Sumary of Doctoral thesis in Economics: Bank restructuring and bank efficiency - The case of Vietnam

MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HO CHI MINH CITY

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NGUYEN HUU HUAN

BANK RESTRUCTURING AND BANK EFFICIENCY
­ THE CASE OF VIETNAM 

SUMARY OF  DOCTORAL THESIS IN ECONOMICS


Ho Chi Minh city – 2018
The Thesis was completed in: 
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Scientific guide:
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Reviewer 2:
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The thesis will be protected by the Board of Review in: 
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The thesis can be found at the library:


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TABLE OF RESEARCH PAPERS
Vo, X. V., & Nguyen, H. H. (2018). Bank restructuring and bank 
efficiency—The   case   of   Vietnam. Cogent   Economics   &  
Finance, 6(1),
 
1520423. 
/>Vo, X. V., & Nguyen, H. H. (2015). Does Bank Restructure Lead 
to Higher Efficiency? An Investigation of the Vietnamese Banking 
System,  Singapore   Economics   Review,  Namyang   University, 
Singapore.
Vo, X. V., & Nguyen, H. H. (2015). The impact of restructuring on 
structure   and   performance   –   Evidence   from   Vietnam,  Infiniti  

Conferrence, University of Sydney, Australia.


SUMMARY OF THESIS
Chapter 1. Introduction
In this chapter, the author presents the role of banking system and 
introduces   the   performance   of   Vietnamese   banking   system   from 
2008   until   now;   details   the   motivations,   research   questions   and 
objectives. In general, under the effect of the global financial crisis, 
Vietnamese banking system has coped up with many difficulties and 
challenges to improve the operational efficiency of the entire system 
and   individual   banks.   With   the   aim   of   assessing   the   situation   to 
restructure   the   banking   system   in   Vietnam   in   recent   years,   the 
subject which is made is based on previous studies on restructuring 
the   banking   system.     The   thesis   focuses   on   the   study   of   the 
restructuring process of the Vietnamese banking system from 2007 
to 2015, in conjunction assesses different financial structure of the 
system   before   and   during   the   implementation   stage   in   the 
restructuring. More specifically, it examines how the restructuring 
measures  effect  on  the performance of  the commercial  banks  and 
whether the process of restructuring in the sample period increases 
the operational efficiency of the banks or not. It also explores the 
effect of reform on Vietnam’s bank structure and performance.     
The   first   research   question   is   based   on   a   research   gap   that  there 
hasn’t been any study discovering the influence of bank restructuring 
method on bank restructuring process in a small transition economy, 
especially Vietnam. It is stated as “How the restructuring measures  
were introduced as government intervention, merger and acquisition  
of commercial banks and privatization of state­owned commercial  

banks   effect   on   the   performance   of   the   commercial   banks   in   the  
study period of Vietnam?”.  To resolve this question,  the  following 
hypothesis is tested:
H1.1:  Government   intervention   increases   the   effective   of 
commercial banks' performance.
H1.2: Merger and acquisition increases the effective of commercial 
banks' performance.
H1.3:  Privatization of state­owned commercial banks increases the 
effective of commercial banks' performance.
The   second   research   question   examines   the  effects   of   first­stage 
reform on bank structure and performance in Vietnam. It is stated 
that “What are the effects of reform on Vietnam's commercial bank  
structure   and   performance?”  With   this   research   question,   it   is   a 
development of classic hypotheses in restructuring, such as quiet­life 
hypothesis,   market   power   and   efficiency   structure   hypotheses   to 
analyze   changes   in   bank   performance   and   structure   before   and 
during   restructuring.   And   to  address   this   objective,   the  following 
hypothesis is tested:
H2.1:  The collusive behaviour of dominating firms in the industry 
influences   the   price   setting   process   in   the   market   which   allowes 
those firms to gain superior profit over other firms. The relationship 
between market concentration and firm performance is positive.
H2.2:  Firms with relatively bigger market shares and differentiated 
product lines have a superior market power and use it to set market 
price and, thereby, earn an above average profit. Accordingly,  the 


market   share   and  the  firm’s   performance   might   have   a   positive 
relationship.

