Diversification strategy, bank risk w88 đăng nhập performance in Vietnam: before, during w88 đăng nhập after financial crisis

ABSTRACT:

The study uses data of 44 commercial banks inVietnamduring the period from 2002 to 2019 to analyze the impacts of diversification w88 đăng nhập ownership strategy on various indicators ofbank risksw88 đăng nhậpperformancein Vietnam before, during w88 đăng nhập post Global financial crisis. The result shows that banks with diversified asset perform better w88 đăng nhập enjoy lower risk. However, during global financial crisis, these banks have negative return w88 đăng nhập 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 w88 đăng nhập total assets would have greaterdiversificationin compare to smaller banks.

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

1. Introduction

Banking industry w88 đăng nhập financial market are nowadays extremely competitive with changing constantly. In the last decades, dozens of banking crisis occur one by one, worse w88 đăng nhập worse, namely, Bank of England (1992) w88 đăng nhập Barings Bank (1995). Recently, Global financial crisis leads to collapse of biggest w88 đăng nhập oldest banks in the US, i.e. Washington Mutual w88 đăng nhập Lehman Brothers in 2008. This, again, raise the question about risk. An old w88 đăng nhập tough question that could never conclude: How to detect w88 đăng nhập 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 w88 đăng nhập posibility of bankruptcy of banks, especially with mergered banks (Boyd w88 đăng nhập Graham 1988). Diversification strongly effects bank risk in two dimensions: the more diversified, the higher the financial leverage banks enjoy; w88 đăng nhập diversification through operation restructuring (Berger, Hasan w88 đăng nhập Zhou, 2010). Research on bank diversification in the case of Vietnam is still limited, including Nguyen w88 đăng nhập Vo (2015), Batten w88 đăng nhập Vo (2016), Vo (2017, 2020) w88 đăng nhập Luu, Nguyen, w88 đăng nhập Vu (2019). However, these studies only mention the effect of income w88 đăng nhập funding diversification on either risk or performance, but not both.

After outlining studies related banking w88 đăng nhập finance on prestigious journals, the author considers conducting a study to assess the impact of asset diversification on bank risk w88 đăng nhập 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 w88 đăng nhập performance of banks. Third, the study also systematically evaluates the effect of global financial crisis 2007-2009 w88 đăng nhập ownership strategy on the relationship between bank diversification, risk w88 đăng nhập performance.

2. Literature review

Currently, there are different theories that analyze the effects of diversification strategy w88 đăng nhập risk. Boyd w88 đăng nhập 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 w88 đăng nhập 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 w88 đăng nhập 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, w88 đăng nhập 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 w88 đăng nhập creates uncertain risks for the bank's operations in the future.

3. Data w88 đăng nhập 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, w88 đăng nhập 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 w88 đăng nhập 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 w88 đăng nhập 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 w88 đăng nhập explained variables are measures of bank risk w88 đăng nhập return. We also add several control variables. With the aim of assessing the impact of diversification on the performance w88 đăng nhập risk of banks in Vietnam, this research pursues three phases: (1) measuring the level of asset diversification; (2) examine bank’s risk w88 đăng nhập return; (3) explain the link between diversification w88 đăng nhập bank return w88 đăng nhập 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) w88 đăng nhập 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) w88 đăng nhập return on average equity (ROE) computed as the ratio of net income to total assets w88 đăng nhập equity, respectively.

For a comprehensive analysis w88 đăng nhập 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) w88 đăng nhập equity σ(ROE), measured as the standard deviation of annual return on assets w88 đăng nhập equity of a bank over the sample period. Higher values of σ(ROA) w88 đăng nhập σ(ROE) represents higher bank income risk.

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

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

3.2.3. Control w88 đăng nhập dummy variables

We include in the regressions a set of variables to control for characteristics that can affect bank risk-taking w88 đăng nhập performance in addition to diversification. We choose these variables based on existing literature on bank diversification (DeYoung w88 đăng nhập Roland 2001, DeYoung w88 đăng nhập Rice 2004, Stiroh w88 đăng nhập Rumble 2006, Laeven w88 đăng nhập Levine 2007, Sanya w88 đăng nhập 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 w88 đăng nhập (FOB) to account for Foreign bank’s wholly owned subsidiaries; w88 đăng nhập finally the inflation rate (INF) w88 đăng nhập 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 w88 đăng nhập return

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

where Y denotes dependent variables measure bank risk w88 đăng nhập performance, which can be either ROA, ROE, σROA, σROE, RAROA, RAROE or ZScore; i w88 đăng nhập t identify individual banks in the sample w88 đăng nhập 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 w88 đăng nhập macroeconomic indicators; Dummy is matrix of dummy variables.

4. Results w88 đăng nhập 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 w88 đăng nhập large standard deviation of 0.16. This suggests that there is a big difference in asset diversification across the sample banks.

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

Source: Bankscope w88 đăng nhập 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 w88 đăng nhập highest values slightly decrease. It is are shown that banks restrict their diversification during crisis.

In table 2, the result shows that asset diversification has a positive impact on bank’s performance w88 đăng nhập risk-adjusted returns in the normal period. Meanwhile, in times of crisis, bank profitability are adversely affected by diversification, i.e. the trading w88 đăng nhập investment in external industry w88 đăng nhập 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 w88 đăng nhập SDROA,SDROE during the crisis period. In other words, during the crisis period, the diversification of assets increased the risks in ROA w88 đăng nhập ROE fluctuations w88 đăng nhập 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- w88 đăng nhập post-crisis stages but increases the risk in the crisis period. This indicates that bankers need to have flexible w88 đăng nhập 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 w88 đăng nhập decisions in managing their asset portfolios.

REFERENCES:

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Chiếnlược 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

TÓMTẮT:

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 lượcđa dạng hóavà chiến lượccấu trúc sở hữuđối 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 cókết quả kinh doanhtốt hơn cácngân hàngchưa 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.

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

[Tạp chí Công Thương - Các kết quả nghiên cứu khoa học và ứng dụng công nghệ, Số 19, tháng 8 năm 2020]