Ph.D. Vo Xuan Vinh
Reviewer: 1. 2. 3. The thesis will be defended at the Board of Examiners of University of Economics Ho Chi Minh City at…………………on……………………………
The thesis can be found at………………………………………
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CHAPTER 1: INTRODUCTION 1.1 The necessity of the research Activities of banks affect the stability of monetary policy in many countries directly. Facing challenges in intergration, most countries in the world recognize that competition forces their economies to grow. In order to improve the effectiveness of the banks’competition strategies, it is necessary to diversify business activities for limitting and diversifing risks and increase the banks’ revenue. However, there are many agruments about the impact of competition and diversification on financial stability of banks’ perfromance. Whether competition and diversification pose a threat to stability of banks or not? And how are all factors considered in each statement or the environment where there are different effects? In Vietnam, in general, economic instability has caused many losses to the banking system in all aspects. The levels of competition among banks have become more intense. As a result, commercial banks have been changing their operation by expanding the scope of their activities to increase income. However, bank costs and risks also increase and impact on banking stability. So, should the bank swap this opportunity to increase income and competition with its stability? Be aware of the urgency of the impact of diversification and competition on stability of bank, the thesis purposes to clarify this problem. They are very practical, important objectives that
contribute to policies for comprehensive development and stabilization of the banking system in the context of competition and international integration. That is the reason why the author chose the thesis "Impact of diversification and competition on the stability of commercial bank: A research in Vietnam". 1.2 Research questions and objectives Overview objectives: The main aim of the thesis is evaluating the impact of diversification and competition on the stability of the commercial banks in Vietnam. It is considered a new evidence for suggesting the solutions to improve the stability of banking system in Vietnam. Specific objectives: -
The impact of diversification on the stability of commercial banks in Vietnam.
The impact of competition on the stability of commercial banks in Vietnam.
The simultaneous impact of diversification and competition on the stability of commercial banks in Vietnam..
Suggesting solutions for diversifying and competing to increase Vietnamese commercial banks’ stability. Research questions:
1. What are correlations betwwen diversification, competition and stability of banks ? 2. How does diversification impact on Vietnamese commercial banks’ stability?
3. How does competition impact on Vietnamese commercial banks’stability? 4. How do diversification and competition impact on Vietnamese commercial banks’ stability simultaneously? 5. What solutions are suggested to improve the stability of commercial banks in Vietnam? 1.3 Subjects and scope of the study Research subjects: The thesis focuses on diversification, competition and stability of bank; Also, it examines the impact of diversification and competition on banking stability. Scope of the study: The thesis studies data of 28 commercial banks in Vietnam in the period of 2006 – 2017. 1.4 Research methodology: The thesis uses multivariate regression model on the panel data and combines synthetic methods with descriptive statistics. 1.5 The meanings of the thesis: Firstly, through the study of the impact of diversification and competition on banking stability, the thesis provides an overview of relationship between the diversification and competition on stability of bank. Secondly, the study shows relationship of the diversification, competition and banking stability of commercial banks in Vietnam. This result contributes to the selection and management of diversification strategy to help the dometic banking system more stable.
Thirdly, identifying the importance of diversification and using it as a special tool for planning strategy will help Vietnamese commercial banks to build business activities, including diversified stratergy. As a result, banks’ performance become better. In addition, based on the results of this research, bankers and policymakers draw the necessary conclusions and policy implications in the current economy. This contributes to improve the commercial bank system and it will be more effective, competitive and stable. 1.6 Structure of the thesis: Chapter 1: Introdution Chapter 2: Literature review Chapter 3: Research methodology Chapter 4: Results and discussion Chapter 5: Conclusion and policy suggestions CHAPTER 2: LITERATURE REVIEW The chapter 2 presents literature review of stability, competition and diversification in banks. Its objectives analyzes concepts, charateristics and theories of above issues. Besides, this chapter detailed previous research on the impact of diversification, competition on banking stability. In the end of the thesis, the author draws the research gaps.