H2.3: This hypothesis is based on ES theory: low costs of production 
by   relatively   efficient   firms   enable   them   to   compete   more 
aggressively, capture a bigger market share and earn higher profits.
H2.4:  Quiet­life  hypothesis:   Banks   that   have   higher   market   share 
have lower efficiency.


Chapter 2. Literature review
Chapter   2   reviews   the   previous   literature   on   restructuring 
including   the   literature   relating   to   factor   impacting   to   bank 
efficiency;   the   theoretical   issues   and   literature   pertaining   to   bank 
restructuring   and   bank   efficiency;   and   the   previous   literature   on 
method   of   bank   restructuring.   Besides,   this   chapter   discusses   the 
theoretical   background   and   the   prior   literature   on   the   relative 
between bank restructure and bank efficiency and the effect of bank 
reform on bank structure and performance. 
First   is   background   knowledge   about   restructuring.   In   this 
content, the author presents Efficiency theory; the related hypothesis 
includes  Market   structure   and   performance   hypothesis,   Relative 
market   power   hypothesis,   Quite­life   hypothesis;   and   literatures 
involving. 
Second,   the   literature   review   focuses   on   method   of   bank 
restructuring   and   bank   efficiency.   It   discusses   the   relationship 
between bank restructuring and bank efficiency; and then the bank 
restructuring methods and its effect on bank efficiency.
Third   is   the   literature   review   about   the   structure   and 
performance relationship in banking system.  In a large amount of 
literature, the author used three main hypothesizes about the structure 
and performance relationship in banking which is the market power 
hypothesis and the other is the efficiency structure hypothesis. 

Chapter 3. Data and methodology 
Chapter 3 presents the sample data and methodology used to 
test   the   hypotheses   related   to   the   three   research   questions.  It 
describes the data sources, the data characteristics, and the necessary 
to   separate   revolving   from   term   loans,  the   sampling   selection 
process,   model   specifications,   estimation   methods,   and   the 
robustness tests to confirm the main findings.
Data and sample
In this thesis, the data in 26 banks’ financial statements were 
collected from Bankscope covering the period from 2001 to 2015. 
The   sample   includes   banks   which   are   influenced   by   the   banking 
crisis in 2008 then implement restructure. Annual data are used to 
measure   technical   efficiencies.   Unconsolidated   financial   data 
obtained   from   the   Bankscope   database   focus   on   analysing   the 
changes in banks’ operations during the implementation period of 
pre, during restructuring.
Methodology
This content describes the estimation methods for RQ1 (Data 
Envelopment Analysis)  and RQ2 (Data Envelopment Analysis and 
Generalized   Least   Squares).   For   RQ1,   the   author   applies   DEA   3 
steps   to   calculate   how   dependent   variables   were   affected   by 
environment variables. For RQ2, instead of investigating the impact 
of environment variables, the author uses normal DEA for step 1 to 
solve them.


Variables and descriptive statistics
This   content  presents  the variables   and  descriptive  statistics 

variables   employed   in   this   thesis.  Firstly,   for   the   bank   efficiency 
from the restructuring methods, three inputs and three outputs under 
the intermediation approach are specified productivity model.  The 
first   group   of   independent   variables   using   to   test   the   impact   of 
restructuring measures on bank efficiency include dummy variables 
for  domestic  bank mergers   (MER),   privatization (COP),  and  state 
intervention (SI). Besides, there are the control variables include six 
country specific factors variable and the control variables include six 
country specific factors and bank characteristic.
Secondly,  to   carry   out   models   for   RQ2,   the   author   collects   and 
calculates all of these following variables in this table:
No.

Variable

Abr.

