Summary of Economic Doctoral thesis: The impact of diversification and competiton on the stability of commercial bank - A research in Vietnam

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

RESEARCHER’S PUBLICATIONS RELATED TO THE

THESIS

TT Tên bài báo Năm Tên tạp chí

1

Ảnh hưởng của đa dạng

hóa địa lý đến hiệu quả

kinh doanh của các ngân

hàng thương mại Việt

Nam

2018

Banking Technology Review

của các ngân hàng thương

mại Việt Nam

2018 Nghiên cứu Tài chính –

commercial banks: New

evidence from Vietnam

2018

International Conference

on Acounting and Finance (ICOAF 2018)

4

Các yếu tố tác động đến

sự ổn định của các

NHTM Việt Nam – Bài

học kinh nghiệm các ngân

hàng trên địa bàn

TP.HCM

2018

Conference on “Giải pháp huy động nguồn lực nhằm phát huy cơ chế đặc thù để đầu tư phát triển kinh tế - xã hội”, Sep 2018 HCMC

TT Tên bài báo Năm Tên tạp chí

Board of Economy – Budget and HCMC Institute for

Development Studies ISBN: 978-604-971-548-8

5

Đánh giá mức độ cạnh

tranh của hệ thống ngân

hàng thương mại Việt

Nam: Cách tiếp cận trong

thời kỳ hội nhập

2018

Conference on “Vận dụng cơ chế đặc thù để phát triển và nâng cao năng lực cạnh tranh doanh nghiệp TP Hồ Chí Minh”, December

2018 HCMC Board of Economy – Budget and HCMC Institute for Development Studies ISBN:978-604-791-996-

3

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

- 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

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"

Theory of

financial

instability

Theory of financial stability

Stability in company

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 Score :

Z-Z-score = 𝑅𝑂𝐴+

𝐸 𝑇𝐴

With:

- ROA : Net Return/Total assets

- E/TA: Equity/Total Asset

- σROA : the standard deviation of ROA

- 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

𝑃P: Average output of bank, revenue/total assets (Carbo-Valverde và cộng sự, 2005)

MC: Margin cost of bank, not be directly observed and be estimated by total cost funtion

𝑀𝐶𝑖𝑡 = 𝐶𝑜𝑠𝑡𝑖𝑡

𝑄𝑖𝑡 [β1 + β2 ln Qit + ∑3𝑘=1𝛷k ln Wk,it + υ trendit]

- Costit : Total cost

2.4 Diversification in banking operations

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 Measurement of revenue diversification in

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

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 non-traditional 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