TÁC ĐỘNG CỦA TIẾP XÚC đa THỊ TRƯỜNG LÊN CẠNH TRANH, RỦI RO TÍN DỤNG VÀ HIỆU QUẢ HOẠT ĐỘNG CỦA CÁC NGÂN HÀNG THƯƠNG MẠI VIỆT NAM tt

MINISTRY OF EDUCATION

STATE BANK OF VIETNAM

BANKING UNIVERSITY, HO CHI MINH CITY

HO THI NGOC TUYEN

THE IMPACT OF MULTIMARKET CONTACT
ON THE COMPETITION, CREDIT RISK AND
OPERATING PERFORMANCE OF
VIETNAMESE COMMERCIAL BANKS
DOCTOR OF PHILOSOPHY IN ECONOMICS
THESIS SUMMARY
Major: Finance – Banking
Code : 9.34.02.01

Instructors: Prof. NGUYEN CHI DUC
Prof. DAO LE KIEU OANH

HO CHI MINH CITY - 2020


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ABSTRACT
The thesis is conducted to analyze the impact of multimarket exposure on competition,
credit risk and performance of Vietnamese commercial banks along with factors related to
commercial banks in the period of 2008 – 2017, with quantitative research methods including
the following analysis steps:
(i) Measure the impact of multimarket contact and relevant factors on the

competitiveness of commercial banks using LERNER index;
(ii) Assess and measure the impact of multimarket contact on credit risk of Vietnamese
commercial banks, using proxies of MMC1 and NPL, respectively;
(iii) Measure the impact of multimarket contact on the performance of Vietnamese
commercial banks, through the estimation of the influence of multimarket contact (MMC1,
MMC2) on the performance of commercial banks (measured by risk-adjusted profitRAROA);
(iv) Apply GMM method on unbalanced panel data, and analyze the impact of
multimarket contact, competition and credit risk, on the performance of Vietnamese
commercial banks.
The research results show that multimarket contact has significant impacts on
competition, credit risk and performance of Vietnamese commercial banks. The findings
associated with MMC1 and MMC2, proxies for multimarket contact, suggest that the
increasing presence of banks in different regions has caused a general decline in market share
and bank performance.


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CHAPTER 1: INTRODUCTION
1.1.

THE NECESSITY OF THE TOPIC
First, the impact of bank competition on bank risk, particularly credit risk, has constantly

been a matter of academic and policy debate.
Secondly, the expansion of economic cooperation and integration into the global
economy has created various opportunities but also challenges, and operating efficiency
becomes an important criterion to assess the development of the financial system of Vietnam
in the current condition.
Thirdly, it can be said that there have been many studies evaluating factors affecting

competition, credit risk and bank performance in Vietnam’s and international contexts;
however, the studies on multimarket contact, especially those on the effect of multimarket
contact on competition, credit risk and bank performance, are scarce in Vietnam.
Reviewing the domestic and international literature on competition, credit risk and bank
performance, the author finds two issues worth considering:
+ Firstly, inconsistent research findings are prone to generate different arguments, and
there are limitations or research gaps that previous works have not considered.
+ Secondly, in Vietnam there has been scant evidence on multimarket contact,
particularly on the impact of multimarket contact on bank competition, credit risk and bank
performance. This hammers the ability to form a reference base for policymakers to operate
and develop the banking industry in a stable and sustainable manner, taken into account the
fact that banks are competing with each other in the same geographical area.
Therefore, the evaluation of the impact of multimarket exposure on competition, credit
risk and performance of commercial banks, as well as the factors related to the performance
of the commercial banks, is crucial to commercial banks in the current period. Thus, the
author chose the topic: "The impact of multimarket contact on the competition, credit risk and
operating performance of Vietnamese commercial banks".
1.2.

Objectives of the study
- General objective: Studying the impact of the multimarket contact on the competition,
credit risk and operating performance of Vietnamese commercial banks.
- Detailed objectives:


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(1) Measure the impact of multimarket contact on the competition of Vietnamese
commercial banks.
(2) Measure the impact of multimarket contact on the credit risk of Vietnamese

commercial banks.
(3) Measure the impact of multimarket contact on the operating performance of
Vietnamese commercial banks.
(4) Propose solutions and recommendations for bank administrators and policymakers
on improving the operating performance of commercial banks, heightening stability
for the operation of banks in the context of the contemporary increase in competition
and risks of Vietnamese commercial banks.
1.3.

RESEARCH QUESTIONS

To address the above objectives, the research questions include:
(1) What are the level and the direction of the impact of multimarket contact on the
competition of commercial banks?
(2) What are the level and the direction of the impact of multimarket contact and other
factors on credit risk of commercial banks?
(3) Which factors affect Vietnamese commercial banks? What are the trend and the
degree of impact of multimarket contact and other factors on the operating performance of
Vietnamese commercial banks?
(4) What are the solutions to improve the stability of commercial banks' operation in the
context of multimarket contact, the increasing competition and risks of Vietnamese
commercial banks?
1.4.

THE SUBJECT AND SCOPE OF RESEARCH

Subjects of the study: the impact of multimarket contact on competition, credit risk and
operating performance as well as a number of other control factors such as Bank Size (SIZE),
Equity Capital/Total Assets (CAP), Total Loan/Total assets (TLTA), Total deposits/ total
assets (DEPOTA); Non-interest income/total income (DIV), State ownership (SOCB), Total

operating expenses/Total assets (OETA), Annual growth rate of GDP (GDP) ; Inflation (INF)
on the operating performance of Vietnamese commercial banks.
Scope of research: Commercial banks in the period of 2008-2017 in Vietnam. The study
excluded banks subject to specific regulations and mechanisms, such as Vietnam Bank for


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Social Policies, cooperative banks, credit funds, banks with 100% foreign capital and joint
venture banks.
1.5.

