UNIVERSITY OF ECONOMICS ERASMUS UNVERSITY ROTTERDAM INSTITUT E OF SOCIAL STUDIES THE NETHER LANDS HO CHI MINH CITY VIETNAM VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS AN ANALYSIS OF THE ECONOMIC EFFICIENCY OF THE BANKING SECTOR IN VIETNAM BY NGUYEN THI PHUONG THAO MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, NOVEMBER 2015 i ABSTRACT This study measures economic efficiency of commercial banks in Viet Nam and its determinants The Stochastic Frontier Model is applied for a profit function We include internal factors (including price of fund, price of physical capital, price of labor, price of loan and price of other earning assets) and macroeconomic factors (economic growth, inflation rate, and other macroeconomic environment variables) in the profit function The empirical results show that the efficiency of Vietnamese commercial banks seems to be fluctuated steeply over the period 20082013 In terms of the efficiency of different groups of commercial banks, the profit efficiency of the State-owned commercial banks and Private commercial banks follow different trend Particularly, the state owned commercial bank’s group seems to have extremely higher profit efficiency score then private commercial bank ii LIST OF ABBREVIATION LSDV Least squares with dummy variables GLS Generalized least squares SFA Stochastic Frontier Analysis SFM Stochastic Frontier Model DEA Development Envelopment Analysis PE Profit efficiency CRER Credit risk LIQD Liquidity CON Concentration DEV Banking development INF Inflation rate GDP GDP SIZE SIZ PROFIT Total profit PBT Profit before tax X1 Labor X2 Capital X3 Fund W1 Price of labor W2 Price of capital W3 Price of fund Y1 Loan Y2 Other earning asset P1 Price of loan P2 Price of other earning asset TE Technical efficiency EE Economic efficiency AE Allocative efficiency Obs Number of observations SOBs State-owned commercial banks PCBs Private commercial banks iii LIST OF TABLES Table 3.1: Variables of potential correlates of profit efficiency function 32 Table 3.2: Data sample of observations over period 2008-2013 43 Table 4.1: Overview of variable in profit function 35 Table 4.2: A summary statistics of profit before tax, inputs, outputs and prices used in the profit efficiency estimation for the whole period 2008-2013 38 Table 4.3: A summary statistics of inputs, outputs and prices used in the profit efficiency estimations: (million VND units for X1, X2, X3, Y1, Y2) 39 Table 4.4: A summary statistics of potential correlated of profit efficiency 40 Table 4.5: Potential correlates of profit before tax (PBT) with time-invariant fixed-effects model 41 Table 4.6: Banking profit efficiency scores in the period 2008-2013 with time-invariant fixedeffects model 42 Table 4.7: Potential correlates profit efficiency through time-invariant fixed-effect model .43 Table 4.8: Potential correlates of profit before tax (PBT) with Cornwell et al (1990) time varying fixed-effects model 44 Table 4.9: Banking profit efficiency scores in the period 2008-2013 with time-varying Battese and Coelli (1995) model 45 Table 4.10: Potential correlates profit efficiency with Kumbhakar (1990) time-varying parametric model (half-normal) 46 Table 4.11: Average banking profit efficiency score of 27 commercial bank in Vietnam and its ranking from 2008 to 2013 48 iv LIST OF FIGURES Figure 1.1: Input-oriented efficiency Figure 1.2: Output-oriented efficiency Figure 4.1: Graph of scatter between Profit before tax (Pbt) and total number of staff (X1) from 2008 to 2013 Figure 4.2: Graph of scatter between Profit before tax (Pbt) and total fixed - asset (X2) from 2008 to 2013 Figure 4.3: Graph of scatter between Profit before tax (Pbt) and total deposit from customer (X3) from 2008 to 2013 Figure 4.4: Graph of scatter between Profit before tax (Pbt) and total loan from customers (Y1) from 2008 to 2013 Figure 4.5: Graph of scatter between Profit before tax (Pbt) and total asset (Y2) from 2008 to 2013 Figure 4.6: Graph of scatter between Profit before tax (Pbt) and Price of labor (W1) from 2008 to 2013 36 Figure 4.7: Graph of scatter between Profit before tax (Pbt) and Price of capital (W2) from 2008 to 2013 37 Figure 4.8: Graph of scatter between Profit before tax (Pbt) and Price of fund (W3) from 2008 to 2013 37 Figure 4.9: Graph of scatter between Profit before tax (Pbt) and Price of loan (P1) from 2008 to 2013 Figure 4.10: Graph of scatter between Profit before tax (Pbt) and Price of other earning asset (P2) from 2008 to 2013 Figure 4.11: Profit efficiency score from 2009 to 2013 with time-invariant fixed-effects model 43 Figure 4.12: Profit efficiency score of SOBs, PCBs and all banks from 2009 to 2013 with timevarying Battese and Coelli (1995) model v LIST OF