1

ROA

ROA

2

ROE

5

ROE

The four­bank concentration 
ratio
The Herfin­ dahl­Hirschman 
Index
Market share

6

X­efficiency

XEFF

7

XINEFF

XINEFF

8

Ownership dummy

OWN

9

Time trend

TT

10

The ratio of loans to assets

LA

11

The ratio of equities to assets

KA

3
4

CR4
HERF
MS


12

SCALE

SEFF

13

SINEFF

SINEFF

Model
  RQ1:   The   effect   of   restructuring   methods   on   banking  
performance
 The three­step model 
In this research question, three inputs and three outputs are 
used in stage 1. It is suggested that the role of a bank is to mobilize 
funds at the lowest cost; we include deposits (TD), interest expense 
(IE) and non­interest expense (NE) as the input variables. Three bank 
outputs   capturing   both   traditional   and   non­traditional   activities   of 
banks  consist  of   total   loans  (TL),  Interest   revenue  (IR)  and Non­
interest revenue (NR). 
 Environmental variables in step 2
To   discover   the   impact   of   environmental   factors   on   the 
validity   of   the   initial   efficiency   analysis,   three   bank   restructuring 
measures, six country­specific factors are included in step 2. 
In step 2, we carry out the test by following models:
 = (1)
 = (2)
= (3)


 =(4)
= (5)
 = (6)

After calculating the effect of three restructure method to three 
inputs:   total   deposits   (TD),   interest   expense   (IE)   and   non­interest 
expense (NE) and three outputs: total loans (TL), interest revenue 

(IR) and non­interest revenue (NR), we continue calculating three 
inputs and three outputs under effect of six countries specific in table 
3.9.  And we build six equals following to measure  the  impact  of 
these control variables to input and output variables:
=  (7)
=  (8)
=  (9)
= (10)
= (11)
= (12)

 Finally, step 3 is similar to stage 1 using DEA method but 
replaces three inputs and three outputs adjusted in step 2.

  RQ2:  The effects of reform to structure and performance


Thesis’s   ideas   based   on   love   study   of   Berg   (1995)   and   Fu 
(2009) to test the hypothesis Quiet ­ life and efficient structure for 
the period of restructuring the system. By testing out the QLH, thesis 
can show out that whether the restructuring have direction effective 
to structure the system or not and how much the impact level is.
First,   according   to   Berger   (1995)   and   Goldberg   and   Rai 
(1996), Eq. (1) is used to test the validity of the hypotheses:
 + eit  (1)
Where : a measure of profitability, such as   return on assets 
(ROA), of bank i at time t; : a measure of market concentration, such 
as   four­bank   concentration   ratio   (CR4)   or   Herfindahl–Hirschman 
index (HERF) of concentration at time t; : market share (in terms of 
deposits) of bank i at time t; XEFFit: X­efficiency of bank i at time t; 

SEFFit: scale­efficiency of bank i at time t; e it: a vector of control 
variables.
Under   the   efficient­structure   (ES)   hypotheses,   causation   is 
assumed to run from efficiency to profits, and to market structure. 
More efficient banks should have higher profits, so the signs of the 
coefficients on XEFF and SEFF should be significantly positive, that 
is,   > 0,   > 0. Under the market­power hypotheses, a positive and 
significant b1 confirms the structure­conduct­performance;   should 
be positive if the relative market­power hypothesis holds.
It is possible that the measures of concentration (CONC) and 
market   share   (MS)   are   endogenous   in   the   ES   model.   However, 
Berger (1995) argued they can be included as independent variables, 


since they are correlated with profitability only because they reflect 
the influences of XEFF and SEFF and/or the control variables in Eq 
(1).
To   ensure   the   absence   of   a   spurious   relationship   between 
profitability   and   market   structure,   both   profits   and   the   market 
structure variables must be positively related to efficiency. Thus, a 
necessary condition for the efficient­structure hypothesis to hold is 
that efficiency has a positive effect on market structure. To establish 
its presence, two additional equations are estimated:
 (2)
+ + eit (3)
Like Berger and Hannan (1997), Eqs. (4) and (5) are used to 
test Hicks’ (1935) ‘quiet life’ hypothesis.
XEFFit= a +  CONt +MSit +CONTROLit + eit (4)
SEFFit = a +  CONCit + MS +  CONTROLit + eit (5)
According   to   the   ‘quiet   life’   hypothesis,   the   signs   on   the 

