Luận án Tiến sĩ: Chiến lược Đa dạng hóa Ngân hàng, Rủi ro & Hiệu quả - Bằng chứng từ Việt Nam

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY --------------------------- PHAM KHANH DUY DIVERSIFICATION STRATEGIES, BANK RISK AND PERFORMANCE: EMPIRICAL EVIDENCE FROM VIETNAM Major: Finance and Banking Code: 9340201 DOCTORAL DISSERTATION ACADEMIC ADVISOR: Assoc. TRUONG THI HONG Ho Chi Minh City - 2021 luan an i STATEMENT OF AUTHENTICATION I solemnly declare that this dissertation, “Diversification strategies, bank risk and performance: Empirical evidence from Vietnam”, is my own research. Except for the references cited in this dissertation, I hereby guarantee that the whole or any part of this dissertation has never been published or used to obtain a degree elsewhere. Any products/studies of other authors that have been used in this dissertation were properly cited.

This dissertation has never been submitted to any university or institution. Ho Chi Minh City, 2021 luan an ii ACKNOWLEDGEMENT In completing this dissertation, I would like to express my gratitude to the University of Economics Ho Chi Minh City (UEH), which provides an ideal environment and financial support for my research journey. At UEH, I have gained valuable academic knowledge and research skills as a lecturer and as a Ph. My utmost appreciation is to my academic supervisor, Assoc.

Truong Thi Hong, for dedicated, whole-heartedly coaching and guidance throughout the completion of my thesis. My gratitude also goes to my dearest colleagues at the School of Banking and the School of UEH Graduate for their continuously dedicated support, contributions, and guidance, for me in writing this dissertation. I want to thank Prof. Vo Xuan Vinh for the preliminary research ideas and suggestions.

My special thanks to Dr. Nguyen Huu Huan, Dr. Ngo Minh Vu, Dr. Phan Chung Thuy, Dr.

Hoang Hai Yen, and Dr. Ngo Minh Hai for their best efforts in helping me with various challenges during my Ph. Saying thank you is just simply not enough for what they have offered me. Finally and most importantly, my beloved family and best friends have always been by my sides, with unconditional love, encouragement, and endless support.

Without them, this dissertation would have never been written. Thank you all for the most profound appreciation. Ho Chi Minh City, October 2021 Pham Khanh Duy luan an iii TABLE OF CONTENTS STATEMENT OF AUTHENTICATION. ii TABLE OF CONTENTS.

iii ABBREVIATION LIST. vii LIST OF TABLES. viii LIST OF FIGURES. xi CHAPTER 1 INTRODUCTION.

Research gap identification. The scope of research. Research procedure and methodology. Structure of the dissertation.

19 CHAPTER 2 LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT. 22 luan an iv 2. Bank diversification definition. Classification of bank diversification strategies.

Asset diversification in the banking sector. Income diversification in the banking sector. Funding diversification in the banking sector. Theories of bank diversification.

Theories of diversification. Theories of bank diversification. Concept and measurement of bank risk and performance. Concept and measurement of bank risk.

Concept and measurement of bank performance. Theoretical overview of banking crisis. The impact of diversification on bank risk and performance. 50 Although the concern on the impact of diversification on banks' risks and performance is discussed in various articles, the conclusion of this topic is still unclear.

Asset diversification, bank risk, and performance. Income diversification, bank risk, and performance. Funding diversification, bank risk, and performance. Combinations of diversification strategies.

Bank diversification, risk and performance in the financial crisis. Role of ownership structure in the nexus between diversification, risk and performance. 67 luan an v CHAPTER 3 DATA AND METHODOLOGY. Construction of variables.

Dependent variables – Bank risk and performance. Key explanatory variables - Bank diversification measures. The role of financial distress and bank ownership. 86 CHAPTER 4 EMPIRICAL RESULTS AND DISCUSSION.

Diversification strategies, bank’s risk and performance. Diversification strategy combination, bank risk and performance. Diversification, bank risk and performance during the crisis. The role of bank ownership structure.