RESEARCH METHODOLOGY

The thesis employs quantitative research method through the use of GMM estimation
technique for all the three research objectives.
1.6.

THE CONTRIBUTION OF THE THESIS
In terms of theoretical contributions, the study helps clarify the impact of multimarket

contact in the banking sector, but at present there are not many in-depth studies on this issue,
at least in Vietnam. The research results can also be used for future studies not only in
updating the theoretical basis, but also in comparing the obtained results. Besides, this
research aims at retesting the previous research results, and will offer topics for future
research from the limitations of the study. According to the literature review, there have been
limited studies on the multimarket contact in developing countries, while studies of
Coccorese and Pechellia, (2009, 2013) and Degl'Innocenti et al (2014) were conducted in the
context of developed markets.
In practical terms, this will be a valid reference base for managers of commercial banks

to make flexible and justifiable decisions based on market fluctuations in the current strong
competition. Moreover, multimarket contact is a relatively untouched aspect of competition;
therefore, this study helps to increase the understanding of whether banks have many
branches and have contact with each other will increase or decrease the competition,
efficiency and credit risk, especially in the integration period.
1.7.

NEW FINDINGS FROM THE RESEARCHa
The research results show that multimarket contact has significant impacts on

competition, credit risk and operating performance of Vietnamese commercial banks as
follows:
(i) The variables of multimarket contact (TXDTT), bank size, equity/asset ratio, and
inflation have positive and statistically significant impacts on the competition of Vietnamese
commercial banks.
(ii) Multimarket contact (MMC1) has a positive and statistically significant impact on
credit risk, implying that the increase in multimarket exposure will increase the credit risk.
This shows that if commercial banks increase competition in the same market with other


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commercial banks, they are prone to reduce the quality of loans in order to induce more
customers and earn profits, enhancing the credit risk for banks.
(iii) Multimarket contact (MMC1) has a positive and statistically significant impact on
credit risk, implying that the increase in multimarket exposure will increase the credit risk.
This shows that if commercial banks increase competition in the same market with
counterparts, they are prone to reduce the quality of loans in order to induce more customers
and earn profits, enhancing the credit risk for banks.
1.8.

THESIS STRUCTURE
The thesis is divided into 5 chapters
Chapter 1: Introduction
Chapter 2: Theoretical basis and related studies on credit risk, competition, and multi-

market contact on the operating performance of commercial banks
Chapter 3: Research methodology.
Chapter 4: Research results and discussion.
Chapter 5: Conclusions and recommendations.

Chapter 2: Theoretical basis and related studies on credit risk,

competition, and multi-market contact on the operating
performance of commercial banks

2.1.

Concepts

2.1.1 Risk and credit risk:
According to Kieu (2012), risk is an uncertain or an unstable condition. The basic feature of a
bank is the pursuit of acceptable benefits and measurable risks. Credit risk occurs when a
customer is unable to repay their loan. According to the Basel Committee (2004), credit risk
is referred to as unexpected events that result in losses in the value of assets, reduction of
profits compared to expected returns, or the generation of additional expenses to complete a
particular transaction. Credit risk occurs when the borrowers are unable to pay both the
principal and the interest on time as stipulated in the contract.

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2.1.2 Competition and multimarket contact
Competition is the fighting for more market share by banks to commercialize a wide range of
products and services, as well as to dominate the market to attain the most favorable
conditions for the production, consumption and market.
Multimarket contact: occurs when two or more businesses are competing with each other at
the same time and in different markets (product or location). When these businesses are
exposed many times and in many places to each other, multimarket contact may lead to a
relationship called "mutual forbearance". Businesses compete with each other at the same
time in a number of different markets. Edwards (1955) conducted the seminal study,
theorizing that when businesses compete with each other, they are likely to encounter in
significant markets and repeated exposure could reduce competition.
2.1.3 Performance and operating performance of banks
Performance is the relative relation between the outcomes and the total cost spent for that
outcome (input), and the greater the difference between the two quantities, the higher the
performance.
Bank operating performance is a reflection of the bank's use of resources to achieve its goals,
showing the relation between output and input. Banks minimize costs to increase its
competitiveness versus other financial institutions.
2.2.

The theories related to competition, risk and operating performance

2.2.1 Structure – Conduct – Perform Hypothesis (SCP)
Concept: The conventional market power hypothesis states that the increase in a bank's
market share is an indication of its market power. Higher market share and a highly
concentrated market (thus fewer competitors) enable banks to price their products and
services more favorably, while allowing lower rates for deposits. An increase in pricing
power above competitors will lead to higher profits for banks.