coefficients on CONC and/or MS should be significantly negative in 
Eqs.  (4)  and  (5).  Thus,  banks  with greater  market  power  are  less 
efficient due to a relaxed environment and slack management. Note 
the direction of causation is reversed between Eqs.  (2)/(3) and (4)/
(5). If both sets of relations are found to hold, then OLS estimation 
causes simultaneous equation bias (Berger and Hannan, 1997), which 
is   usually   resolved   by   using   a   two­stage   least   squares   (2SLS) 
procedure. 


Roburstness test
This   content   discusses   the   robustness   tests   used   to   address 
methodology concerns related to the different proxies for measures 
of restructuring method’s effects on the performance and efficiency 
of   the   commercial   banks.   They   are  SFA   regression   for   research 
question 1 and SFA and and Hausman test for research question 2.


Chapter 4. Results and discussion of results 
The empirical results for the hypothesis testing of the three research 
questions are reported in Chapter 4. 
Result of Research question 1
The thesis examines the impact of the measures that the government 
put   forward   which   are   the   government   intervention,   M&As   and 
privatization   of   state­owned   commercial   banks.   The   study   results 
show   that   M&As   increase   both   the   input   and   the   output   of 
commercial banks. During the post­restructuring period, it appears to 
be less in Managing Resources to Produce Efficient output because 
the banking takeover has merged to bear inefficiency of weak banks 
as credit and liquidity risk. Thus, banks that have support from the 

government,   usually   through   recapitalization   have   to   face   higher 
marginal costs to generate revenue and higher inefficiency. This is 
quite consistent with the reality in Vietnam where banks that receive 
the   government’s   support   from   mostly   state­owned   commercial 
banks, and in return, they often have to spend higher expenses for 
activities to support the government and the community.
Besides,   privatized   banks   do   not   seem   to   greatly   affect   the 
performance of the commercial banks because the central bank still 
holds dominant shares of the Commercial Bank, which does not have 
a   significant   change   on   the   structure   and   the   operation   of   the 
machine.
Result of Research question 2
From the test results, it can be concluded that the effects of reform on 
Vietnam's commercial bank structure and performance as follows:


In the research period, both stage 1 and stage 2, RMP theory is hold 
and   nothing   change  the   structure   in  banking   system   between   two 
states.   With   four   state­owned   banks,   there   was   no   evidence   of   a 
significantly negative relationship between the concentration and the 
efficiency. It means that in the bank restructuring period in Vietnam, 
banks   with   higher   market   share   were   more   profitable   and 
independent of market concentration (RMP). In the first stage, there 
is a great impact and influence of big­four state­owned commercial 
banks. They have advantages to mobilize money from state agencies, 
state   treasuries   ...   as   well   as   the   favour   from   the   government. 
Therefore they create a high market share and bring big profits. At 
the   second   stage,   although   state­own   commercial   banks   were 
privatization, but state­bank still covered the majority shares and the 
monopoly still exists. While there is no evidence show that low costs 

of production by relatively efficient firms enable them to compete 
more aggressively,  capture a bigger  market  share and earn higher 
profits as ES theory. In comparison with some previous papers, the 
result of this test in the Vietnamese economy is different from the 
Chinese one. Ye, Xu and Fang (2012) showed that during the period 
of   1998–2007,   neither   the   SCP   nor   ES   hypotheses   were   held   in 
China; In the Chinese reform period, only X­Efficiency Hypothesis 
was held. There is a difference between them because the banking 
restructuring  in  two  countries   are  different.   In  Vietnam,   the   main 
factors   in   restructuring   resolve   bad   debt   focus   on   M&A   and 
privatization.   Meanwhile   in   China,   beside   normal   restructuring 
methods,   they   strengthen   banking   administration   including 
organizational   and   human   resource,   banks   are   also   allowed   to 
increase   their   capital   and   use   new   mobilized   capital   to   increase 
investment in technology system and risk management to improve 
the efficiency of banking operations.


