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MINISTRY OF EDUCATION AND TRAINING

STATE BANK OF VIETNAM

BANKING UNIVERSITY – HOCHIMINH CITY

NGUYEN THI ĐOAN TRANG

THE IMPACT OF INCOME DIVERSIFICATION ON
THE PERFORMANCE OF VIETNAMESE COMMERCIAL BANKS

SUMMARY OF PHD THESIS

Major: Finance – Banking
Code: 9 34 02 01
Scientific instructor: Assoc.Prof., Dr. Nguyen Thi Loan

HO CHI MINH CITY - 2020


CHAPTER 1: OVERVIEW OF THE RESEARCH
1.1.

The necessary of the research
To cope with competition in banking business and to be required by the Government,

commercial banks have been expanding from traditional activities such as raising funds, lending
to non-interest income activities for bank income diversification. As a result, bank performance
will be affected accordingly.
Understanding the relationship between bank’s income diversification and bank
performance is important for bank executives, policy makers, and investors because the decisionmakers want to know whether income diversification will increase the bank value.

There are two competing views on the relationship between bank income diversification
and bank performance. On one hand, bank income diversification will increase profits and reduce
risks for banks. There have been empirical studies supporting this hypothesis such as Elsas,
Hackethal & Holzhäuser (2010), Gurbuz, Yanik & Ayturk (2013), Meslier, Tacneng & Tarazi
(2014), Lee, Yang & Chang (2014), Moudud-Ul-Huq, Zheng, Gupta & Ashraf (2018). On the
other hand, bank income diversification will reduce bank profits and increase risks such as
DeYoung and Rice (2004), Stiroh and Rumble (2006), Lepetit, Nys, Rous & Tarazi (2008).
The current studies on the impact of income diversification on the commercial banks’
performance lead to different conclusions. In addition, the explanation of why bank income
diversification is different, the causes of income diversification have not been clearly explained
although there are also many studies abroad that research on factors influencing bank income
diversification (such as Landi & Venturelli (2001), Hahm (2008), Pennathur et al (2012),
Nguyen, Skully & Perera (2012), Firth, Li & Wang (2013) ) Murharsito (2015), Meng, Cavoli &
Deng (2017), Hamdi, Hakimi & Zaghdoudi (2017), Ozek (2017), Capraru, Ihnatov & Pintilie
(2018), Robertho & Wibowo (2018)).
In Vietnam, there are some studies on the effects of income diversification on banks'
performance. These studies show that income diversification increases performance of
Vietnamese commercial banks (Ho Thi Hong Minh and Nguyen Thi Canh 2015; Vo Xuan Vinh
and Tran Thi Phuong Mai 2015; Le Van Hau and Pham Xuan Quynh 2016; Nguyen Minh Sang
2017). However, when considering the risk factor, the empirical studies have not yet reached a


conclusion on the impact of income diversification on the risk-adjustment performance of
Vietnamese commercial banks. Thus, there are no conclusions about the benefits of income
diversification. Besides, in Vietnam, there is also very little research on the factors affecting
income diversification. Especially, there are very few researchs on the impact of income
diversification on performance of Vietnamese commercial banks and the factors affecting
income diversification of Vietnamese commercial banks, so that these banks have a full
assessment of the benefits of income diversification and the factors that influence to income
diversification, in order to impact these factors to change the level of income diversification,

bringing the highest efficiency to the bank.
Therefore, the research topic "The impact of income diversification on the performance
of Vietnamese Commercial Banks" is necessary to supplement the theoretical basis as well as
empirical evidence on the impact of income diversification on bank performance and riskadjusted performance at Vietnamese commercial banks, as well as identifying factors affecting
income diversification at Vietnamese commercial banks. Hence, it helps Vietnamese commercial
banks have a basis to diversify their income accordingly to increase the bank performance.

1.2.

Objectives and research questions
Overall objectives:
The objective of this study is to provide more theoretical basis and empirical evidence to

conclude about the impact of income diversification on business performance and risk-adjusted
performance at Vietnamese commercial banks. In addition, in order to increase or decrease the
income diversification level for increasing the bank performance, it is necessary to understand
the factors that affect income diversification, so that the bank will affect these factors for
diversifying bank income. Therefore, the dissertation determines the factors affecting income
diversification to suggest solutions for Vietnamese commercial banks to change these factors as
well as implement appropriate income diversification for increasing bank performance and riskSpecific research objectives:
- Evaluate the impact of income diversification on performance and risk-adjusted
performance at Vietnamese commercial banks
- Evaluate the factors affecting income diversification at Vietnamese commercial banks


- Propose solutions to diversify income for increasing performance at Vietnamese
commercial banks
Research questions:
- How does income diversification affect the performance of Vietnamese commercial
banks?