Impact: this condition will influence the competition of commercial banks, in particular on
operating costs, equity as well as total assets of the bank, capital mobilizing strategies
(deposits) and credit provision (loans and non-performing loans) as well as services that
generate interest income and non-interest income.
2.2.2 Quiet life hypothesis (Quiet Life -QL)
Concept: The quiet life hypothesis argues that the higher the market power, the lower the
management effort to maximize operating performance. Market power may confuse bank


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owners to distinguish between effective and ineffective managerial behaviors. This
hypothesis is opposed to the SCP model developed by Hicks (1935) and it may result in
higher profits for reasons not related to managerial effectiveness.
Impact: First, banks that compete in a highly concentrated market can set prices higher than
marginal costs, and managers do not have to exert efforts to keep costs under control; Second,
market power can allow managers to pursue goals other than profit or value maximization;
Third, in the absence of competition, managers who spend resources to win and maintain the
market share will unnecessarily increase costs and reduce efficiency; Fourth, if banks benefit
from market power, poorly-performing managers can survive without trying to work more
effectively.
2.2.3

Mutual forbearance hypothesis

Concept: According to oligopoly theory, multimarket companies will not compete strongly
with their competitors in a certain market if they are afraid of retaliation in all the remaining
markets (Edwards, 1955; Sorenson, 2007). This is because the higher number of mutual
markets in which businesses compete with each other, the higher likelihood that retaliation
will occur in these markets, resulting in significant losses. In such a situation, the overall

level of competition will decrease to avoid excessive losses across the markets.
Impact: Bernheim and Whinston (1990) have shown that, when businesses have multimarket
contact, they will have tacit agreements with each other and maintain cooperation instead of
competition if there are imbalances among markets where businesses compete. On the
contrary, there is also the view that multimarket contact with competitors is positively related
to competition. Solomon (1970) argues that if the bank was highly competitive in certain
markets within a certain region, the number of multimarket linkages in the same area could
lead to increased competition, and reduce bank profits.
2.2.4

Theory on the impact of competition on the risk of commercial banks

Concept: This hypothesis holds that excessive competition among banks may threaten the
solvency of particular institutions and hinder the stability of the entire banking system
(Keeley, 1990).
Impact: Competition among banks arising from the deregulation of the banking system will
reduce the value of bank charter capital by reducing the benefits of monopoly power, and
encourage banks to opt for more risky policies to maintain profit levels in previous periods


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(Keeley, 1990). However, Boyd and De Nicoló (2005) show that less competition among
banks creates favorable conditions for setting higher interest rates on business loans, leading
to increased credit risk of borrowers (ethical issues), and can lead to high nonperforming loan
ratios and increased bank instability.
2.2.5

Theory on bank diversification

Definition: Diversification can be referred to as an act of a company to extend its product
range or fields of business with the aim of increasing operational efficiency and profitability
or minimizing risks or both of two purposes.
Impact: The first view is that product diversification can help the bank mitigate the risk of
bankruptcy because it has allocated resources for different products (Haugen, 2001); The
second view is that banks should focus on one type of product or service as a better operating
strategy, rather than diversifying products and services.
2.2.6

“Too-big-to-fail” hypothesis

Concept: "Too-big-to-fail" hypothesis refers to the relationship between bank size and bank
risk. This theory states that banks or financial institutions are large-scale organizations
associated with many other economic sectors, thus having a great influence on a country's
economy. As a consequence, their bankruptcy risk will spell catastrophic trouble for the
whole economy, so they need to be supported by the Government when they face distress and
constraints.
Impact: Government protection of large-scale financial institutions and banks may increase
their risk-taking behavior (Mishkin, 1999).
2.3. Determinants of competition, credit risk and operating performance of commercial
banks
2.3.1 Subjective factors: Financial capability, Managing capability
2.3.2 Objective factors: economic environment, political environment, and society
2.4. Literature review
There are numerous researches on the competition, credit risk and operating
performance of commercial banks in Vietnamese and international contexts. Nonetheless,
the results tend to differ due to the differences in research scale, data sources, and research
methods.
Recently, banks have increasingly become aware of the importance of risks as well as
the relationship between risk and profitability. A bank with proper risk management will

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have better resistance against and be less affected by unforeseen impacts, and be able to take
timely actions to minimize losses to the bank. Integrating into international financial markets,
commercial banks have to compete fiercely with each other to make profits, so the risks also
increase and affect the operational efficiency.
Ho and Saunders (1981) opine that the profits made by banks when setting interest
rates for deposits and loans depend on (i) banks' risk aversion, (ii) market structure, (iii) the
economy of scale, and (iv) interest rate fluctuations. Ho and Saunder (1981) argue that banks
are still profitable even in highly competitive markets. Previous studies have shown the
positive impact of multimarket contact on improving efficiency, service quality, innovation
and international competition (Claessens & Laeven, 2004). However, recent studies indicate
that the relationship between competition and performance is less obvious in the financial
sector compared to other sectors (Akins et al., 2016). Numerous studies find that multimarket
contact modifies the relationship between competition and bank efficiency and stability
(Maudos et al., 2004).
Over the past few decades, banks have focused more on strengthening their position
and competitiveness in the context of continuous technological progress, globalization and
pro-monopoly regulatory provisions being removed. This phenomenon can have marked
effects on the revolution of the level of competition, because in more concentrated markets,
businesses will capture information more quickly, facilitating the comparison of interest rates.
In addition, mergers and acquisitions (M&A) have led to more overlap between branches,
thus increasing the number of markets in which banks will have to compete with each other.
Issues related to multimarket contact have been analyzed in theoretical and empirical works
for decades, and most of these studies have been conducted in developed countries.
According to oligopoly theory, multimarket companies will not compete intensively with
their competitors in the anticipation of retaliation in other markets. Because the greater the
number of markets that businesses operate together, retaliation in these markets is likely to

occur and will cause significant losses. In such a situation, the overall level of competition
will shrink. Bernheim and Whinston (1990) show that, when multimarket encountering takes
place, businesses tend to have tacit agreements to cooperate rather than compete if there are
imbalances between markets in which firms compete. However, there are some studies that
do not support this theory, even showing that competition in the market becomes stronger
when businesses have multimarket contact (Degl’Innocenti et al, 2014).