Results
Research questions, 
related hypotheses 
Stage 1

Stage 2

How   the   restructuring   measures 
were   introduced   as   government 
intervention,
Panel A ­ RQ1

 

merger

 

and 

acquisition   of   commercial   banks 
and   privatization   of   state­owned 

Stage 1

Stage 2

commercial   banks   effect   on   the 
performance   of   the   commercial 
banks in the study period?
H1.1:   Government   intervention 
increases   the   effective   of 
commercial banks' performance.
H1.2:   Merger   and   acquisition 
Hypotheses

increases   the   effective   of 
commercial banks' performance.

Not 
Supported

Not 
Supported

H1.3:  Privatization  of  state­owned 
commercial   banks   increases   the 

Not 

effective   of   commercial   banks' 

Supported

performance.


What are the effects of reform on 
Panel B – RQ2

Vietnam's   commercial   bank 
structure and performance? 

Hypotheses

Stage 1

Stage 2

(2001­

(2007­

2006)

2015)

H2.1:  This   hypothesis,   based   on 
SCP,   suggests   that   the   collusive 
behaviour   of   dominating   firms   in 
the   industry   influences   the   price 
setting process in the market which 
allowed   those   firms   to   get   high 
profit   over   the   other   firms.   SCP 

  Insufficien
t

Insufficient

supposes   that   there   is   a   positive 
relationship   between   market 
concentration

 

and

 

firm 

performance.
H2.2:This   hypothesis   is   based   on 
RMP.  It  suggests that  Firms have 
bigger   market   shares   and   well­
differential   products   will   have  Supported

Supported

higher   market   power   and   can 
achieve   more   profit   than   usual 
firms do.
  H2.3: This hypothesis is based on  Not 

Not 

ES theory: low costs of production  Supported

Supported

by relatively efficient firms enable 
them   to   compete   more 


aggressively,   capture   a   bigger 
market   share   and   earn   higher 
profits.
H2.4  Quiet  life  hypothesis.  Banks 
have   higher   market   share   would  Insufficient

Insufficient

have lower efficiency.

Chapter 5. Conclusion
Chapter 5 concludes the thesis.
Review Of Research Questions, Hypotheses And Findings
The   table   below   presents   a   summary   of   the   thesis’   two   research 
questions   and   their   8   associated   hypotheses   and   findings.   The 
research questions are raised in Chapter 1 and their hypotheses are 
developed   in   Chapter   2.   The   data   and   methodology   to   test   these 
hypotheses   and   variable   selections   and   measurements   are 
documented in Chapters 3. The findings are discussed in Chapter 4. 
Contributions
First, the thesis’ contribution is to point out the overall picture of the 
restructuring   process   in   Vietnam   at   early   stages.   This   research 
indicates  that the first  period of  banking restructuring in Vietnam 
was not effective because the government still hold the majority of 
shares, which did not change much the operational structure of the 
commercial   banks.   Besides,   banks   were   strongly   affected   by   the 
environment factors. Upon that, a system of solutions for this issue 
can  be  built.  This  investigation  is  consistent  with prior  studies  of 


Hsiao et al (2010), Thoraneenitiyan (2009) which showed that the 
bank   efficiency   dropped   during   the   restructuring   period   due   to 
transitioning cost. Moreover, the bank efficiency was also affected 
by   the   environment   variables,   such   as   financial   crisis   or   weak 
domestic economy. 
Second, in the context of the bank restructuring initiated during this 
period,   the   objectives   are   to   identify   which   model,   if   any,   best 