- How does income diversification affect the risk-adjusted performance of Vietnamese
commercial banks?
- What are factors affect income diversification at Vietnamese commercial banks?
- What are solutions to help Vietnamese commercial banks increase their performance?

1.3.

Object and scope of the research
Research subject: The relationship between income diversification and bank performance

at Vietnamese commercial banks.
Scope of research: 28 Vietnamese commercial banks.
Research period: From 2008 to 2018

1.4.

Research Methods
For the first research objective, the author developed the model of the impact of income

diversification on performance of Vietnamese commercial banks from the research of Lee et al.
(2014) and some related studies. This model also is applied for two sets of measurement of
income diversification using the Herfindahl Hirschman index and the non-interest rate ratio.
For the second research objective, the research is based on the research of Hamdi, Hakimi
and Zaghdoudi (2017) and some related studies, and adjusted, omitted and added some variables
to build research model of factors affecting income diversification in Vietnamese commercial
banks. Compared to previous studies, this study simultaneously considers 3 risks in banking
operations, including bankruptcy risk, credit risk, liquidity risk and adding financial openness
variable.
The author used two-step SGMM (SystemGMM) estimation by Arellano & Bover (1995)
and Blundell & Bond (1998), an effective research method to fix the defects of the model for the

two above research models.


For the third research objective, based on the research results of above two models, the
author recommends solutions to diversify income contributing to increase performance of
Vietnamese commercial banks.

1.5.

Contribution of the research
Compared to previous studies, this study has the following new contributions:
- The research approach towards researching both the factors affecting income

diversification and the impact of income diversification on performance of commercial banks in
Vietnam.
- The research has systematized empirical studies on factors affecting income
diversification and studies on the impact of income diversification on bank performance.
- The research examines the impact of income diversification on performance, and the
impact of income diversification on risk-adjusted performance of Vietnamese commercial banks,
while other studies in Vietnam often consider only one aspect. The research results confirm the
benefits of income diversification - increasing performance and risk-adjusted performance of
commercial banks in Vietnam. In addition, the study also examines the model in the economic
and financial openness of Vietnam and the results show that financial openness has a positive
impact on performance and risk-adjusted performance of Vietnamese commercial banks.
- In the model of factors affecting income diversification at Vietnamese commercial
banks, this study has identified and tested all three types of risks in banking operations, including
bankruptcy, credit risk and liquidity risk. Furthermore, the study also assesses these effects in
condition of the financial openness in Vietnam and the results show that financial openness is
also one of the factors positively affecting income diversification of Vietnamese commercial
banks.

- In both research models, income diversification was measured in two ways, respectively,
the diversification index (DIV) and the non-interest income rate (NON). The research results of
these two ways of measurement do not conflict with each other, which confirms that these
research results are more reliable.
In addition, in practical terms, this research helps Vietnamese commercial banks to
determine the benefits of income diversification on banking performance and identify the factors
affecting revenue diversification as well as suggests appropriate policies for the bank to diversify


income for increasing bank performance. Besides, the study also provides useful information for
researchers in the banking sector to continue researching more deeply and broadly on related
issues.
1.6.

Research structure

The research topic includes 5 chapters:
Chapter 1: OVERVIEW OF THE RESEARCH THESIS.
Chapter 2: THEORETICAL BASIS AND LITERATURE REVIEW.
Chapter 3: RESEARCH METHODS.
Chapter 4: RESEARCH RESULTS AND DISCUSSION.
Chapter 5: CONCLUSION AND RECOMMENDATION.
Summary of chapter 1


CHAPTER 2: THEORETICAL BASIS AND LITERATURE REVIEW
2.1.

Theoretical basis

2.1.1. Theoretical basis of bank income diversification
2.1.1.1.

The concept of bank income diversification

2.1.1.2.

The measurement of bank income diversification

-

Non-interest income ratio

-

Herfindahl Hirschman index

-

Share ratio of each type of non-interest income

2.1.2. Theoretical basis of bank performance
2.1.2.1.

The concept of bank performance

2.1.2.2.