2.1 Theory of economics 2.1.1 Theory of stability of economy 2.1.2 Theory of financial stability 2.2 Theory of banking stability
2.2.1 Stability in banks The theory of financial stability is actually studies of financial instability in the economy. Hyman P.Minskiy firstly introduced the theory of financial instability by the concept of "Minsky moment". It was the time when the economy was changing from a stable to crisis state. The main reason of this process was started from the economy, specifically from the debt structure of financial system and attitude of investors in creation, maintenance and bankruptcy of debt structure. From the theory of financial stability, banking stability is considered in terms of financial stability in banking operations. It is “ the effective operation of the bank. The bank is able to cope with the internal and external effects, both in the present and future. Especially in the shocks of the economy, it still remains solvency for the debts and maintains normal operation". Stability in company Theory of
Stability in Intermediary financial institution
2.2.2 The role of banking stability The stability of financial system in general and banking system in particular create a favorable business environment for investors, protect depositors and encourage more and more money to be converted and put into economy. The result is that the process of operating money is also more effective. Banking stability helps to increase the efficiency of financial system, helps to promote the full functions of financial markets and improves the distribution of resources. Banking
encourages them to send money, use services provided by banks and reduces their habit of using cash. Banking stability helps to minimize the costs of solving the weaknesses of the financial system, enhances the efficiency of economic policies and makes the macroeconomy more stable and sustainable. 2.2.3 Factors
profitability, credit risk, operating costs, revenue diversification, payment ability, loans, competition, market share, elements form the macroeconomy.. 2.2.4 Measurement of banking stability Mercieca et al (2007) proposed equation of estimating ZScore : Z-score =
ROA : Net Return/Total assets.
E/TA: Equity/Total Asset
σROA : the standard deviation of ROA.
2.3 Competition in banking 2.3.1 Concept - Competition is the objective rule of commodity production which is the objective phenomenon of the market economy. - The relationship between actors in the process of competition is essentially economic. - Competitive activity occurs on detailed cases but complies with certain rules and regulations. - Competition is more and more diversified. 2.3.2 The theory of competition: The thesis introduces theories of competition including the classical competition theory, neoclassical competition theory and modern competitive theory. 2.3.3 Measurement of competiton in banks Competitive characteristics in commercial banks: - The competitive activities of commercial banks rely heavily on the trust of customers for prestige and brand name of the bank. - Commercial banks have closed relationship with each other. - Competition between commercial banks is not weakened, annexed or mutually exclusive.
- Banking activities take place in a wide range, in the region and expand in many countries around the world. - Competition of commercial banks is subject to supervision and strict control of the central bank. Measurement of competiton in banks: Many indicators are used to measure the level of competition of bank, such as the Lerner index, the H index, and the Boone index. The thesis approaches the Lerner index. Lerner index: 𝐿𝑒𝑟𝑛𝑒𝑟 𝐼𝑛𝑑𝑒𝑥 (𝐿) =
𝑃 − 𝑀𝐶 𝑃
P: Average output of bank, revenue/total assets (CarboValverde và cộng sự, 2005). MC: Margin cost of bank, not be directly observed and be estimated by total cost funtion. 𝑀𝐶𝑖𝑡 =
[β1 + β2 ln Qit + ∑3𝑘=1 𝛷k ln Wk,it + υ trendit]
- Costit : Total cost - Qit : Output - W1 : Cost of deposits - W2 : Cost of labour - W3 : Cost of capital The higher the value Lerner is, the higher the value of the bank is but competitive condition of economy is descreased.
2.4 Diversification in banking operations 2.4.1 Concept Diversification is that state where bank focuses on creating a wide range of products and services, expands its business scope or expands its geographical scope (geodiversity) to create a competitive advantage and increase income and profits for the bank. 2.4.2 The theory of diversification in banking operation The theory of diversification in bank comes from the theory of financial diversification based on the analysis of costs and benefits. By accelerating the launch of a range of new financial services (Teece, 1982) and cross-selling of financial products alongside traditional lending services, this has led to increasing opportunities to raise bank’s income significantly. In addition, diversification also reduces information asymmetry (Diamond, 1984 and Stein, 2002) and agent representation costs (Stulz, 1990) and increases efficiency of internal capital market in the bank (Stein, 2002). In addition to these positive effects, however, the disadvantages of bank performance in diversification are also clearly demonstrated (Mazur and Zhang, 2015). Diversification also increases the disagreement in the relationship between large and small shareholders in the bank (Stulz, 1990). On the other hand, increasing the scope and size of the bank also increases the cost of representation (Rajan et al., 2000)..
