Diversification strategy, bank risk nhà cái w88 performance in Vietnam: Before, during nhà cái w88 after financial crisis

Abstract:

The study uses data of 44 commercial banks in Vietnam during the period from 2002 to 2019 to analyze the impacts of diversification nhà cái w88 ownership strategy on various indicators of bank risks nhà cái w88 performance in Vietnam before, during nhà cái w88 post Global financial crisis. The result shows that banks with diversified asset perform better nhà cái w88 enjoy lower risk. However, during global financial crisis, these banks have negative return nhà cái w88 bear more risk. State-owned banks achieve the lowest profitability ratios in the system, while foreign banks achieve the highest return rates. Last but not least, listed banks are seen to have a better performance than unlisted banks. Research also indicates that big banks with large market share nhà cái w88 total assets would have greater diversification in compare to smaller banks.

Keywords:Vietnam, Bank risk, bank performance, diversification, financial crisis, ownership structure.

1. Introduction

Banking industry nhà cái w88 financial market are nowadays extremely competitive with changing constantly. In the last decades, dozens of banking crisis occur one by one, worse nhà cái w88 worse, namely, Bank of England (1992) nhà cái w88 Barings Bank (1995). Recently, Global financial crisis leads to collapse of biggest nhà cái w88 oldest banks in the US, i.e. Washington Mutual nhà cái w88 Lehman Brothers in 2008. This, again, raise the question about risk. An old nhà cái w88 tough question that could never conclude: How to detect nhà cái w88 control risk?

Academically, there are many answers for this question. However, during an economic downturn or a financial crisis, the most popular answer for this question is diversification. Previous researches prove that diversification significantly reduces financial risk nhà cái w88 posibility of bankruptcy of banks, especially with mergered banks (Boyd nhà cái w88 Graham 1988). Diversification strongly effects bank risk in two dimensions: the more diversified, the higher the financial leverage banks enjoy; nhà cái w88 diversification through operation restructuring (Berger, Hasan nhà cái w88 Zhou, 2010). Research on bank diversification in the case of Vietnam is still limited, including Nguyen nhà cái w88 Vo (2015), Batten nhà cái w88 Vo (2016), Vo (2017, 2020) nhà cái w88 Luu, Nguyen, nhà cái w88 Vu (2019). However, these studies only mention the effect of income nhà cái w88 funding diversification on either risk or performance, but not both.

After outlining studies related banking nhà cái w88 finance on prestigious journals, the author considers conducting a study to assess the impact of asset diversification on bank risk nhà cái w88 performance in an emerging market, Vietnam with the following contributions. Firstly, author measure the level of asset diversification for commercial banks in Vietnam, an emerging market. Second, the paper evaluated the effects of diversification strategies on both risk nhà cái w88 performance of banks. Third, the study also systematically evaluates the effect of global financial crisis 2007-2009 nhà cái w88 ownership strategy on the relationship between bank diversification, risk nhà cái w88 performance.

2. Literature review

Currently, there are different theories that analyze the effects of diversification strategy nhà cái w88 risk. Boyd nhà cái w88 Graham (1988) based on the classical principles  showing the following three theoretical bases. First, the expansion of diversification components in the banking institutional system (shifting from traditional activities to non-traditional service elements) will reduce the bank profit performance fluctuations - also known as risk, derive from the asset adjustment mechanisms on diversification strategy. Second, in the opposite direction, the risk will be motivated when there is an overwhelming effect from the characteristics of profit fluctuations. In other words, the benefits of diversification cannot overcome the inherent volatility risk of bank profits, increasing the risks of the bank. Ultimately, the banking system's risk issue is likely irrelevant to diversification adjustment decisions, as banks have created contingencies as well as built up technical regulatory barriers to may react with risks impairing the value of the risk.

A second group of theories, that Keeton (1991); Templeton nhà cái w88 Severiens (1992), with the theory emphasizes the role of "the list" modern. This theory group argues that the variation in shareholder returns can be adjusted by appropriate diversification incremental decisions. This problem is evident in the overall adjustment mechanism across the portfolio weights for the variance of each activity fluctuations old nhà cái w88 new activity. From here will form a cycle of reactions increased activity diversification will help adjust decline overall risk of banking operations, but with conditions the portfolio diversification of new unrelated to old banking activities.