The measurement of bank performance

-

Financial ratio

-

Frontier efficiency

2.1.3. The theory of income diversification and bank performance
2.1.3.1.

Modern portfolio theory

2.1.3.2.

Economies of scale theory

2.1.3.3.

Market power theory

2.1.3.4.

Efficiency structure theory

2.2.

Literature review

2.2.1. Literature review of impact of bank income diversification on bank performance

2.2.1.1.

Income diversification has a positive impact on bank performance

2.2.1.2.

Income diversification has a negative impact on bank performance

2.2.1.3.

Literature review of impact of income diversification on bank performance in Vietnam

2.2.2. Literature review of factors affecting bank income diversification
It is seen that the research gap in the topic of income diversification of Vietnamese
commercial banks is:
-

The study does a full range of factors affecting income diversification and the impact
of income diversification on Vietnamese commercial banks’ performance to find out
factors affecting income diversification and the impact of income diversification on


bank performance in order to change these factors and to implement an appropriate
income diversification strategy for improving bank performance.
-

The study examines three risk factors in banking operations, namely credit risk,
liquidity risk and bankruptcy risk affecting bank income diversification.

-

The study uses the simultaneous income diversification measurement method through
the non-interest income rate and the Herfindahl Hirschman index to confirm the
conclusions of the study.

-

The study examines the impact of income diversification on bank performance under
both profitability and risk perspective.

-

The study adds the financial openness variable in the model of bank income
diversification.

Therefore, this dissertation is done to fill the above research gaps in order to supply more
theoretical basis and empirical evidence on the impact of income diversification on Vietnamese
commercial banks’ performance. The study examines the impact of income diversification on
performance by considering its impact on performance and risk- adjusted performance at
Vietnamese commercial banks. Besides, this research also carries out a study of factors
(including the bank performance) that affect income diversification at Vietnamese commercial
banks to identify factors affecting income diversification and to implement the appropriate
income diversification for improving bank performance. To measure income diversification, the
study also applied two methods (non-interest income rate and Herfindahl Hirschman index) to
compare these results and make conclusions.
Summary of chapter 2


CHAPTER 3: RESEARCH METHOD
3.1.

Research process

3.2.

The research model of impact of income diversification on bank performance

3.2.1. The research model of impact of income diversification on Vietnamese commercial
banks’ performance
Yit = β0 + β1Yit-1 + β2DIVit + β3SIZEit + β4ETAit + β5GROWit + β6LTAit + β7LLPit + β8DTAit +
β9OTRit + β10GDPit + β11INFit + β12FOit + λi + ԑit
3.2.2. Research hypothesis

Table 3.1: Summary of variables in the research model of impact of income
diversification on bank performance
Symbol

ROA

ROE
SDROA
SDROE

DIV

SIZE

Measurement

Data

source

Research

Dependent Variable
Profit
after Balance
Lee et al (2014), Meslier et al
tax/Average
total sheet,
(2014), Vo Xuan Vinh and
assets
Income
Tran Thi Phuong Mai (2015)
Profit
after statement
tax/Average equity
ROA/standard
Stiroh & Rumble (2006),
deviation of ROA
Lepetit
et
al
(2008),
Chiorazzo et al (2008), Sanya
ROE/standard
& Wolfe (2011), Gurbuz et al
deviation of ROE
(2013), Batten and Vo (2016),
Nguyen Quang Khai (2016)

Independent variables
2
2
1 – (INT + NON )
Income
Stiroh & Rumble (2006),
INT = TNL / TNHĐ statement
Chiorazzo et al (2008)
NON = TNNL/TNHĐ
Ln(total assets)
Balance
Stiroh & Rumble (2006),
sheet
Lepetit
et
al
(2008),
Chiorazzo et al (2008), Sanya
& Wolfe (2011), Gurbuz et al
(2013), Lee et al (2014),
Meslier et al. (2014), Ho Thi
Hong Minh and Nguyen Thi
Canh (2015), Batten and Vo
(2016), Nguyen Quang Khai
(2016)

Expected Expected
sign on
sign on
ROA,

SDROA,
ROE
SDROE

+

+

+

+


ETA

Equity/Total assets

GROW

Total assets growth Balance
rate
sheet

LTA

Loans/Total assets

Balance
sheet

LLP

Balance
sheet
Balance
sheet

GDP

Loan
loss
provision/Total assets
Deposits
from
customers/
Total
assets
Operating
expenses/Operating
income
GDP growth rate