Robustness check results. Summary of research findings. 119 luan an vi 5. 122 LIST OF PUBLICATION.

xv luan an vii ABBREVIATION LIST ASEAN Association of Southeast Asian Nations BSI The banking stability index CPI Consumer Price Index DEA Data envelopment analysis FOB Foreign-owned bank GDP Gross domestic product GMM Generalized Method of Moments HHI Herfindahl-Hirschman Index JPoD Joint Probability of Distress JSB Joint-stock bank NIM Net Interest Margin NPL Non-performing Loan PB Policy Bank POLS Pooled Ordinary Least Squared RBV Resources Based View SBV State Bank of Vietnam SGMM System Generalized Method of Moments SOB State-owned Bank US The United States of America WTO World Trade Organisation luan an viii LIST OF TABLES Table 1.1: Descriptive number of banks in Vietnam, 2005-2019 .1: Summary of hypotheses associated with research questions .1: Definition of Variables .2: The expected sign of variables .3: Testing steps for the hypotheses associated with the research question .1: Summary statistics of variables .2: Cross-Correlation Matrix of Variables .3: Empirical results – Using Pooled OLS estimation Method Basic model of the impact of diversification on banks performance and risks .4: Empirical results – Using Random effects estimation Method Basic model of the impact of diversification on banks performance and risks .5: Empirical results – Using Fixed effects estimation approach Basic model of the impact of diversification on banks performance and risks .6: Empirical results – Using SGMM estimation approach The baseline model of the effectiveness of diversification strategies on banks performance and risks .7: Empirical Results Using SGMM Estimation Approach .8: Empirical results Using SGMM Estimation Approach .9: Regression Results Using SGMM Estimation Approach .10: Regression Results Using SGMM Estimation Approach Diversification, risk and performance of Foreign banks.11: Robustness test results. 115 luan an ix LIST OF FIGURES Figure 1.1: Diversification indexes of the Vietnam banks from 2005 to 2019.1: Research conceptual model. 67 luan an x ABSTRACT Purpose – This dissertation investigates the impacts of asset, funding, and income diversification strategies and their combinations on the banking system’s performance and risk in Vietnam, especially during the financial crisis. The research also evaluates the role of ownership structure upon diversification-risk and performance nexus.

Methodology – Using panel data collected from 34 Vietnamese commercial banks from 2005 to 2019, with modern econometrics technique – two-step system GMM estimator method described by Arellano and Bover (1995), are employed to achieve research objectives. The data was collected manually from the bank's audited financial statements, obtained from reliable sources. Findings – The empirical results indicate that, in general, diversification practices in banking sectors are effective in improving banks’ risk-return profile, especially during the financial crisis. However, using them in combinations is only effective for income and funding diversifications.

These results are robust regarding the use of alternative measures of diversification level. The results also indicate that this impact varies across different types of bank ownership: State-owned banks, domestic private banks, and foreign banks. Contribution – This dissertation fills the gap in empirical literature by systematically examining the nexus between diversification strategies, bank risk, and performance, conditioned upon financial crisis and ownership structure. In this sense, the findings of this dissertation provide bank managers and regulators important information about the diversification strategy effectiveness to maintain the stability of the banking system and financial market.

Keywords: Diversification strategies, bank performance, bank risk, ownership structure, financial crisis, emerging market. luan an xi TÓM TẮT Mục đích - Mục đích của luận án này là nghiên cứu tác động của các chiến lược đa dạng hóa tài sản, nguồn vốn, thu nhập và sự kết hợp của chúng đối với rủi ro và hiệu quả hoạt động của các ngân hàng thương mại Việt Nam, đặc biệt trong thời kỳ khủng hoảng ngân hàng Việt Nam. Nghiên cứu cũng đánh giá vai trò của cấu trúc sở hữu dựa trên mối quan hệ giữa đa dạng hóa-rủi ro và hiệu suất. Phương pháp luận - Sử dụng dữ liệu bảng thu thập từ 34 ngân hàng thương mại Việt Nam từ năm 2005 đến năm 2019, với kỹ thuật kinh tế lượng hiện đại - phương pháp ước lượng GMM hệ thống hai bước được mô tả bởi Arellano và Bover (1995), được sử dụng để đạt được các mục tiêu nghiên cứu.