2.4.3 Forms of diversification in commercial bank - Diversifying current products of the bank - Geographic diversification - Geographic diversification combined product diversifiaction 2.4.4 Revenue diversification in commercial bank One of the indicators used to reflect that banking diversification helps to increase income. Income diversification is considered to be the best indicator that reflects the results of diversification strategies. It is not a form of diversification in the bank's operations (Acharya et al., 2006, Chiorazzo and Salvini, 2008). Lepetit et al., 2008; Baele et al., 2007; Campa and Kedia, 2002). 2.4.5
commercial bank Mercieca et al (2007) proposed Herfindahl Hirschmann Index (HHI) to measure revenue diversification in each bank. 𝑁𝑂𝑁
HHIREV = (𝑁𝐸𝑇𝑂𝑃) + (𝑁𝐸𝑇𝑂𝑃) With: NON
commissions, other services and business activities. NET
: Interst income
NETOP: Net income, calculated by: NON + NET. This higher figure reflects the lower level of the diversification in the bank
2.5 Theoretical framework on the impact of diversification and competition on banking stability 2.5.1 Theoretical framework on the impact of diversification on banking stability Theory of financial intermediation implies that banks increase their profitability associated with diversified activities. As the bank expands on a wide range of products and services, it will create more demand and thereby increase revenue for the bank. In addition, banking activities spread to non-traditional sectors because these activities are less sensitive to interest rate fluctuations in the economy. Moreover, banks will look at their capital, human and technological resources to make the operation more effective and benefit to offset the costs incurred. However, there is a mixed view that diversification does not bring benefits to the bank and makes the bank more instable. This argument analyzes the relative costs of increasing the complexity of the bank that may not be offset by the benefits orded by diversification. In addition, when income from nontraditional activities is correlated with interest rate fluctuations, the ineffective operation of the portfolio will lead to banking instability. 2.5.2 Theoretical framework on the impact of competition on banking stability Competition in the banking sector affects the ability of access capital, and stability the financial sector and the economy unclearly. From the standpoint of market power view
(Boyd and De Nicolo, 2005), high position in the market allows banks to set higher lending rates. So there is an increased risk of moral hazard and adverse selection because only companies with high risk accept high interest rates and can also increase the risk of obtianing return/capital in banks. There are two opinions in previous studies on competition and banking stability. One is argued that there is a negative relationship between competition and bank stability, as high competition reduces the market power of the bank and margin profits. Therefore, it will increase the risk for the bank. Another one is argued that the more competition leads to greater stability. 2.6 Overview of study 2.6.1 Overview of study on the impact of diversification on banking stability When studying the impact of diversification on banking stability, there are two opposite views: On the point of view that diversification really benefits the bank, there were studies by Mohammed et al. (2016), Mercieca et al. (2007), Lee et al. (2013), Mathuva (2015) , Fang and Van Lelyveld, 2014, Thilakaweera et al. (2016), Elsas et al. (2009), Meslier et al. (2016), Curi et al. (2015), Rossi et al. (2009). On the point of view that diversification does not benefit and can lead to the risk of banking business, there were studies by Garcia-Kuhnert et al. (2013), Berger et al. (2010) , Acharya et al. (2006), Bõninghausen and Kõhler (2015),
Hayden et al. (2006), Gulmhussen et al. (2014), Vo Xuan Vinh and Tran Thi Phuong Mai (2015), Ngo Thi Lien Huong), Nguyen Thanh Phong (2011). 2.6.2 Overview of study on the impact of competition on banking stability There are many agruments on the impact of competition on bank stability, including: On the first view, competition not be supported: studies by Berger et al. (2008), Boyd et al. (2009), Fu et al. (2014). On the second view, competition
impacts on stability
positively: studies by Fiordelisi and Mare (2014), Jeon and Lim (2013), Goetz (2017), Martinez-Miera and Repullo (2010), Ariss (2010), Yeyati and Micco (2007), Fernandez and GarzaGarcia (2017), Agoraki et al. (2011), Schaeck et al. (2009), Liu et al. (2012), Soedarmono and Tarazi (2016), Vo Xuan Vinh and Dang Buu Kiem (2016). 2.6.3 Overview of study on the impact of diversification and competition on banking stability There are many studies that measure simultaneous influence of the diversification and the competitition on bank. The thesis finds prominent studies by Amidu and Wolfe (2014), Mensi and Labidi (2015). 2.7 Research gaps Firstly, the thesis provides an overview which clearly shows the correlations of diversification and competition with the stability of the bank.