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Some authors have investigated the influence of multimarket contact on the
profitability of manufacturing enterprises, and shown that businesses lever on multimarket
contact to increase profitability (Scott, 1982; Hughes and Oughton, 1993). Gimeno (2002)
studies American airlines and Busse (2000) studies the mobile phone industry in the U.S.
market, while Fu (2003) looked at news businesses in Central America. All these studies have
confirmed that the multimarket contact has a positive impact on the corporate profitability, in
line with the "mutual forbearance hypothesis".
In the banking sector, there have been a number of empirical studies providing
inconsistent results on the influence of multimarket contact on bank performance. Coccorese
and Pellecchia (2009) show that multimarket contact increases profitability of Italian banks.
Using Italian bank data in the period from 1997-2009, Coccorese and Pellecchia (2013) show
that companies operating in many markets are prone to collude with each other. Fuentelsaz
and Gomez (2006) study Spanish savings banks, again showing an inverted U-shaped
relationship between multimarket contact and market entry.
A number of studies have analyzed the impact of diversification in the banking sector
on risks and profitability. Several studies have found evidence that diversifying income
sources increases risk (De Young and Roland, 2001; Stiroh, 2004; Stiroh and Rumble, 2006;
Lepetit et al., 2008; Demirgüc-Kunt and Huizinga, 2010).
Studies by Gallo et al. (1996), Rogers and Sinkey (1999) and Ashraf et al. (2016) have
found the opposite. Income diversification is thought to have a positive effect on profitability

in Stiroh and Rumble (2006), Chiorazzo et al. (2008), Lepetit et al (2008), Demirgüc-Kunt
and Huizinga (2010) and Elsas et al. (2010). However, income diversification tends to exert a
negative impact on profitability (DeYoung and Roland (2001); Stiroh (2004), DeYoung and
Rice (2004), Stiroh (2004), Baele et al (2007), Berger et al (2010) and Fiordelisi et al (2011)).
For the banking sector, the results of empirical studies are more ambiguous, and it is
impossible to make a indecisive opinion on the role of multi-market contact in the
relationship between competition and profitability. In these studies, multimarket contact is
often measured by calculating the number of contacts between a certain group of banks (all
the banks operating in the market or a subset of organizations) or the amount of deposits
related to those links, while the level of competition is assessed through the changes in
indicators such as profit, loan income, cost related to deposits, and market share.


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Income diversification is one of a bank's competitive strategies during times of fierce
competition, forcing the bank to seek a wide variety of sources of income. Another strategy
that has received much less attention is that a bank diversifies its business areas within a
territory (region or country level), resulting in repeated contacts between banks, leading to
enhanced competition. Competition in the banking market can lead to banks competing for
customers, thus increasing the risk of low-quality customers being granted the loans,
affecting the bank's credit risk. According to the literature review, until recently there has
been no research analyzing the relationship between multimarket contact, competition and
credit risk and performance of banks, at least in developing countries.
Banks in Vietnam have grown rapidly in terms of number, scale and location of
operations. The competition with domestic commercial banks has become more and more
intense, leading to the trend of banks diversifying their operational activities, mainly services,
to maintain market share. The banking system plays an important role in Vietnam's economy
and contributes 16 to 18 per cent to economic growth (Stewart et al., 2016). Studies in
Vietnam have chiefly been conducted on bank performance, but these studies often focus on

the impact of income diversification on bank performance (Canh and Minh, 2014; Vinh and
Mai, 2015; Quynh and Hau, 2016).
In Vietnam, there have been research topics on competition including Trung (2010),
Vinh (2015), Vinh and Tien (2017). It can be seen that in Vietnam’s context, the link between
competition in terms of multimarket contact, operational risks affecting the performance of
commercial banks in Vietnam has not been dissected. Although Vietnamese commercial
banks are trying to diversify services, the options are still not adequate; non-credit services
such as payment, investment, foreign exchange business and financial consultancy are
underdeveloped; Modern banking products and services are only in the experimental or pilot
phase. In addition, following State Bank implementing tight monetary policy, commercial
banks have restricted lending and have continuously increased lending interest rates,
traditional banking services (mobilization and lending of money) could have little impact on
the bank income, leading to increased competition in banks in the form of their increased
presence in different markets.
2.5. Measures of competition, multimarket contact, credit risk and operating
performance