Finally, we can consider the arguments of Berger, Hasan, nhà cái w88 Zhou (2010), with the following two prominent theoretical background. First, on the basis of classical theory, banks should diversify as much as possible through leverage structure or promote restructuring across all sectors of banking operations. This will help to reduce the probability of bearing risks from financial stress or even bankruptcy. However, based on the view of Winton (1999), Berger et al. (2010) argue that the decision of bank managers to increase their diversification strategy will promote the possibility of creating problem subjected "agent cost", thereby increasing risks for the banking system. This means that, according to the theory of "agent cost", the adjustment to expand diversification will cause negative consequences for the governance system, reducing the "real value" of the bank nhà cái w88 creates uncertain risks for the bank's operations in the future.

3. Data nhà cái w88 methodology

3.1. Data

Dynamic panel data from 44 Vietnamese banks from 2002 to 2019 are used in this research. Zooming in a country figures permits us to analyse the bank behavior in a more coherent environment. The data is collected from several good data sources such as Bankscope, Orbis Bank Focus, Vietstock, nhà cái w88 individual bank financial reports.

There are at least two reasons to select this sample period: First, to systematically examine the effects of the crisis of 2008-2009, or global financial crisis, to banking system in Vietnam. After a high rate development from 2003 to 2007 with average annual rate of 8.0%, Vietnam’s GDP growth rate was slow down in the period from 2008 to 2012, before picking up afterward. Especially, in 2008 nhà cái w88 2009, Vietnam had been affected strongly by global financial crisis, with lowest GDP growth rate of only 5.3% (ADB, 2013).

Second, there are too many missing values in Bankscope/OrbisBankFocus database for the sample banks before the year 2002. Too many missing values can create sample selection bias in favor of few banks. After eliminating missing values nhà cái w88 outliners, we left with a dynamic panel of 44 banks with approximately 580 bank-year observations.

3.2. Construction of variables

In our empirical models, the key explainatory variables are measures of bank diversification nhà cái w88 explained variables are measures of bank risk nhà cái w88 return. We also add several control variables. With the aim of assessing the impact of diversification on the performance nhà cái w88 risk of banks in Vietnam, this research pursues three phases: (1) measuring the level of asset diversification; (2) examine bank’s risk nhà cái w88 return; (3) explain the link between diversification nhà cái w88 bank return nhà cái w88 risk. Details are presented in the following subsections.

3.2.1. Measures of diversification

Diversification is a form of index that shows the different aspects of an element. This index is shown through the formula of HHI, representing the measurement of diversification for each bank (Curi, Lozano-Vivas, & Zelenyuk, 2015; Elsas, Hackethal, & Holzhäuser, 2010). The diversification index is constructed by subtracting HHI from 1, so that it increases with diversification. We focus on most important categories for commercial banks operating in Vietnam. For asset diversification (ASTDIV), for each bank i at time t, the formula is measured as follows:

Where earning assets (EA) is the sum of the four numerators: interbank loans (IBLOAN), customer loans (CLOAN), securities (SEC) nhà cái w88 other earning assets (OTHEREA).

3.2.2. Dependent variables

Following recent literature (Amidu & Wolfe, 2013; Chen & Zeng, 2014; Clark, Mare, & Radić, 2018), this study uses bank income statement return on average assets (ROA) nhà cái w88 return on average equity (ROE) computed as the ratio of net income to total assets nhà cái w88 equity, respectively.

For a comprehensive analysis nhà cái w88 robust results, we employ five inverse bank risk indicators, that have been widely used in banking studies (Amidu & Wolfe, 2013; Vo, 2018). The first two risk proxies are standard deviation of the return on average assets σ(ROA) nhà cái w88 equity σ(ROE), measured as the standard deviation of annual return on assets nhà cái w88 equity of a bank over the sample period. Higher values of σ(ROA) nhà cái w88 σ(ROE) represents higher bank income risk.

We also construct the two risk-adjusted measures of return on average assets (RAROA) nhà cái w88 return on average equity (RAROE) by dividing ROA nhà cái w88 ROE by their standard deviation (σ) calculated over the entire sample period. The formulas are shown below:

                 nhà cái w88               

Our last proxy is a measure of default risk of each bank by computing the Z-score (ZScore) as

where ETA is the ratio of total equity to total asset (Boyd & Graham, 1986). Lower values of RAROA, RAROE nhà cái w88 ZScore denote respectively a higher risk nhà cái w88 higher probability of default.