INF

Inflation rate

IMF

FO

Foreign
Direct IMF,
Investment/Gross
Worldbank
Domestic
Product
(FDI/GDP)

DTA

OTR

Balance
sheet

Income
statement
Worldbank

Stiroh & Rumble (2006),
Lepetit et al (2008), Sanya &
Wolfe (2011), Gurbuz et al
(2013), Lee et al (2014),
Meslier et al (2014), Ho Thi
Hong Minh and Nguyen Thi
Canh (2015), Nguyen Quang
Khai (2016)
Stiroh & Rumble (2006),
Sanya & Wolfe (2011),
Gurbuz et al (2013), Lee et al

(2014), Meslier et al (2014),
Vo Xuan Vinh and Tran Thi
Phuong Mai (2015), Nguyen
Quang Khai (2016)
Stiroh & Rumble (2006),
Lepetit et al (2008), Sanya &
Wolfe (2011), Gurbuz et al
(2013), Lee et al (2014),
Meslier et al. (2014), Vo
Xuan Vinh and Tran Thi
Phuong Mai (2015), Ho Thi
Hong Minh and Nguyen Thi
Canh (2015), Nguyen Quang
Khai (2016)
Lee et al (2014)

+

+

+

-

+

-

-

-

Lepetit et al (2008), Lee et al
(2014), Vo Xuan Vinh and
Tran Thi Phuong Mai (2015)
Ho Thi Hong Minh and
Nguyen Thi Canh (2015)

+

+

-

-

Ho Thi Hong Minh and
Nguyen Thi Canh (2015)
Ho Thi Hong Minh and
Nguyen Thi Canh (2015)
Simplice Anutechia (2010),
Hanh (2010)

+

+

-

-

+

+

Source: Synthesis of the author


3.3.

The research model of factors affecting bank income diversification

3.3.1. The research model of factors affecting Vietnamese commercial banks’ income
diversification
DIVit = β0 + β1DIVit-1 + β2BPit + β3SIZEit + β4ETAit + β5LTAit + β6ZSCOREit + β7LTDit +
β8LLPit + β9OTRit + β10GDPit + β11INFit + β12FOit + λi + ԑit
3.3.2. Research hypothesis
Table 3.2: Summary of variables in the research model of factors
affecting bank income diversification
Sym
bol

Measurement

1 – (INT2 + NON2)
INT = TNL / TNHĐ
NON = TNNL/TNHĐ
NON NON = TNNL/TNHĐ
DIV

ROA Profit
tax/Average
assets

after
total

ROE

Profit
after
tax/Average equity

ZSC
L

Ln(Zscore)

SIZE Ln(Total assets)

Data
source

Research

Expected
sign

Dependent variable
Income

Meng, Cavoli & Deng (2017)
statement
Income
statement

Hahm (2008), Robertho & Wibowo
(2018), Capraru, Ihnatov & Pintilie
(2018)
Independent variables
Balance
Hahm (2008), Murharsito (2015),
sheet,
Ozek (2017), Hamdi, Hakimi &
Income
Zaghdoudi (2017), Capraru, Ihnatov
statement & Pintilie (2018)
Balance
sheet,
Income
statement
Balance
Meng, Cavoli & Deng (2017)
sheet,
Income
statement
Balance
Hahm (2008), Nguyen, Skully &
sheet
Perera
(2012),

Pennathur,
Subrahmanyam & Vishwarr (2012),
Firth, Li & Wang (2013), Hamdi,
Murharsito (2015), Ozek (2017),
Hakimi & Zaghdoudi (2017),
Robertho & Wibowo (2018) và
Capraru, Ihnatov & Pintilie (2018)

+

+

-

+


LTD
ETA

Loans/Deposits from
customers
Equity/ Total assets

Balance
sheet
Balance
sheet

LTA

Loans/ Total assets

Balance
sheet

LLP

Loan loss provision/
Total assets

Balance
sheet

OTR

Operating
expenses
/Operating income

Income
statement

GDP

GDP growth rate

Hamdi, Hakimi & Zaghdoudi
(2017), Meng, Cavoli & Deng (2017)
Hahm

(2008),
Pennathur,
Subrahmanyam & Vishwarr (2012),
Nguyen, Skully & Perera (2012)
Hamdi, Hakimi & Zaghdoudi
(2017), Meng, Cavoli & Deng (2017)
Hahm
(2008),
Pennathur,
Subrahmanyam & Vishwarr (2012),
Murharsito (2015), Hamdi, Hakimi
& Zaghdoudi (2017)
Hahm (2008), Nguyen, Skully &
Perera
(2012),
Pennathur,
Subrahmanyam & Vishwarr (2012),
Firth, Li & Wang (2013), Murharsito
(2015), Ozek (2017)
Hahm (2008), Nguyen, Skully &
Perera (2012), Capraru, Ihnatov &
Pintilie (2018), Robertho & Wibowo
(2018)