Dữ liệu được thu thập theo cách thủ công từ báo cáo tài chính hàng năm của ngân hàng, lấy từ Bankscope. Kết quả - Kết quả thực nghiệm cho thấy, nhìn chung, thực tiễn đa dạng hóa trong các lĩnh vực ngân hàng có hiệu quả trong việc cải thiện hiệu quả và rủi ro của các ngân hàng, đặc biệt là trong cuộc khủng hoảng ngân hàng Việt Nam từ năm 2011 đến năm 2014. Tuy nhiên, sử dụng kết hợp các chiến lược chỉ có hiệu quả đối với đa dạng hóa thu nhập và đa dạng hóa nguồn vốn. Những kết quả này rất rõ ràng khi sử dụng các phương pháp đo lường mức độ đa dạng hóa khác nhau.

Kết quả cũng chỉ ra rằng tác động này khác nhau giữa các loại hình sở hữu ngân hàng: ngân hàng quốc doanh, ngân hàng tư nhân trong nước và ngân hàng nước ngoài. Đóng góp - Luận án này đóng góp thêm vào các nghiên cứu thực nghiệm bằng cách xem xét một cách có hệ thống mối quan hệ giữa đa dạng hóa, rủi ro và hiệu quả hoạt động ngân hàng, tùy thuộc vào cấu trúc sở hữu và trong từng thời kỳ. Kết quả nghiên cứu của luận án cung cấp cho các nhà quản lý ngân hàng những thông tin quan trọng về hiệu quả của chiến lược đa dạng hóa nhằm duy trì sự ổn định của hệ thống ngân hàng và thị trường tài chính. luan an 1 CHAPTER 1 INTRODUCTION 1.

Research motivation “In 1952, Nobel Laureate Harry Markowitz demonstrated mathematically why putting all your eggs in one basket is an unacceptably risky strategy and why diversification is the nearest an investor or business manager can ever come to a free lunch. That revelation touched off the intellectual movement that revolutionized Wall Street, corporate finance and business decisions around the world; its effects are still being felt today” Bernstein and Bernstein (1996) The practice of diversification has created conflicting arguments about its impact on the banking sector’s risk and performance. On the one hand, a diversification strategy is motivated by certain advantages that focused banks cannot have: (1) gaining from exploiting managerial skills and abilities across products and geographical areas (Iskandar-Datta & McLaughlin, 2007), (2) taking advantage of economies of scale by sharing fixed costs across various products and markets (Drucker & Puri, 2009), and (3) offering a wide range of financial services to clients who require multiple products. On the other hand, the ones that prefer the concentration strategy claim that diversified banks can reduce their comparative management advantage when investing in many areas they are not experts (Klein & Saidenberg, 1998).

Furthermore, diversification increases competition (Winton, 1999) and creates higher agency costs resulting from diminishing value activities when managers reduce their risk (L. The empirical literature on banking diversification first addresses developed markets, where banks have been fully mature, such as the US market and other luan an 2 developed countries in Europe (Baele, De Jonghe, & Vander Vennet, 2007; Curi, Lozano-Vivas, & Zelenyuk, 2015; Elsas, Hackethal, & Holzhäuser, 2010; Mercieca, Schaeck, & Wolfe, 2007; Stiroh & Rumble, 2006). The research and discussion on this topic in emerging and transition economies are explored (N. Chen, Liang, & Yu, 2018; Moudud-Ul-Huq, Ashraf, Gupta, & Zheng, 2018).

However, the literature provides different results for different countries and regions (T. According to Doumpos, Gaganis, and Pasiouras (2016), diversification can be more beneficial for banks operating in less developed countries compared to banks in advanced and major advanced countries. Vietnam is one of the fastest-growing emerging markets with significant reforms in both politics and the economy.