3.2.3.Control nhà cái w88 dummy variables

We include in the regressions a set of variables to control for characteristics that can affect bank risk-taking nhà cái w88 performance in addition to diversification. We choose these variables based on existing literature on bank diversification (DeYoung nhà cái w88 Roland 2001, DeYoung nhà cái w88 Rice 2004, Stiroh nhà cái w88 Rumble 2006, Laeven nhà cái w88 Levine 2007, Sanya nhà cái w88 Wolfe 2011, Lee et al., 2014, Meslier et al., 2014, Edirisuriya et al., 2015, Sissy et al., 2017): the natural logarithm of bank total assets (LOGASSET) to account for bank size; the ratio of equity to total assets (ETA) to control for bank capitalisation; the ratio of loans loss provision (LLP); dummy variables (SOB) to account for the State-owned banks, (LIST) to account for the listed banks nhà cái w88 (FOB) to account for Foreign bank’s wholly owned subsidiaries; nhà cái w88 finally the inflation rate (INF) nhà cái w88 the growth rate of the real gross domestic product (GDP) to take into account diffences in the macroeconomic environment.

3.3. Measurement of relationship between diversification, risk nhà cái w88 return

Using quantitative method, specifically a general panel data with fixed effects model (FEM) nhà cái w88 System Generalized Method of Moments estimation method (System-GMM), we estimate the following equation to test the effect of asset, income nhà cái w88 funding diversification on bank risk nhà cái w88 performance:

where Y denotes dependent variables measure bank risk nhà cái w88 performance, which can be either ROA, ROE, σROA, σROE, RAROA, RAROE or ZScore; i nhà cái w88 t identify individual banks in the sample nhà cái w88 time variable in years; Y_(i,t-1) are their lagged value; α: coefficient; βs are the parameters to be estimated; Control is matrix of bank specific control variables nhà cái w88 macroeconomic indicators; Dummy is matrix of dummy variables.

4. Results nhà cái w88 discussion

Table 1, descriptive statistics, shows that asset diversification variables are in the range of 0.04 to 1, with average value of 0.45 nhà cái w88 large standard deviation of 0.16. This suggests that there is a big difference in asset diversification across the sample banks.

Table 1. Descriptive statistics

Notes: ADIVCRIS, interation terms between asset diversification index nhà cái w88 financial crisis dummy variable, represent the level of asset diversification during crisis period 2007 - 2009.

Source: Bankscope nhà cái w88 author’s own calculation. This table reports the summary statistics of annual data for 44 sample banks in Vietnam, from 2002 to 2019.

During the crisis, the average asset diversification (ASTCRI) decline to around 0.09, while the standard deviation increases to about 0.19. The lowest nhà cái w88 highest values slightly decrease. It is are shown that banks restrict their diversification during crisis.

Table 2. Empirical results

Note: ***,**,* stand for statistically significant at 1&, 5% andd 10%, respectively

Source: Author’s calculations

In table 2, the result shows that asset diversification has a positive impact on bank’s performance nhà cái w88 risk-adjusted returns in the normal period. Meanwhile, in times of crisis, bank profitability are adversely affected by diversification, i.e. the trading nhà cái w88 investment in external industry nhà cái w88 holding non-core assets; reflected through the bank behaviors when they try to restrict diversification activities in difficult economic times. This is also related to the agency cost when management uses bank capital to finance projects that involve potential risks.

In regards to ownership structure, state-owned banks achieve the lowest profitability ratios in the system, while foreign banks achieve the highest return rates. Last but not least, listed banks are seen to have a better performance than private banks.

Regarding the risk of bank profitability, asset diversification reduces the volatility in ROA in the non-crisis period. Banks, with diversified asset, enjoy lower volatility in return on total assets. We also find evidence of an inverse relationship between asset diversification nhà cái w88 SDROA,SDROE during the crisis period. In other words, during the crisis period, the diversification of assets increased the risks in ROA nhà cái w88 ROE fluctuations nhà cái w88 was statistically significant. This suggests that banks need to minimize immediately diversification of assets during the crisis to ensure profit stability.

As for the impact of diversification on bank's Zscore bankruptcy coefficient, asset diversification once again increases the operational safety of banks in the non-crisis period. Meanwhile, we found no evidence on the impact of asset diversification on bankruptcy risk during the crisis.

5. Conclusion

The diversification of assets has a positive impact on reducing the bank's risk in the pre- nhà cái w88 post-crisis stages but increases the risk in the crisis period. This indicates that bankers need to have flexible nhà cái w88 appropriate adjustments to the concentration or diversification of assets in different stages. Yet, the transfer of assets structure is not simple. Hence, banks need to make accurate forecasts on long-term macroeconomic situation in order to make proper provisions nhà cái w88 decisions in managing their asset portfolios.