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2.5.1. Risk and credit risk:
According to Kieu (2012), risk is an uncertain or an unstable condition. The basic feature of a
bank is the pursuit of acceptable benefits and measurable risks. Credit risk occurs when a
customer is unable to repay their loan. According to the Basel Committee (2004), credit risk
is referred to as unexpected events that result in losses in the value of assets, reduction of
profits compared to expected returns, or the generation of additional expenses to complete a
particular transaction. Credit risk occurs when the borrowers are unable to pay both the
principal and the interest on time as stipulated in the contract.
2.5.2. Competition and multimarket contact
Competition is the fighting for more market share by banks to commercialize a wide range of

products and services, as well as to dominate the market to attain the most favorable
conditions for the production, consumption and market.
Multimarket contact: occurs when two or more businesses are competing with each other at
the same time and in different markets (product or location). When these businesses are
exposed many times and in many places to each other, multimarket contact may lead to a
relationship called "mutual forbearance". Businesses compete with each other at the same
time in a number of different markets. Edwards (1955) conducted the seminal study,
theorizing that when businesses compete with each other, they are likely to encounter in
significant markets and repeated exposure could reduce competition.
2.5.3. Performance and operating performance of banks
Performance is the relative relation between the outcomes and the total cost spent for that
outcome (input), and the greater the difference between the two quantities, the higher the
performance.
Bank operating performance is a reflection of the bank's use of resources to achieve its goals,
showing the relation between output and input. Banks minimize costs to increase its
competitiveness versus other financial institutions.
2.6. Research gap
(i) There have been no studies analyzing the impact of the multimarket contact on the
competition of Vietnamese commercial banks.
(ii) There have been no studies analyzing the impact of multimarket on credit risk of


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Vietnamese commercial banks.
(i)

There have been no studies analyzing the impact of the multimarket contact on
the operating performance of Vietnamese commercial banks

CONCLUSION OF CHAPTER 2
In this chapter, the author presented important theories related to the thesis, systematized
the domestic and international studies, as well as related concepts related to multimarket
contact, competition, credit risk and operating performance.

CHAPTER 3: RESEARCH METHODOGY
3.1 Research model about Competition-related model, Risk-related model, Operating
performance-related model
3.1.1
Competition-related model: The model is as follows:
LERNERit = β0 + β1MMC1i,t + β2SIZEi,t + β3CAPi,t + β4SOCBi,t
+ β5LLPi,t + β6GDPt + β7INFt + μit

(MH1)

- Dependent variable: competition (Lerner)
- The independent variables that act as control variables are included in the model to
reduce the noise in the model, and to simultaneously partition the impact of the multimarket contact on competition, including: multi-market contact (MMC1); Bank size
(SIZE); Equity/total assets (CAP); State ownership (SOCB); Loan loss provision (LLP);
Annual growth rate of GDP (GDP); Inflation (INF)
3.1.2 Risk-related model: The model is as follows :
NPLit = β0 + β1MMC1i,t + β2SIZEi,t + β3DIVi,t + β4TLTAi,t + β5CAPi,t+ β6OETAi,t + μit
(MH2)
- Dependent variable (Risk): Credit risk is measured by NPL (Non-performing loan /
Total loans).
- The independent variables that act as control variables are included in the model to
reduce the noise in the model and single out the impact of multimarket contact on risk,
including: Multi-market contact (MMC1); Bank size (SIZE); Non-interest income / total
income (DIV); Total Loans / Total Assets (TLTA); Equity / Total Assets (CAP); Total
operating expenses / Total assets (OETA)

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3.1.3 Operating performance-related model: The research model is as follows
RAROAit = β0 + β1MMCi,t + β2DEPOTAi,t + β3DIVi,t + β4TLTAi,t + β4CAPi,t
+ β5OETAi,t + μit

(MH3)

- Dependent variable (RAROA): Performance measure has been adjusted for risk.
- The independent variables that act as control variables are included in the model to reduce
the noise in the model and single out the impact of multimarket contact on operating
performance, including: Multi-market contact (MMC1 and MMC2); Total deposits / total
assets (DEPOTA); Non-interest income / total income (DIV); Total Loans / Total Assets
(TLTA); Equity / Total Assets (CAP); Total operating expenses / Total assets (OETA).
- The measurement of MMC1 and MMC2 is through the establishment of 3 matrices 3.1, 3.2,
3.3, in line with Coccorese and Pellechia (2009, 2013). First, calculate the matrix of the
number of commercial bank branches in each provincial market, where k is the number of
markets and dij is the number of branches of bank i in the market j.
(3.1)
Next, matrix NxK is formed (C), and Cij representing whether bank i operates in market j.
(3.2)
Regarding matrix C, cij = 1 if dij> 0 and cij = 0 if dij = 0. Therefore, cij = 1 means that bank i
is active in market j, i.e., there is at least 1 branch in the market j.
Then, matrix M (NxN) is calculated as follows:
(3.3)
In which, CT is the inverse matrix of C. The components (mij) are the number of markets that
banks i and j operate in, meaning that the number of markets that banks i and j concurrently
have at least 1 branch. From these matrices, the author calculates an important indicator to

measure the extent of multimarket contact as follows:
(3.4)


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The lower and higher values of MMC1 depend on the distribution of banks among
provinces. Theoretically, the minimum is zero, which occurs if a bank has the monopoly in
the market where it operates, and maximum is equal to the number of provinces provided that
all banks meet in all provincial markets. Therefore, for single-market banks, MMC1 is equal
to 1 unless they are monopolies.
Calculation of MMC2: Starting from the S matrix (NxK) with elements being the
market share of bank i in province j

(3.5)
The similarity index between the two banks is calculated by the sum of the absolute
differences of market share in the provinces where the two banks meet:
(3.6)
The SI index, in theory, runs from zero to the number of markets that banks come into
contact with, and it will be small if the two banks are similar in terms of market share. To
calculate an index that increases with the similarity of banks in terms of market share and
runs from 0 to 1, we use the following conversion mechanism:
(3.7)
The corresponding matrix for calculating the number of multi-market contacts becomes
(3.8)
Finally, MMC2 is obtained as follows:
(3.9)
3.2.1. Comparison with the extant studies
Similarity: The competition is measured by the Lerner index, in consistence with
Vinh and Tien (2017) and Delis (2012), credit risk measured by NPL - similar to the study of