Secondly, the thesis investigates the one-way relationship of diversification, competition and banking stability in Vietnam. Thirdly, in particular, the thesis focuses on the magnitude of impacts of diversification on the relationship between competition and banking stability in Vietnamese commercial banks. Will competition depending on diversification as a special catalyst push banks to sustainable levels? Do the Vietnamese commercial banks really exploit the benefits of the diversification, use them to promote the process of competition and make banks more stable? CHAPTER 3: METHODOLOGY At the beginning of chapter 3, the author builds three research models for whole research objectives. Next, this chapter describes the variables in detail. Finally, based on the results of previously empirical research, the author argues and elaborates research hypothesis appropriately. 3.1 Research models - Model estimates the impact of diversification on banking stability: Bankstabi,t = α0 + α1Bankstabi,t-1 + α2R-Divi,t + βj,Controli,t + βj,,Control’i,t + εi,t -
Model estimates the impact of competition on banking stability: Bankstabi,t = α0 + α1Bankstabi,t-1 + α2Lerneri,t + α3Lerneri,t2 + βj,Controli,t + βj,,Control’i,t + εi,t
: measures the banking stability, calculated as Zscore, ROA, ROE
: measures the income diversification in banks.
: measures the competition in banks
: variables describe specific figures of each (including: logarit of total assets, , growth rate of total assets, loans/total assets, deposits/total)
: variables describe characteristics of the economy that impact on banking stability (GDP, INF)
: bank i in year t
αj ( j = 0,2), βj, (j, = 1-4), βj’, (j,, = 1,2): regression coefficients 3.3 Research hypothesis H1: Banks diversify will increase their stability. H2: Banks compete will increase their stability H3: As the bank simultaneously increases the level of competition and promotes the diversification strategy, its stability will increase. H4: Bank size correlated with banking stability positively. H5: Growth rate of total assets correlated with banking stability positively.