+

-

+

+

Worldbank Hahm (2008), Nguyen, Skully &
Perera (2012), Hamdi, Hakimi &
Zaghdoudi (2017), Robertho &
Wibowo (2018), Capraru, Ihnatov &
Pintilie (2018)
INF Inflation rate
IMF
Hamdi, Hakimi & Zaghdoudi
(2017), Meng, Cavoli & Deng
(2017), Capraru, Ihnatov & Pintilie
(2018)
FO
Foreign
Direct
IMF,
Vithessonthi (2014)
+
Investment/Gross
Worldbank
Domestic
Product
(FDI/GDP)
Source: Synthesis of the author
3.4. Research data
The study uses secondary data, which are audited financial statements of 28 Vietnamese
commercial banks during 11 years from 2008 to 2018. The research data is an unbalanced panel
including 307 observations. Data for calculating internal variables is obtained from audited
financial statements, annual reports of commercial banks. Data for calculating external factors in

the macro environment is collected from International Monetary Fund (IMF) and World Bank
(World Bank).


3.5.

Estimation method
For the regression model, the study uses two-step SGMM (SystemGMM) by Arellano &

Bover (1995) and Blundell & Bond (1998) for perfect estimation. Blundell and Bond (1998)
demonstrated that SGMM has smaller and more efficient variance, thus improving the accuracy
in the estimation.
Estimation of two-step SGMM is appropriate because the dynamic model with the lag
variable of the dependent variable will have endogeneity problems; causal models and income
diverfisication variable and bank performance variable can be correlated with error terms; bank’s
specific characteristics that are constant over time can also be correlated with error terms; the
existence of lagged dependent variable in the model can also cause autocorrelation; The study
dataset consists of short time period and relatively longer bank units. SGMM is used to solve the
endogeneity problem of some explanatory variables through instrumental variables. The
effectiveness of the estimation depends on the appropriateness of the instrument variable.
Therefore, the study carried out the Hansen test for instrument over-identification and AR2 test
for autocorrelation.
Summary of chapter 3


CHAPTER 4: RESEARCH RESULTS AND DISCUSSION
4.1. Descriptive statistics of research data

4.2. Research results
4.2.1. The research results on the impact of income diversification on bank performance

4.2.1.1.

The research results on the impact of income diversification measured by DIV
index on bank performance

According to Gujarati (2004), if the correlation coefficient between the independent
variables exceeds 0.8, it is likely to lead to high multicollinearity in the model. Then the sign of
the regression coefficient in the model may be changed, leading to incorrect research results.
Table 4.5 describes the correlation coefficient matrix between pairs of independent variables in
the model, showing that the correlation coefficient of all pairs of independent variables are less
than 0.8. Therefore, there is no multi-collinearity that seriously affects the model's estimation.
In all models, the Hansen test result for over-identification of the tool variables shows that
the p-value is greater than 0.05, meaning the tool variable is over-identifying. In addition, the
second-order autocorrelation (AR2) test result shows p-value is greater than 0.05, so the residue
in the model does not exist for second-order autocorrelation. Thus, test results for SGMM are
good, so estimation found in the model is firm and completely analytical.
Table 4.3: Regresssion results of impact of DIV on ROA, ROE
Variables
L.ROA

(1)
ROA
0.328***
[5.93]

L.ROE
DIV
SIZE
GROW
ETA

LTA

(2)
ROE

0.00983***
[5.51]
0.00101***
[2.75]
0.00257***
[3.47]
0.0588***
[6.21]
0.0104***
[3.50]

(3)
ROA

(4)
ROE

0.256***
[9.82]
0.551***
[8.86]
0.0967***
[5.16]
0.00580
[1.63]

0.0299***
[3.92]
0.0610
[1.01]
0.0787***
[2.67]

0.00975***
[5.51]
0.00142***
[4.73]
0.00151***
[2.70]
0.0621***
[11.03]
0.00415
[1.42]