Bana Abuzayed et al. (2018), and operating performance measured by RAROA of banks,


16

which has been used in previous studies. Multimarket contact is measured using MMC1 and
MMC2 according to Coccorese and Pellecchia (2009, 2013). The thesis also uses the intrinsic
variables of banks related to credit activities and operating performance including: Bank size
(SIZE), Non-interest income / total income (DIV), Total loans / Total assets (TLTA), Equity
capital / Total assets (CAP), Total operating expenses / Total assets (OETA), state ownership
(SOCB) measured as the ratio of state capital to total ownership; loan loss provision (LLP),
annual growth rate of GDP (GDP), Inflation (INF) are used as the control variables in the
model.
Differences: The biggest difference of this study compared to previous studies is the
application of the factor of multimarket contact (Coccorese and Pellecchia, 2009, 2013) to
study how banks competing in the same market can exert influence on credit risk and
operating performance measured by RAROA (Performance measure that has been adjusted
for risks of Vietnamese commercial banks). Therefore, compared with the prior studies, the
thesis focuses on understanding the impact of multimarket contact and the factors related to
competition, credit risk and operating performance that no previous studies on Vietnamese
commercial banks discussed.
3.2 Estimation method
Study using unbalanced panel data and Stata 12.0 for data processing and the estimation
using GMM for all the 3 models.
Conclusion for Chapter 3: Chapter 3 discussed the research models examining the link
between multimarket contact, credit risk and operating performance of Vietnamese
commercial banks.


17

CHAPTER 4 : RESEARCH RESULTS AND DISCUSSION
4.1 Descriptive statistics
Table 4.1:Descriptive statistics of variables
Variable
RAROA
NPL
LERNER
MMC1
MMC2
DIV
TLTA
SIZE
LLP
OETA
CAP
SOCB
GDPGR
INF

Obs
319
311
311
319
319
311
319
319
310

319
319
319
319
319

Mean
1.9561
0.0099
0.424
14.600
13.931
0.099
0.516
17.616
1.409
0.016
0.126
0.154
6.004
8.193

Std. Err
Min
Max
1.509
0.012
6.293
0.00993
-0.0099

0.1097
0.091
-0.173
0.634
7.542
1.000
34.148
6.958
0.910
31.275
0.080
-0.195
0.468
0.141
0.114
0.852
1.403
13.135
20.590
2.547
0.013
43.969
0.007
0.000
0.069
0.094
0.011
0.661
0.361
0.000

1.000
0.529
5.247
6.812
6.305
0.879
23.116
Source: Author’s calculation using Stata 12

The variable RAROA is the risk-adjusted measure of operating performance in Table 4.1.
The average value of the variable in the sample is 1.9561 with the lowest value of 0.012 of
Tien Phong Commercial Joint Stock Bank in 2013 and highest value of 18,416 of Vietnam
Joint Stock Commercial Bank for Industry and Trade in 2011, showing that there is a
significant difference in risk-adjusted operating performance between commercial banks in
the sample.
Credit risk variable (NPL) has the average value of 0.0099, and standard deviation being
0.00993, the largest value 0.1097 and the smallest value -0.0099. This shows that the data
have high homogeneity, and there is low variation in credit risk measured by NPL.
The variable LERNER has the average value of 0.424, standard deviation 0.091, the largest
value 0.634 and the smallest value -0.173. This shows that the data have poor similarities, and
there are significant differences in competition variable between banks.
Multi-market contact (MMC): The MMC1 variable measures the impact of multi-market
exposure of banks, with a minimum value of 1 and a maximum value of 34,148 with a mean


18

value of 14,600 and standard deviation of 7,542. The gap between the largest and the smallest
values is relatively large at 33,148 along with the high degree of dispersion around the mean
value, suggesting that the commercial banks in the sample have a large difference in the level

of multimarket contact.
The MMC2 variable has the smallest value of 0.910 and the largest value 31.275 with an
average value of 13,931 and a standard deviation of 6,958. MMC2 shows that the number of
markets in which banks are exposed to each other is 13,931 (nearly 14 provinces). The
MMC1 variable shows that the banks are exposed on average in 14,600 (more than 14)
provinces. MMC2 is lower than MMC1, suggesting that the increasing presence of banks in
different regions has caused a general decline in their average market share.
4.2 Results on the impact of multimarket contact on competition (MH1)
Table 4.3: Regression result of MH1
LERNER _L1.
MMC1
SIZE
CAP
LLP
SOCB
GDP
INF
_cons
AR(2)
Sargan-Hansan test

Coeff
-0.1326
0.0037
0.0248
0.3786
0.0015
0.1468
-0.0051
0.0047

-0.1273

Std. Err
0.011
0.001
0.013
0.155
0.001
0.039
0.013
0.000
0.201

t
-11.52
1.96
1.79
2.43
0.54
0.37
-0.38
6.52
-0.47

P>t
0.000
0.049
0.073
0.015
0.124

0.712
0.706
0.000
0.640
0.96
0.456
Source: Author’s calculation using Stata 12

4.3 Regression results on the impact of multimarket contact on credit risk (MH2)
Table 4.5: Regression result of MH2
Variable
Coeff
Biến
Hệ số
NPL_ L1
-.0975672
MMC1
.4788295
DIV
-7.41919
TLTA
13.89682
SIZE
-8.777854
CAP
-119.8612
OETA
505.8847