described the competitive structure of Vietnam’s banking sector and 
the impact of the bank size/ownership. The results indicate that the 
banking   system   structure   changes   towards   higher   profits,   higher 
efficiency score but the sensitivity and vulnerability also increase. 
These activities affected banks from the crisis of the world recession 
is higher than the pre­restructuring period. This indicates that in an 
open   economy   such   as   Vietnam,   a   side   benefit   to   increase   the 
competitiveness   of   the   system   on   the   one   hand   would   bring 
challenges   to   domestic   banks   for   further   integration   into   the 
international financial system. Comparing with prior studies in China 
(Fu   and   Heffernan,   2009),   the   economy   shares   consistent 
characteristic with Vietnam: the emerging market, the transitioning 
and   socialist   economy.   This   investigation   shows   that   Vietnam’s 
banking   system   is   more   vulnerable   and   sensitive   than   China’s 
banking   system   during   the   transition   period;   the   difference   is   the 
scale as Vietnamese economy’s is quite small. So, this finding shows 
the small economy has to face more pressure and instability than big 
economy during the transition and the integration process, which is 
consistent with the economies of scale theory (Silberston, 1972).
Theoretically,  this is the first time that  the market­power,  the  quiet 
life and the efficient­structure hypothesisare extended to be included 
in   the   test   on   the   impact   of   the  banking   restructuring  on  the 


performance of Vietnam banking system as well as  the  small open 
transition economy, then this gap was filled with this hypothesis. 
Implications
Regarding to the effect of restructuring methods, it was shown that 
the  change of  the bank ownership of  the state­owned  commercial 
banks did not have a significant change on the operational structure 

of   the   commercial   banks.   Additionally,  the  government   should 
reduce its intervention in the market, actively allow privatization of 
state­owned   commercial   banks  as   well   as  maintain  integrative 
policies   to   enhance  the  competition   and  the  transparency   of  the 
banking system.
These   results   have   provided   us   with   a   partly   comprehensive 
restructuring   of   the   banking   system   in   Vietnam   as   the 
implementation   process   of   the   restructuring   to   integrate   in   the 
international   financial   markets.   A   major   problem   arises   as   the 
opportunity   to   take   advantage   of   is   connected   with   the   financial 
system to raise capital and capital exchange, but the financial system 
in   small   emerging   countries   will   face   an   edgy   pressure   of   huge 
competition from foreign banks, and the instability of the banking 
performance will also increase not only during the global economic 
crisis that cover early stages of the integration process. Instead of 
accepting such rapid integration,  the government  needs to build a 
strategy and a plan to engage in the international financial system to 
ensure the system stability during and after the transitioning period. 

Finally,   governments   should   prepare   fully   and   consider 
carefully about the right time that they choose to integrate into 
international financial markets, avoid integration at the time of 
the world financial crisis.


Limitations
Nevertheless, this thesis has some limitations. In terms of its data’ 
characteristics,  the main sources  of  data used  for  this  thesis  were 
obtained from Orbis Bank Focus and State Bank of Vietnam. There 
were some missing numbers which caused difficulty for the variable 

statistics. Besides, the banking restructuring still took place, so the 
research   could   only   be   carried   out   with   the   first   stage   of   the 
restructuring   in   the   period  from   2007  to  2015.     Regarding   to  the 
research method, there were quite a few research methods for this 
issue but there was no method better than the others and suitable for 
all   cases.   Thus,   the   methods   were   combined   together   properly   to 
solve the research’s issue.
Future Research Directions
These   results   have   provided   an   overview   of   the   comprehensive 
restructuring of the banking system in Vietnam and the conclusions 
are quite similar to the previous studies on emerging markets well as 
the implementation process of the restructuring to integrate in the 
international   financial   markets.   Whether   Vietnamese   commercial 
banks can maintain the market share, stand out in the market and 
benefit the competitive advantage with commercial banks in foreign 
countries   that   have   been   increasingly   involved   in   the   financial 
system in a sweeping Vietnam or not, or become trend follower of 
another economy, remain small and open with less competitiveness , 
obsolete technology and management skills, lose market share to the 
foreign   banks,   be   subject   to   distribution   from   them   and   major 
financial institutions of the world. 
Besides, the author also intends to investigate why some banks can 
overcome   the   restructuring   process   and   the   impact   of   the   world 


financial crisis, and continue to develop, while other banks cant do it. 
That would be the next research direction for the following topics.