 REFERENCES:

1. Amidu, M., & Wolfe, S. (2013). Does bank competition nhà cái w88 diversification lead to greater stability? Evidence from emerging markets.Review of Development Finance, 3(3), 152-166.
2. Batten, J. A., & Vo, X. V. (2016). Bank risk shifting nhà cái w88 diversification in an emerging market.Risk Management, 18(4), 217-235.
3. Berger, A. N., Hasan, I., & Zhou, M. (2010). The effects of focus versus diversification on bank performance: Evidence from Chinese banks.Journal of Banking & Finance, 34(7), 1417-1435.
4. Boyd, J. H., & Graham, S. L. (1986). Risk, regulation, nhà cái w88 bank holding company expansion into nonbanking.Quarterly Review, Spring, 2-17.
5. Boyd, J. H., & Graham, S. L. (1988). The profitability nhà cái w88 risk effects of allowing bank holding.Federal Reserve Bank of Minneapolis. Quarterly Review-Federal Reserve Bank of Minneapolis, 12(2), 3.
6. Chen, P.-F., & Zeng, J.-H. (2014). Asymmetric effects of households’ financial participation on banking diversification.Journal of Financial Stability, 13, 18-29.
7. Clark, E., Mare, D. S., & Radić, N. (2018). Cooperative banks: What do we know about competition nhà cái w88 risk preferences?Journal of International Financial Markets, Institutions nhà cái w88 Money, 52, 90-101.
8. Curi, C., Lozano-Vivas, A., & Zelenyuk, V. (2015). Foreign bank diversification nhà cái w88 efficiency prior to nhà cái w88 during the financial crisis: Does one business model fit all?Journal of Banking & Finance, 61, S22-S35.
9. Elsas, R., Hackethal, A., & Holzhäuser, M. (2010). The anatomy of bank diversification.Journal of Banking & Finance, 34(6), 1274-1287.
10. Keeton, W. R. (1991). The Treasury plan for banking reform.Economic Review, May/June, 5-2.
11. Luu, H. N., Nguyen, L. Q. T., & Vu, Q. H. (2019). Income diversification nhà cái w88 financial performance of commercial banks in Vietnam.Review of Behavioral Finance.
12. Nguyen, T. C., & Vo, D. V. (2015). Risk nhà cái w88 income diversification in the Vietnamese banking system.Journal of Applied Finance nhà cái w88 banking, 5(1), 93.
13. Templeton, W. K., & Severiens, J. T. (1992). The effect of nonbank diversification on bank holding company risk.Quarterly Journal of Business nhà cái w88 Economics, 3-17.
14. Vo, X. V. (2017). How does the stock market value bank diversification? Evidence from Vietnam.Finance Research Letters, 22, 101-104.
15. Vo, X. V. (2018). The role of bank funding diversity: Evidence from Vietnam.International Review of Finance.
16. Vo, X. V. (2020). The role of bank funding diversity: Evidence from Vietnam.International Review of Finance, 20(2), 529-536.
17. Winton, A. (1999). Don't put all your eggs in one basket? Diversification nhà cái w88 specialization in lending.Diversification nhà cái w88 Specialization in Lending. 

Chiến lược đa dạng hóa, rủi ro và kết quả kinh doanh của các ngân hàng tại Việt Nam: Trước, trong và sau khủng hoảng tài chính toàn cầu

Phạm Khánh Duy -Đại học Kinh tế TP. Hồ Chí Minh

Tóm tắt:

Thông qua dữ liệu được thu thập từ 44 ngân hàng thương mại tại Việt Nam trong giai đoạn từ năm 2002 đến năm 2019, nghiên cứu này phân tích tác động của chiến lược đa dạng hóa và chiến lược cấu trúc sở hữu đối với các chỉ số khác nhau đánh giá rủi ro và kết quả kinh doanh của các ngân hàng tại Việt Nam trước, trong và sau cuộc khủng hoảng tài chính toàn cầu. Kết quả nghiên cứu cho thấy các ngân hàng có tài sản đa dạng hoạt động tốt hơn và đối mặt với rủi ro thấp hơn. Tuy nhiên, trong cuộc khủng hoảng tài chính toàn cầu, các ngân hàng này có lợi nhuận âm và chịu nhiều rủi ro hơn. Các ngân hàng quốc doanh đạt tỷ suất sinh lời thấp nhất trong hệ thống ngân hàng, trong khi đó, các ngân hàng nước ngoài ghi nhận mức tỷ suất sinh lời cao nhất. Bên cạnh đó, các ngân hàng niêm yết có kết quả kinh doanh tốt hơn các ngân hàng chưa niêm yết. Nghiên cứu cũng cho thấy các ngân hàng lớn có thị phần và tổng tài sản lớn sẽ có sự đa dạng hóa hơn so với các ngân hàng nhỏ hơn.

Từ khoá:Việt Nam, rủi ro ngân hàng, kết quả kinh doanh của ngân hàng, đa dạng hóa, khủng hoảng tài chính, cấu trúc sở hữu.