Std. Err

Sai số
.0108035
.0809334
3.607396
4.050023
1.252146
22.2975
118.9972

t
t
-9.03
5.92
-2.06
-3.43
-7.01
-5.38
4.25

P>t
P>t
0.000
0.000
0.046
0.001
0.000
0.000
0.000

19

CONS
F(7, 40)
Prob > F
AR(2)
Sargan-Hansan test

165.2938

23.94022

6.90

0.000
82.17
0.000
0.196
0.690
Source: Author’s calculation using Stata 12

4.4 Regression results on the impact of multimarket contact on operating performance
(MH3)
Table 4.10: Regression results of MH3
Variable
RAROA_L1
MMC1
MMC2
DEPOTA
DIV

TLTA
CAP
OETA
CONS

RAROA
0.47575***
-0.02303**
-3.54864***
6.43864***
5.52131***
-2.11955***
-31.0173***
0.71449*

0.46001***
-0.03309**
-3.35749***
6.09835***
5.46544***
-2.00596***
-30.3273***
0.85139***

Source: Author’s calculation using Stata 12. Note: ***, **, * denote significance at 1%, 5%
and 10%, respectively.
General conclusion: Regression results show that:
Firstly, multimarket contact increases competition among banks, leading to a reduction in the
quality of loans, reflected in the fact that banks have to lend to businesses with deteriorating
business conditions, resulting in a decrease in profitability of the bank.

Secondly, according to Boyd and De Nicolo (2005), multimarket contact can reduce
competition among banks, creating favorable conditions for higher interest rates, leading to
an increase in credit risk due to ethical issues ( Stiglitz and Weizz, 1981), thereby reducing
banks' profitability. Consistently, multimarket contact increases the Lerner index, indicating
the banks' ability to price their services at higher rates as multimarket contact increases.
The DIV variable has a positive coefficient and is statistically significant, indicating that
banks with a high proportion of non-traditional services are more likely to be profitable. The
TLTA variable has a positive coefficient and is statistically significant, suggesting that the
more loans banks make, the higher the profit. This is in line with the view that banks are able
to convert assets into loans, thereby increasing the interest income earned on these loans.


20

Banks with large equity (CAP) are more profitable, in line with Vo and Batten (2019), which
shows that banks with large equity have higher liquidity, so risk premium from funding the
bank is lower. Finally, the higher the operating cost (OETA), the lower the efficiency. This is
consistent with the hypothesis that increased operating costs reflect the bank's inefficiency in
managing costs. This is in line with Boyld and De Nicolo (2005), which suggests that lower
competition results in the bank being able to set higher prices for services (higher interest
rates), as a result, only firms with high credit risk tend to borrow (consistent with model 2).
This can easily cause business default, leading to a decrease in RAROA.
CONCLUSION OF CHAPTER 4: Chapter 4 presents the regression results of models 1, 2
and 3.

CHAPTER 5 : CONCLUSIONS AND IMPLICATIONS
5.1. Main points from the study
+ For Research Objective 1: The study has quantified the level and direction of the
impact of multimarket contact and other control factors on the competition (Lerner) of
Vietnamese commercial banks. Specifically, the research results show that multimarket

contact, bank size, equity/asset ratio, inflation have positively and statistically significant
impacts on the competition of Vietnamese commercial banks.
With the data set in the study, the results did not establish a statistically significant
impact of Loan loss provision (LLP), state ownership (SOCB), the annual growth rate of
GDP (GDP) on the competition of commercial banks.
+ For the Research Objective 2: The thesis has estimated the impact of multimarket
contact and other factors on credit risk of Vietnamese commercial banks. The results are as
follows:
The thesis has identified factors significantly affecting credit risk of Vietnamese
commercial banks, including Bank Size (SIZE), Non-Interest Income / Total Income (DIV),
Total Loans / Total Assets (TLTA), Equity / Total Assets (CAP), Total operating expenses /
Total assets (OETA).
The research results show that multimarket contact (MMC1) has a positive and
statistically significant impact on the credit risk, meaning that as multimarket contact increase,
credit risk will also rise. This shows that if a commercial bank increases contact in the same


21

market with other commercial banks, they are prone to reduce the quality of loans to increase
customers and profits, leading to an increase in credit risk
Bank size has a negative correlation with credit risk, which is similar to previous
studies of De Haan and Poghosyan (2012), Williams (2014). The study provides evidence in
line with "too-big-to-fail" hypothesis for a sample of Vietnamese commercial banks. Other
control variables such as Non-Interest Income / Total Income (DIV), Total Loans / Total
Assets (TLTA), and Equity Capital / Total Assets (CAP) have the negative effect on credit
risk. On the other hand, the total operating cost / Total assets (OETA) has a positive impact
on credit risk of Vietnamese commercial banks.
+ For Research Objective 3: The study has quantified the extent and direction of the
impact of multimarket contact on operating performance of Vietnamese commercial banks.