APPENDIXES: Appendix 1: List of Vietnamese commercial banks in Vietnam Data was collected from www.taichinhvietnam.com and sorted based on their charter capital 57 Appendix 2: The result of estimation about the determinants of banking profit before tax and its potential correlate through different type of model 59 Appendix 3: Descriptive statistics of profit efficiency estimation through different type of model 67 vi TABLE OF CONTENTS ABSTRACT LIST OF ABBREVIATION LIST OF TABLES LIST OF FIGURES LIST OF APPENDIXES: CHAPTER I: INTRODUCTION Introduction: Research objective CHAPTER II: LITERATURE REVIEW Theory of the efficiency Reviews of empirical study on bank efficiency 2.1 Overview on bank efficiency 2.2 Determinants of banking efficiency 2.3 Bank efficiency measurement CHAPTER III: DATA AND METHODOLOGY Overview of the banking industry in Vietnam Analytical framework Research method Theoretical Model Estimation Methodology Model specification Functional form Profit Efficiency Variables description 10 Data sources: CHAPTER IV: RESULTS AND DISCUSSION Descriptive statistics Regression results 2.1 Time-invariant fixed-effects model vii 2.2 Time-varying fixed-effects model 42 CHAPTER V: CONCLUSION 47 REFERENCES 49 APPENDIX 54 viii Vietnam – Netherlands Programme for M.A in Development Economics CHAPTER I: INTRODUCTION Introduction: In most countries, the banking sector is considered as a key indicator to ensure the national economy operates smoothly Banking industry is widely considered as the backbone of an economy and highly regulated in many countries Banks usually has been considered as key players in providing capital and stimulating economic development In the study of Demirguc & Huizinga (2000), it showed that when an economy is developed at a certain level, it requires an intensive support from the stable and sustainable national financial system Prior studies in the body of literature indicate that there are a wide range of factors affecting the bank efficiency which can be classified into two main groups namely external factors (e.g macroeconomic factors and industrial factors) and internal factors of commercial banks (e.g size, losses, liquidity, and other factors) Particularly, Hasan and Marton (2003) examines the relationship between the development and efficiency of banking sector while Hou, Wang, and Zhang (2014) measure the linkages among market structure, risk taking and efficiency of commercial banks Due to their importance on the financial sector and their influence on the national economy, this sector requires a high regulation by the government However, in most developing countries like Vietnam, there is lacks of perfect regulation to support this sector to stabilize and develop Like other countries, the banking system in Vietnam provides many products from retail banking such as saving accounts, deposits, credit/debit card, mortgage, loans to commercial banking such as business loan, capital equity, risk management, and credit services As commercial banks have evolved in Vietnam before the investment banks, this service is one of the most sensitive business which suffers direct and indirect impacts on several intrinsic obstacles of the economy as well as the external effects, thus stabilizing the currency and the banking system play an important factor, primarily in the financial system stabilization Therefore, understanding the efficiency of the banking system as well those factors affecting the banking operations attracts a lot of attention from many economists and scholars all over the world In measuring efficiency, people usually choose between technical efficiency and economic efficiency We choose economic efficiency as this is more comprehensive In this thesis, the profit function is used to measure economic efficiency Vietnam – Netherlands Programme for M.A in Development Economics Chortareas, G E., Garza-García, J G., and Girardone, C (2012) Competition, efficiency and interest rate margins in latin american banking International Review of Financial Analysis, 24(0), 93-103 Coelli, T J., Rao, D S P., O’Donnell, C J., and Battese, G E (2005) Data envelopment analysis An introduction to efficiency and productivity analysis 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technical efficiency European Journal of Operational research, volume 174 issue 3, November 2006, Pages 1616–1630 K.Kim et al Analysis on the Technical Efficiency and Productivity Growth of the Korean Cable SOs: A Stochastic Frontier Approach Contributions to economic (2009) Zhu, W and Zhao, D (2007) Effect of Subsidy Policy on Technical Efficiency: An Empirical Study of China's Urban Public Transportation International Conference on Transportation Engineering 2007 