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The research results of this thesis will contribute important empirical evidence in research topics on diversification, competition and bank stability in Vietnamese commercial banks. The policy implications of the thesis will help commercial banks and relevant authorities to guide, plan and propose solutions to improve Vietnamese commercial bank stability in the next years.
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: 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……………………………………… RESEARCHER’S PUBLICATIONS RELATED TO THE THESIS TT Tên báo Năm Tên tạp chí Ảnh hưởng đa dạng Banking Technology hóa địa lý đến hiệu kinh doanh ngân 2018 Review hàng thương mại Việt Volume 144 March, Nam 2018 Nghiên cứu tác động cạnh tranh đến ổn định ngân hàng thương 2018 Nghiên cứu Tài – Marketing, tháng 4/2018 mại Việt Nam The Impact of competition on diversification in International Conference 2018 commercial banks: New on Acounting and Finance (ICOAF 2018) evidence from Vietnam Các yếu tố tác động đến Conference on “Giải ổn định NHTM Việt Nam – Bài học kinh nghiệm ngân hàng địa bàn TP.HCM pháp huy động nguồn 2018 lực nhằm phát huy chế đặc thù để đầu tư phát triển kinh tế - xã hội”, Sep 2018 HCMC TT Tên báo Năm Tên tạp chí Board of Economy – Budget and HCMC Institute for Development Studies ISBN: 978-604-971548-8 Conference on “Vận dụng chế đặc thù để phát triển nâng cao lực cạnh tranh Đánh giá mức độ cạnh doanh nghiệp TP Hồ tranh hệ thống ngân hàng thương mại Việt Nam: Cách tiếp cận thời kỳ hội nhập 2018 Chí Minh”, December 2018 HCMC Board of Economy – Budget and HCMC Institute Development for Studies ISBN:978-604-791-9963 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: What are correlations betwwen diversification, competition and stability of banks ? How does diversification impact on Vietnamese commercial banks’ stability? 3 How does competition impact on Vietnamese commercial banks’stability? How diversification and competition impact on Vietnamese commercial banks’ stability simultaneously? 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 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 Theory of financial financial instability stability 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 stability also enhances customers’ belief, 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 affecting banking stability: bank size, 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+ 𝐸 𝑇𝐴 𝜎𝑅𝑂𝐴 10 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 Measurement of revenue diversification in commercial bank Mercieca et al (2007) proposed Herfindahl Hirschmann Index (HHI) to measure revenue diversification in each bank 𝑁𝑂𝑁 𝑁𝐸𝑇 HHIREV = (𝑁𝐸𝑇𝑂𝑃) + (𝑁𝐸𝑇𝑂𝑃) With: NON : Non-interest income, including fee income, 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 11 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 12 (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), 13 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 14 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 15 - Model estimates the impact of diversification and competition on banking stability: Bankstabi,t = α0 + α1Bankstabi,t-1 + α2R-Divi,t + α3Lerneri,t + α4Lerneri,t * R-Divi,t + βj,Controli,t + βj,,Control’i,t + εi,t With : Bankstab : measures the banking stability, calculated as Zscore, ROA, ROE R-Div : measures the income diversification in banks Lerner : measures the competition in banks Control : variables describe specific figures of each (including: logarit of total assets, , growth rate of total assets, loans/total assets, deposits/total) Control’ : variables describe characteristics of the economy that impact on banking stability (GDP, INF) it : 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 16 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: multi-collinear verification, self-correlation, and 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 17 Bảng 4.10: Results of thesis Variables Hypothesis Result R-Div + + Lerner - - Lerner*Div + - Size + - Growth + + Loans + Deposits + - DGDP + + INF - - ROA Dependent ROE variable – Banking stability Independent variables RARROA RARROE 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 factors on banking stability, including: income diversification, natural logarithm of total assets, growth rate of 18 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 19 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 their resources and strength Based on 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 20 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 21 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 research results confirm the importance of 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 not reflect and measure all the activities of the 22 bank's diversification: products, services, geodiversity While banking operations are directly or indirectly affected by these activities After the analysis and results obtained from the thesis, there are still issues needed to be investigated and studied in the next time: - Whether diversification in geography, service or which form of diversification brings competitive advantages and helps banks more stable? - In terms of research context, what requirements should the financial market of Vietnam meet to create a healthily competitive environment that helps the system of commercial banks to have the ability to implement their business strategies well CONCLUSION 23 The Thesis " The impact of diversification and competition on the stability of commercial bank: A research in Viet Nam" examines the impact of diversification and competition on banking stability of Vietnamese commercial banks in 2006 2017 The results of the study show the same impact of diversification on banking stability and competition on banking stability In addition, the thesis pointed out that diversification in banking sector in Vietnam has brought effective business but has not yet promoted its important role as a special catalyst to make positive effects of competition on banking stability Through the research results, the thesis has made important conclusions related to diversified activities and selection of competitive strategies in banks to prove banking stability Besides, the conclusions also underline the importance of the economic conditions while considering diversification, competition and banking stability Especially, it’s actually useful for banks’managers in the planning strategy The thesis contributes policy suggestions for banks’ managers and policymakers when developing strategy for diversification, competition and both of them to help the operation of commercial banks in Vietnam more effective This will help the banking system in particular and the national financial system in general become more stable 24 ... 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... 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 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