The results are as follows:
The study used the RAROA, a risk-adjusted performance proxy. Also, the thesis
employs the GMM method to control for heterogeneity, and address the potential endogeneity
due to unobserved factors affecting operating performance as well as other explanatory
variables.
The results show that factors affecting risk-adjusted operating performance include
Total Deposits / Total Assets (DEPOTA); Non-Interest Income / Total Income (DIV), Total
Loans / Total Assets (TLTA), Equity Capital / Total Assets (CAP), and Total Operating Cost
/ Total Assets (OETA) have significant impact on the operating performance of Vietnamese
commercial banks, with some differerences in each research model. Multimarket contact
(MMC1 and MMC2 measures) has shown a negative impact on operating performance of
Vietnamese commercial banks. The negative effect is also significant for Total Deposits of
total assets (DEPOTA), Equity / Total assets (CAP) and Operating expenses / Total assets
(OETA). The factors that have a positive impact on the operating performance of Vietnamese
commercial banks include Non-interest income / total assets (DIV), and Total loans / Total
assets (TLTA).
In summary, these results show that if the commercial banks increase multimarket
contact with other commercial banks, they are more likely to experience a reduction in the
quality of loans. This means a simultaneous increase in credit risk and reduction of riskadjusted operating performance of Vietnamese commercial banks.


22

5.2. Policy implications
5.2.1. For bank administrators
Firstly, on the relationship between multimarket contact and the competition of commercial
banks: The research results suggest that multimarket contact has a significant impact on the
competition of commercial banks; therefore, the more banks are exposed to more competitors
in the market, the level of competition is likely to increase. Managers of commercial banks
need to focus more on increasing the internal strength of the banks, through more

diversification and more intense concentration on service quality to increase the
competitiveness of commercial banks.
Secondly, on the relationship between multimarket contact and credit risk. Administrators
should reckon the impact of multimarket contact on their bank’s credit risk, because from the
research results it is clear that if the commercial banks increase its multimarket contact, i.e. it
increases the contact with other commercial banks in the same area, it will increase credit risk
and reduce operating performance. This is partly due to the pressure to increase annual sales
of commercial banks, and this problem creates pressure to increase the amount of loans at
branches when all other commercial banks seem to desire the same thing. The forced
expansion of lending areas and the need to maintain existing market shares inadvertently
reduce loan quality, resulting in an increase in credit risk. Therefore, for the increasingly
fierce competition, in addition to maintaining market share, the administrators of commercial
banks need to pay attention to the number of other commercial banks operating in the same
areas, need to determine market segments and customers that the bank have advantages over
other banks.
Thirdly, bank administrators need to pay attention to the size of deposits, expressed by the
ratio of deposits / total assets. The research results show that this ratio has a negative impact
on operating performance, suggesting that the increase in multimarket contact among banks
may increase the cost of mobilizing capital. Therefore, attention should be paid to the
efficient use of mobilized capital.
Fourth, the research results show that the increase in non-interest income heightens the
operating performance. Therefore, for bank managers in addition to focusing on the bank's
traditional business of mobilizing and lending, it is necessary to consider the move of


23

diversifying services associated with traditional credit products rather than diversifying fields
of operations.
Fifthly, from the research results show that the increase in operational costs of commercial

banks also leads to an increase of credit risk and reduction of operating performance. This
shows that the commercial bank managers need to maintain high loan quality, regularly
demanding the reviews of bad debts.
Sixth, the expansion of a bank's equity size does not necessarily strengthen the bank. Bank
administrators need to properly manage the bank expansion. Increasing the scale of banking
activities is a decent strategy to enhance the position of the bank compared to rival banks,
creating trust for customers. However, the increase in scale should be in tandem with the
appropriate exploitation of existing resources, thus helping the bank to operate efficiently and
stably.
5.2.3 For regulatory bodies
The results of the study show that the increase in multimarket contact, the greater the
competition pressure, shrinking the operating performance and heightening credit risk. It can
be said that the increase in multimarket contact of banks will be conducive to the reduction of
operating performance, which is in contrast to the principal purpose of competition policy,
which is to promote fair competition among banks.
Firstly, the state regulatory agencies on banking issues should have measures to supervise the
increase of capital of commercial banks, ensuring that the increase of capital is based on their
authentic capacity. At the same time, through reviewing the lack of capital of commercial
banks, there should be tough measures to thoroughly solve deficient banks, while the
activities of large banks should be monitored to ensure that those banks operate in accordance
with standards and regulations set by the State Bank.
Secondly, it is necessary to review and consolidate regulations, processes, and laws related to
the operations of commercial banks to minimize risks, especially to closely review banks
with high debt ratios to reduce systemic risk, as well as control bankruptcy risk in
Vietnamese commercial banking system.
Thirdly, since rising inflation also increases the competition of commercial banks, it is
necessary to develop appropriate inflation control policies to create competitive advantage
among banks.

24

5.3. Limitations and directions for future studies
Firstly, the study was conducted in the period of 2008-2017, when Vietnamese commercial
banks had been restructuring. Although the study has filled the research gap for commercial
banks during this period, the sample did not include joint-venture commercial banks and
foreign banks. To overcome this limitation, the author proposes that future studies examine a
longer period with a scope of research comprising joint-venture commercial banks and banks
with 100% foreign capital.
Secondly, although the author finds evidence of the impact of multimarket contact and credit
risk on operating performance of commercial banks, the research has not studied the impact
among banks with different ownership types, e.g. local and foreign commercial banks.
Therefore, to overcome this limitation, future studies may expand the scope to include
different banking groups in different countries. Through this it is possible to consider this
effect under different institutional settings in other countries around the world.

THE CONCLUSION OF CHAPTER 5
In chapter 5, the author summarized the results obtained and proposed recommendations
to increase competition, control credit risk and improve operating performance of commercial
banks in the context of the increasing multimarket contact in Vietnam.
.