H6: Loans/total assets correlated with banking stability negatively H7: Deposits correlated with banking stability positively H8: The GDP has a positive impact on banking stability H9: The inflation rate correlated with banking stability negatively. 3.4 Research data The thesis used unbalanced panel data of 28 Joint Stock Commercial Banks in Vietnam for the period 2006-2017. All data was collected from their audited financial statements and annual reports. The GDP and INF were collects from the portal of the General Statistics Office of Vietnam. 3.5 The tests using in the models The author uses the tests related to the linear regression model:
endogenous. GMM method is used for finding default results (Lee et al, 2013; Amidu at el, 2013; Mensi and Labidi, 2015). CHAPTER 4: RESULTS ANS DISCUSSION Using linear regression with panel data and tests including FEM, GLS, GMM, the thesis finds approxiate results of inpact of divesification and competiton on stability in Vietnamese commercial banks. The details results are presented in table 4.10
Bảng 4.10: Results of thesis Variables
variable – Banking stability
Source: Regression results of the research models CHAPTER 5: CONCLUSION AND POLICY SUGGESTIONS 5.1 Conclusion The impact of diversification on banking stability: The results of estimated model show that there are statistical impact of
diversification, natural logarithm of total assets, growth rate of
total assets loans/ total assets, deposits/total assets. These results are the same with most previous studies. The impact of competition on banking stability: The results of the model show that the regression coefficients of lerner index and control variables which are characteristic of the bank are tested correctly. That reflects that the banks’ competitive strategy has a positive impact on maintaining banking stability in Vietnamese commercial banks. The impact of the diversification in the relationship between competition and banking stability: To answer the question that whether diversification is really influencing positively on this relationship, the thesis has conducted the test and the results show that: In the process of competition, the banks selected diversification strategy will negatively affect their stability. This is an important empirical evidence to prove that Vietnamese commercial banks will be more cautious in choosing the way to diversify their portfolio in their competitive strategy. 5.2 Policy suggestions Planning banking business strategy: - Competition strategy: the bank needs to consolidate its competitiveness, effectively manage its operating costs. Managers need to have supportive policies that create a effective environment to encourage banks’ investment in order to strengthen their capabilities. - Income diversification strategy: Banks should have a strategy for planning their products and services to meet the
needs of their customers in the long time. In addition, policymakers should focus on diversification in the development policies of credit institutions which help to develop banks’diversification - The strategy of using diversification as a important mean for increasing competition: banks should develop an integrated strategy in which income diversification is part of the plan. Besides, banks need to carry out other business strategies by exploiting
accumulated experience and potentials, the bank will accelerate their activities. The structure of asset and equity: banks should develop criteria for assessing the efficiency of using banks' capital in all fields. Also, they find out the reasons for increasing their assets is to meet the demand of the banks or profit. Besides, it is important to review the credit quality of loans. In addition, bank managers and executives also need to promote and support commercial banks to deal with bad debts to strengthen their financial system and avoid harming the banking system. The ability to face fluctuations from the economy: banks not only need to develop policies to forecast well the changes of the economy but also have active measures to cope with the changes. In addition, managers and policymakers need to maintain stability in the monetary market, control inflation, and set up targets for managing credit growth of commercial
banks. Besides, it is necessary to closely monitor the banking business, to grasp and direct the mergers and acquisitions of banks in order to avoid cross-ownership cases between banks that affect banking stability. 5.3
New contributions of the thesis: The thesis "The impact of diversification and competition on
the stability of commercial banks: A research in Vietnam" examines theories of banking stability, competition and diversification in banking. Its goals focuse on the impact of diversification,competition and the simultaneous impact of both on banking stability in Vietnamese commercial banks in the period 2006 - 2017. The results of the thesis bring important academic and empirical contributions as follows: Firstly, the thesis provides an overview of relationship of diversification, competition and the stability of bank. In particular, it shows the impact of income diversification on banking stability and the effects of competition to banking stability. Besides, it also considers the correlation of diversification to the relationship of competition and banking stability. That gives effective strategies for diversification as well as competition in performance of banks. Secondly, the thesis shows the positive correlation of diversification, competition and stability of commercial banks in Vietnam from 2006 to 2017. This result significantly contributes to banks when they want to select and manage
strategies in diversification and competitive to help them more stable. Thirdly, the thesis considers the impact of diversification and competition on banking stability in the Vietnamese commercial banking system in order to identify the importance of diversification and use it as a special tool in the process of planning competition strategy. This will help Vietnamese commercial banks build business directions in order to be more stable, including diversification strategy. The
diversification, competition for banks’efficiency and stability. Meanwhile, it implies significant implications for the policymakers of banks and managers in the banking and finance. Based on the results of this research, bankers and policymakers have the necessary conclusions and policy recommendations in the current economy that contribute to stability of banking system 5.4
Research limitations and the next study suggestions It is not possible to compare the degree of diversification,
competition and stability of Vietnamese commercial banks in relation to some economies in the region. This is a significant limitation of the thesis that influents to suggesting policy in the context of globalization of the financial and monetary sector. In addition, the thesis limits the review of the diversification by bank's non-interest income and non-interest income. These indicators do not reflect and measure all the activities of the