Benefit from income diversification of Viet Nam commercial banks - Nguyen Van Dinh

In this study, relationship between non-interest income generating activities (incomediversification) and bank performance is investigated by using an unbalanced panel dataset of tencommercial banks listed on Vietnam stock market during the period 2007–2016.
Nội dung trích xuất từ tài liệu:
Benefit from income diversification of Viet Nam commercial banks - Nguyen Van DinhVNU Journal of Science: Policy and Management Studies, Vol. 33, No. 2 (2017) 157-165Benefit from Income Diversificationof Viet Nam Commercial BanksNguyen Van Dinh1, Phi Hong Hanh2,*1VNU International School, Building G7-G8, 144 Xuan Thuy, Cau Giay, Hanoi, Vietnam2University of Financial Business Administration, Van Lam, Hung Yen, VietnamReceived 07 April 2017Revised 12 May 2017; Accepted 28 June 2017Abstract: In this study, relationship between non-interest income generating activities (incomediversification) and bank performance is investigated by using an unbalanced panel dataset of tencommercial banks listed on Vietnam stock market during the period 2007–2016. Our empiricalresults indicate that income diversification decrease insolvency risk and enhance performance oflisted banks and the relationship between income diversification and bank performance is nonlinear. In addition to be affected by factors of income diversification, bank performance is alsoaffected by banks’ characteristics and business environment factors. Bank size, deposit on totalliabilities ratio, the first lags risk adjusted returns have positive effects on bank performance whilethe effect of enforcement index on bank performance is negative.Keywords: Income diversification, bank performance, banks.1. Introductionthat there is a relationship betweendiversification and bank performance.In Vietnam, practice has shown that manycommercial banks have implemented incomediversification strategies for nearly a decade[3]. The income structure of banks hasgradually changed. In addition to the interestincome from traditional lending activities, noninterest income from services, forex tradingactivities, securities trading and other activities,also accounts for increasing proportion of thebanksincomestructure.However,diversification is really beneficial forcommercial banks in Vietnam or not, theanswer is still not satisfactory and there aremany contradictions.The abolition of regulations, technologicaladvances and financial innovation over the pasttwo decades until the global financial crisis hasurged banks to expand their operations anddiversification [1]. Expansion of scale andscope is believed to help banks to increaseprofitability and thus an increase in valueresults from an economic advantage in size andscale, or risk reduced by the benefits fromEconomies of Scope and Scale [2]. From theearly researches of Short (1979) and Bourke(1989), subsequent empirical studies suggest_______Corresponding author. Tel.: 84-979852288.Email: phihonghanh85@gmail.comhttps://doi.org/10.25073/2588-1116/vnupam.4088This study is, therefore, conducted toreview the relationship between income157158N.V. Dinh, P.H. Hanh / VNU Journal of Science: Policy and Management Studies, Vol. 33, No. 2 (2017) 157-165diversification and performance of Vietnamcommercial banks. Unlike existing studies, (i)this study uses only data collected fromfinancial statements of listed banks to ensurethat data standards are met [4, 5]; (ii) Variableselection procedure is more concerned to ensuremodel reliability, and (iii) Several country-levelcontrol variables are added to control therelationship between income diversification andbanks performance.2. Review of the literature on bankperformance and income diversificationIn general, researches on the impact ofincome diversification to bank performance canbe divided into 3 groups. The first group isbased on the Market Power Theory, the Modernportfolio theory, and the Economies of Scopeand Scale to affirm benefits of diversification.Accordingly, diversification enables banks toreduce cost, increase profits and bank value, orreduce idiosyncratic risks or improveperformance [5-7]In contrast, the second group is based on theAgency theory, the Efficiency Structure towardsX-efficiency approach in order to prove theadverse impact of diversification to the bankperformance. This group argues that banks aremore engaged in non-interest activities,although they would provide higher returns, butalso make banks encounter greater risk becauseof high volatility of these activities, resulting inreducing bank performance [8, 9]. De Jonghe etal (2015), Lepetit et al (2008), Mercieca et al(2007), Odesanmi and Wofle (2007), Pennathurat el (2012), also find similar evidences of theadverse effect of diversification on bankperformance: reducing the safety of banks,increasing the risk of bankruptcy, and thusintensifying the trade-off between returns andrisk for banks [1, 2, 4, 10, 11].The third group emerged recently based onthe Institutional Theory to explain thecontradicted conclusions on the impact ofdiversification of business activities to theperformance of banks. Amidu and Wolfe(2013), Brighi and Venturelli (2014), Mensiand Labidi (2015), Sanya and Wolfe (2011)argue that this relationship is governed by anumber of determinants: the capacity ofeffective risk management, the ownershipstructure of banks, the market structure, thelevel of competition, the volatility ofmacroeconomic and institutional environmentfor operation of banks [5, 12-14]. It appears thatfeatures at national level have been moreemphasized in researches to explaindisagreementsonthebenefitsofdiversification [2].3. Methodology3.1. Measures of diversificationTo measure income diversification, wecompute the Herfindahl Hirschman Index(HHI) for all banks. Following Elsas et al(2010) , our income-based diversificationindicators captures diversification across thefour main types of bank income, namelyinterest income, commission income, tradingincome, other operating income [15]. It iscalculated as follows:(1)Where: INT is the gross interest revenue,COM is the net commission revenue,TRAD isthe net trading revenue, OT ...