0.454***
[9.03]
0.0732***
[4.28]
0.0152***
[5.68]
0.0152**
[2.15]
0.103
[1.50]
0.0257
[0.90]

-0.00314
0.0000141
[-0.89]
[0.00]
-0.238***
-0.900
LLP
[-3.45]
[-1.11]
-0.000778***
-0.00810***
OTR
[-48.35]
[-59.03]
-0.00914
0.0600
GDP
[-0.37]
[0.26]
0.0346***
0.280***
INF
[6.29]
[3.67]
0.165***
1.893***
FO
[5.34]

[7.29]
-0.0255***
-0.164**
-0.0388***
-0.400***
_cons
[-3.67]
[-2.52]
[-5.95]
[-7.37]
28
28
28
28
Number of group
21
21
22
22
Number of instrument
0.489
0.615
0,498
0,548
AR2
0.238
0,300
0,253
0,154
Hansen test

*, **, *** represent significance at the 10%, 5%, 1% levels, respectively
Source: Calculated from Stata
DTA

-0.00640*
[-1.84]
-0.258***
[-3.31]
-0.000787***
[-48.93]
0.0422
[1.53]
0.0231***
[3.46]

-0.0266
[-0.74]
-1.205
[-1.52]
-0.00809***
[-81.45]
0.571**
[2.26]
0.133
[1.61]

Table 4.4: Regresssion results of impact of DIV on SDROA, SDROE
(5)
(6)
(7)

(8)
Variables
SDROA
SDROE
SDROA
SDROE
L.SDROA

0.606***
[8.55]

L.SDROE
DIV
SIZE
GROW
ETA
LTA
DTA

1.899***
[6.64]
0.153***
[2.69]
0.378**
[2.31]
3.868***
[3.28]
2.083***
[3.72]
-0.626

[-0.87]

0.500***
[7.11]
0.669***
[11.91]
1.936***
[5.59]
0.0316
[0.43]
0.725***
[3.36]
-0.282
[-0.22]
2.004***
[3.59]
-0.492
[-0.66]

1.691***
[6.07]
0.314***
[4.86]
0.147
[1.13]
5.598***
[4.59]
1.666***
[2.92]
-0.817

[-1.22]

0.583***
[11.76]
1.711***
[4.78]
0.139*
[1.81]
0.344
[1.54]
1.134
[0.85]
1.197*
[1.95]
-0.0363
[-0.05]


-22.09
[-1.62]
-0.0314***
[-16.80]
9.573*
[1.70]
3.274**
[2.19]

-11.37
-14.80
[-0.97]

[-1.24]
-0.0296***
-0.0347***
OTR
[-11.91]
[-13.08]
-6.281
6.939
GDP
[-1.04]
[1.12]
4.601***
4.350***
INF
[3.22]
[3.31]
30.81***
30.57***
FO
[4.42]
[4.08]
-4.551***
-2.510**
-8.045***
-5.446***
_cons
[-5.06]
[-2.17]
[-7.04]
[-4.32]

28
28
28
28
Number of group
21
21
22
22
Number of instrument
0,540
0,755
0,682
0,679
AR2
0,497
0,481
0,307
0,633
Hansen test
*, **, *** represent significance at the 10%, 5%, 1% levels, respectively
Source: Calculated from Stata
LLP

-25.15**
[-2.05]
-0.0352***
[-19.60]
18.10***
[2.98]

2.375
[1.50]

The research results in tables 4.3 and 4.4 show that income diversification has a positive
impact on performance (ROA, ROE) and risk-adjusted performance (SDROA, SDROE) of
Vietnamese commercial banks in the period 2008-2018 with the significance level of 1%.
Because the study focuses on the impact of income diversification on the performance of
commercial banks in the context of a control variable called financial openness, the study
analyzes the results from regression models (3), (4), (7), (8).
Research results on the impact of bank income diversification shows that income
diversification has a positive impact on Vietnamese commercial banks’ performance and riskadjusted performance. In addition, factors such as the lagged variable of bank performance, bank
size, growth rate, capital adequacy ratio, loans ratio, inflation, and financial openness also have
positive impact, while credit risk, operating expenses ratio to operating income have negative
impact on Vietnamese commercial banks’ performance and risk-adjusted performance. The
study has not found a relationship between the variables of the deposit ratio, economic growth
rate and bank performance.


4.2.1.2.

