MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM
BANKING UNIVERSITY – HOCHIMINH CITY
NGUYEN THI ĐOAN TRANG
THE IMPACT OF INCOME DIVERSIFICATION ON
THE PERFORMANCE OF VIETNAMESE COMMERCIAL BANKS
SUMMARY OF PHD THESIS
Major: Finance – Banking
Code: 9 34 02 01
Scientific instructor: Assoc.Prof., Dr. Nguyen Thi Loan
HO CHI MINH CITY - 2020
CHAPTER 1: OVERVIEW OF THE RESEARCH
1.1. The necessary of the research
To cope with competition in banking business and to be required by the Government,
commercial banks have been expanding from traditional activities such as raising funds, lending
to non-interest income activities for bank income diversification. As a result, bank performance
will be affected accordingly.
Understanding the relationship between bank’s income diversification and bank
performance is important for bank executives, policy makers, and investors because the decision-
makers want to know whether income diversification will increase the bank value.
There are two competing views on the relationship between bank income diversification
and bank performance. On one hand, bank income diversification will increase profits and reduce
risks for banks. There have been empirical studies supporting this hypothesis such as Elsas,
Hackethal & Holzhäuser (2010), Gurbuz, Yanik & Ayturk (2013), Meslier, Tacneng & Tarazi
(2014), Lee, Yang & Chang (2014), Moudud-Ul-Huq, Zheng, Gupta & Ashraf (2018). On the
other hand, bank income diversification will reduce bank profits and increase risks such as
DeYoung and Rice (2004), Stiroh and Rumble (2006), Lepetit, Nys, Rous & Tarazi (2008).
The current studies on the impact of income diversification on the commercial banks’
performance lead to different conclusions. In addition, the explanation of why bank income
diversification is different, the causes of income diversification have not been clearly explained
although there are also many studies abroad that research on factors influencing bank income
diversification (such as Landi & Venturelli (2001), Hahm (2008), Pennathur et al (2012),
Nguyen, Skully & Perera (2012), Firth, Li & Wang (2013) ) Murharsito (2015), Meng, Cavoli &
Deng (2017), Hamdi, Hakimi & Zaghdoudi (2017), Ozek (2017), Capraru, Ihnatov & Pintilie
(2018), Robertho & Wibowo (2018)).
In Vietnam, there are some studies on the effects of income diversification on banks'
performance. These studies show that income diversification increases performance of
Vietnamese commercial banks (Ho Thi Hong Minh and Nguyen Thi Canh 2015; Vo Xuan Vinh
and Tran Thi Phuong Mai 2015; Le Van Hau and Pham Xuan Quynh 2016; Nguyen Minh Sang
2017). However, when considering the risk factor, the empirical studies have not yet reached a
conclusion on the impact of income diversification on the risk-adjustment performance of
Vietnamese commercial banks. Thus, there are no conclusions about the benefits of income
diversification. Besides, in Vietnam, there is also very little research on the factors affecting
income diversification. Especially, there are very few researchs on the impact of income
diversification on performance of Vietnamese commercial banks and the factors affecting
income diversification of Vietnamese commercial banks, so that these banks have a full
assessment of the benefits of income diversification and the factors that influence to income
diversification, in order to impact these factors to change the level of income diversification,
bringing the highest efficiency to the bank.
Therefore, the research topic "The impact of income diversification on the performance
of Vietnamese Commercial Banks" is necessary to supplement the theoretical basis as well as
empirical evidence on the impact of income diversification on bank performance and risk-
adjusted performance at Vietnamese commercial banks, as well as identifying factors affecting
income diversification at Vietnamese commercial banks. Hence, it helps Vietnamese commercial
banks have a basis to diversify their income accordingly to increase the bank performance.
1.2. Objectives and research questions
Overall objectives:
The objective of this study is to provide more theoretical basis and empirical evidence to
conclude about the impact of income diversification on business performance and risk-adjusted
performance at Vietnamese commercial banks. In addition, in order to increase or decrease the
income diversification level for increasing the bank performance, it is necessary to understand
the factors that affect income diversification, so that the bank will affect these factors for
diversifying bank income. Therefore, the dissertation determines the factors affecting income
diversification to suggest solutions for Vietnamese commercial banks to change these factors as
well as implement appropriate income diversification for increasing bank performance and risk-
Specific research objectives:
- Evaluate the impact of income diversification on performance and risk-adjusted
performance at Vietnamese commercial banks
- Evaluate the factors affecting income diversification at Vietnamese commercial banks
- Propose solutions to diversify income for increasing performance at Vietnamese
commercial banks
Research questions:
- How does income diversification affect the performance of Vietnamese commercial
banks?
- How does income diversification affect the risk-adjusted performance of Vietnamese
commercial banks?
- What are factors affect income diversification at Vietnamese commercial banks?
- What are solutions to help Vietnamese commercial banks increase their performance?
1.3. Object and scope of the research
Research subject: The relationship between income diversification and bank performance
at Vietnamese commercial banks.
Scope of research: 28 Vietnamese commercial banks.
Research period: From 2008 to 2018
1.4. Research Methods
For the first research objective, the author developed the model of the impact of income
diversification on performance of Vietnamese commercial banks from the research of Lee et al.
(2014) and some related studies. This model also is applied for two sets of measurement of
income diversification using the Herfindahl Hirschman index and the non-interest rate ratio.
For the second research objective, the research is based on the research of Hamdi, Hakimi
and Zaghdoudi (2017) and some related studies, and adjusted, omitted and added some variables
to build research model of factors affecting income diversification in Vietnamese commercial
banks. Compared to previous studies, this study simultaneously considers 3 risks in banking
operations, including bankruptcy risk, credit risk, liquidity risk and adding financial openness
variable.
The author used two-step SGMM (SystemGMM) estimation by Arellano & Bover (1995)
and Blundell & Bond (1998), an effective research method to fix the defects of the model for the
two above research models.
For the third research objective, based on the research results of above two models, the
author recommends solutions to diversify income contributing to increase performance of
Vietnamese commercial banks.
1.5. Contribution of the research
Compared to previous studies, this study has the following new contributions:
- The research approach towards researching both the factors affecting income
diversification and the impact of income diversification on performance of commercial banks in
Vietnam.
- The research has systematized empirical studies on factors affecting income
diversification and studies on the impact of income diversification on bank performance.
- The research examines the impact of income diversification on performance, and the
impact of income diversification on risk-adjusted performance of Vietnamese commercial banks,
while other studies in Vietnam often consider only one aspect. The research results confirm the
benefits of income diversification - increasing performance and risk-adjusted performance of
commercial banks in Vietnam. In addition, the study also examines the model in the economic
and financial openness of Vietnam and the results show that financial openness has a positive
impact on performance and risk-adjusted performance of Vietnamese commercial banks.
- In the model of factors affecting income diversification at Vietnamese commercial
banks, this study has identified and tested all three types of risks in banking operations, including
bankruptcy, credit risk and liquidity risk. Furthermore, the study also assesses these effects in
condition of the financial openness in Vietnam and the results show that financial openness is
also one of the factors positively affecting income diversification of Vietnamese commercial
banks.
- In both research models, income diversification was measured in two ways, respectively,
the diversification index (DIV) and the non-interest income rate (NON). The research results of
these two ways of measurement do not conflict with each other, which confirms that these
research results are more reliable.
In addition, in practical terms, this research helps Vietnamese commercial banks to
determine the benefits of income diversification on banking performance and identify the factors
affecting revenue diversification as well as suggests appropriate policies for the bank to diversify