Kumbhakar S.C Temporal patterns of technical efficiency: Results from competing models International Journal of Industrial Organization (1997) Claudia Ginrardone et al (2004) Analysing determinants of banking efficiency: the case of Italian banks Applied economic, 2004, 36, 215-227 53 Vietnam – Netherlands Programme for M.A in Development Economics APPENDIX Appendix 1: List of Vietnamese commercial banks in Vietnam Data was collected from www.taichinhvietnam.com and sorted based on their charter capital (Billion VND dong) No Name of bank Agribank Vietinbank Vietcombank BIDV Eximbank Maritime Bank Asia Commercial Bank Sacombank Saigon commercial bank 10 PV Bank 11 Techcombank 12 Military Bank 13 LienVietPostBank 14 VPBank 15 HDBank 16 SeABank 17 Saigon-Hanoi commercial bank 18 Construction Bank 19 DongA Bank Vietnam – Netherlands Programme for M.A in Development Economics No Name of bank 20 Vietnaminternational commercial bank 21 Oceanbank 22 Southern Bank 23 National citizen commercial bank 24 Oriented commercial bank 25 Dai A Bank 26 GPBank 27 NAS bank 28 Viet Capital Bank 29 KienLong Bank 30 Nam A Bank 31 Saigonbank 32 VietABank 33 VietBank 34 Petrolimex Bank 35 TienPhongBank 36 An Binh Bank 37 BaoVietBank Appendix 2: The result of estimation about the determinants of banking profit before tax and its potential correlate through different type of model 2.1 Schmidt and Sickles, 1984 with fixed effect model 55 Vietnam – Netherlands Programme for M.A in Development Economics sfpanel lnpbt lnp1 lnp2 prlabor prcapital prfund,model(fe) Time-invariant fixed-effects model (LSDV) Group variable: bank Time variable: year 56 Vietnam – Netherlands Programme for M.A in Development Economics 2.2 (Schmidt and Sickles, 1984) with random effect model sfpanel lnpbt lnp1 lnp2 prlabor prcapital prfund,model(regls) Time-invariant Random-effects model (FGLS) Group variable: bank Time variable: year 57 Vietnam – Netherlands Programme for M.A in Development Economics 2.3 Battese and Coelli (1988) with u truncated normal sfpanel lnpbt lnp1 lnp2 prlabor prcapital prfund,model(bc88) Time-invariant model (truncated-normal) Group variable: bank Time variable: year Log likelihood Frontier 58 Vietnam – Netherlands Programme for M.A in Development Economics 2.4 Cornwell et al (1990) time varying effects which follows a function of time sfpanel lnpbt lnp1 lnp2 prlabor prcapital prfund,model(fecss) Time-varying fixed-effects model (CSS Modified-LSDV) Number of obs Group variable: bank Time variable: year 59 Vietnam – Netherlands Programme for M.A in Development Economics 2.5 Kumbhakar (1990) with the time varying sfpanel lnpbt lnp1 lnp2 prlabor prcapital prfund,model(kumb90) Time-varying parametric model (half-normal) Group variable: bank Time variable: year Log likelihood Frontier Bt 60 Vietnam – Netherlands Programme for M.A in Development Economics 2.6 Battese and Coelli (1992) with a technical efficiency and truncated normal distribution at zero sfpanel lnpbt lnp1 lnp2 prlabor prcapital prfund,model(bc92) Time-varying decay model (truncated-normal) Group variable: bank Time variable: year avg = max Prob > chi2 Log likelihood = lnp Frontier ln ln prlab prcapit prfu _co /lnsigm /ilgtgam / /e sigm gam sigma_ sigma_ 61 Vietnam – Netherlands Programme for M.A in Development Economics 2.7 Battese and Coelli (1995) with a technical efficiency and truncated normal distribution at zero sfpanel lnpbt lnp1 lnp2 prlabor prcapital prfund,model(bc95) Inefficiency effects model (truncated-normal) Group variable: bank Time variable: year Log likelihood Frontier Mu Usigma Vsigma 62 Vietnam – Netherlands Programme for M.A in Development Economics 2.8 Lee and Schmidt (1993) with a function with the time function is replaced by a set of dummy variables sfpanel lnpbt lnp1 lnp2 prlabor prcapital prfund,model(fels) Time-varying fixed-effects model (Iterative LS) Group variable: bank Time variable: year Frontier 63 Vietnam – Netherlands Programme for M.A in Development Economics Appendix 3: Descriptive statistics of profit efficiency estimation through different type of model sum eff1 eff2 eff3 eff4 eff5 eff7 eff8 eff10 64 ... Vietnamese banking system pioneers in attracting foreign investment and integrating into the global economy From the beginning, the banking sector was based on the single/double-level banking system... to find out the relationship between banking profit efficiency and what are determinants of banking efficiency using the panel data of the period 2008-2013 of twenty-seven banks in Viet Nam including... banking system play an important factor, primarily in the financial system stabilization Therefore, understanding the efficiency of the banking system as well those factors affecting the banking