The research results on the impact of income diversification measured by noninterest income rate on bank performance

Variables
L.ROA

Table 4.6: Regresssion results of impact of NON on ROA, ROE
(9)
(10)
(11)
(12)

ROA
ROE
ROA
ROE
0.262***
0.320***
[5.86]

[10.33]

0.464***
[9.18]
0.0126***
0.0113***
0.0771***
NON
[4.34]
[3.89]
[2.88]
0.00121***
0.00150***
0.0151***
SIZE
[3.28]
[5.08]
[5.37]
0.00311***
0.00207***
0.0172**
GROW

[4.51]
[3.43]
[2.18]
0.0600***
0.0611***
0.0870
ETA
[5.90]
[10.53]
[1.15]
0.0112***
0.00574**
0.0333
LTA
[3.78]
[2.00]
[1.23]
-0.00528
-0.00325
0.00197
DTA
[-1.52]
[-0.91]
[0.06]
-0.297***
-0.264***
-1.109
LLP
[-3.95]
[-3.90]

[-1.34]
-0.000920***
-0.000906***
-0.00902***
OTR
[-36.29]
[-39.43]
[-34.64]
0.0246
-0.0213
-0.0740
GDP
[0.94]
[-0.84]
[-0.35]
0.0259***
0.0341***
0.269***
INF
[3.67]
[6.22]
[3.58]
0.148***
1.825***
FO
[4.29]
[6.30]
-0.0287***
-0.169***
-0.0384***

-0.383***
_cons
[-4.20]
[-2.67]
[-6.19]
[-6.77]
28
28
28
28
Number of group
21
21
22
22
Number of instrument
0,624
0,433
0,603
0,420
AR2
0,266
0,299
0,232
0,190
Hansen test
*, **, *** represent significance at the 10%, 5%, 1% levels, respectively
Source: Calculated from Stata
L.ROE

0.552***
[9.14]
0.106***
[3.63]
0.00679**
[1.97]
0.0318***
[3.71]
0.0473
[0.72]
0.0898***
[3.31]
-0.0214
[-0.61]
-1.518*
[-1.92]
-0.00931***
[-34.13]
0.395
[1.58]
0.132
[1.62]


Table 4.7: Regresssion results of impact of NON on SDROA, SDROE
(13)
(14)
(15)
(16)
Variables

SDROA

L.SDROA

0.621***
[8.86]

SDROE

SDROA
0.495***

SDROE

[7.26]

0.586***
[12.51]
2.064***
1.701***
1.700***
NON
[4.87]
[4.16]
[3.36]
0.190***
0.338***
0.148*
SIZE

[3.34]
[5.44]
[1.89]
0.423**
0.222
0.416*
GROW
[2.49]
[1.59]
[1.85]
4.198***
5.633***
0.762
ETA
[2.99]
[4.20]
[0.53]
2.290***
1.818***
1.368**
LTA
[4.07]
[3.07]
[2.27]
-0.646
-0.823
-0.00611
DTA
[-0.89]
[-1.20]

[-0.01]
-28.05**
-15.42
-20.73
LLP
[-1.97]
[-1.25]
[-1.52]
-0.0535***
-0.0491***
-0.0549***
OTR
[-13.05]
[-11.52]
[-10.93]
4.122
-9.187
3.752
GDP
[0.75]
[-1.60]
[0.61]
2.642*
4.378***
4.169***
INF
[1.79]
[3.10]
[3.08]
30.23***

30.47***
FO
[4.27]
[4.01]
-4.844***
-2.469**
-8.178***
-5.282***
_cons
[-5.33]
[-2.12]
[-7.46]
[-4.12]
28
28
28
28
Number of group
21
21
22
22
Number of instrument
0,779
0,554
0,937
0,540
AR2
0,401
0,340

0,268
0,528
Hansen test
*, **, *** represent significance at the 10%, 5%, 1% levels, respectively
L.SDROE

0.676***
[12.02]
2.102***
[4.08]
0.0468
[0.64]
0.759***
[3.45]
-0.547
[-0.40]
2.220***
[4.14]
-0.409
[-0.54]
-32.30**
[-2.41]
-0.0589***
[-12.72]
13.88**
[2.25]
2.210
[1.34]

Source: Calculated from Stata

The results in tables 4.6 and 4.7 show that income diversification, measured by the noninterest income rate, has a positive impact on bank performance (ROA, ROE) and risk-adjusted
performance (SDROA, SDROE) of Vietnamese commercial banks in the period 2008-2018 at


the significance level of 1%. This result is similar to the result of the above model with
measurement of income diversification by DIV index.
4.2.2. The research result on factors affecting bank income diversification
4.2.2.1.

The research result on factors affecting bank income diversification measured
by DIV index

Table 4.9: Regresssion results of factors affecting bank income diversification
measured by DIV index
(17)
(18)
(19)
(20)
Variables
DIV
DIV
DIV
DIV
L.DIV
ROA

0.409***
[11.69]
6.464***
[6.25]

0.435***
[12.72]

0.380***
[8.22]

0.438***
[3.45]
0.0200***
0.0260***
0.0259***
SIZE
[4.99]
[5.78]
[5.42]
0.243
0.329**
0.742***
ETA
[1.52]
[2.01]
[5.20]
-0.220***
-0.187***
-0.205***
LTA
[-3.49]
[-4.47]
[-4.85]

0.00748
0.0115
0.00841
ZSC
[0.59]
[0.94]
[0.65]
-0.00531
-0.0361
-0.0320
LTD
[-0.15]
[-1.06]
[-0.95]
5.004***
4.640***
4.307***
LLP
[3.65]
[4.09]
[4.00]
0.000333
-0.000400
-0.00101
OTR
[0.44]
[-0.47]
[-1.05]
-2.360***
-2.693***

-2.833***
GDP
[-3.04]
[-3.65]
[-4.01]
-0.960***
-0.782***
-0.796***
INF
[-6.97]
[-6.99]
[-6.39]
2.148***
2.421***
FO
[3.46]
[3.81]
-0.00966
0.00895
-0.224*
-0.252*
_cons
[-0.09]
[0.09]
[-1.80]
[-1.83]
28
28
28
28

Number of group
27
27
28
28
Number of instrument
0,941
0,975
0,993
0,957
AR2
0,075
0,073
0,064
0,063
Hansen test
*, **, *** represent significance at the 10%, 5%, 1% levels, respectively
ROE

0.588***
[5.36]
0.0183***
[4.45]
0.745***
[4.67]
-0.239***
[-3.53]
0.00132
[0.10]
-0.00129

[-0.03]
4.518***
[3.62]
-0.000359
[-0.42]
-2.555***
[-3.15]
-1.005***
[-6.46]

0.372***
[8.31]
5.107***
[4.55]


Source: Calculated from Stata
The research results in Table 4.9 show that factors that have a positive influence on
income diversification at Vietnamese commercial banks are: previous income diversification,
bank performance, bank size, capital adequacy ratio, credit risk and financial openness.
Meanwhile, loan ratio, economic growth rate and inflation rate have a negative effects on
Vietnamese commercial banks’ income diversification.
4.2.2.2. The research result on factors affecting bank income diversification measured by
NON index
Table 4.10: Regresssion results of factors affecting bank income diversification
measured by NON index
(5)
(6)
(7)
(8)

Variables
NON
NON
NON
NON
L.NON
ROA

0.279***
[7.99]
5.957***
[4.83]

0.0131**
[2.50]
0.0508
[0.33]
-0.158***
[-2.72]
0.0108
[1.14]
-0.0558*
[-1.79]
4.511***
[4.56]
0.0126***
[13.89]
-1.256**
[-2.14]
-0.706***

[-6.87]

0.415***
[4.38]
0.0124**
[2.51]
0.447***
[3.08]
-0.151***
[-3.07]
0.00708
[0.72]
-0.0398
[-1.34]
3.505***
[3.81]
0.0110***
[13.95]
-1.528**
[-2.44]
-0.696***
[-6.42]

0.0226
[0.27]

0.0154
[0.18]

ROE

SIZE
ETA
LTA
ZSC
LTD
LLP
OTR
GDP
INF

0.343***
[12.56]

FO
_cons

0.272***
[7.48]
4.371***
[4.38]

0.0193***
[3.99]
0.199
[1.60]
-0.140***
[-3.52]
0.0176**
[2.05]
-0.0759**

[-2.35]
4.581***
[4.39]
0.0118***
[13.04]
-1.771***
[-2.94]
-0.572***
[-5.78]
2.114***
[3.67]
-0.205***
[-2.65]

0.312***
[10.24]

0.243***
[3.25]
0.0215***
[4.87]
0.515***
[3.95]
-0.146***
[-4.72]
0.0143*
[1.80]
-0.0670**
[-2.26]
3.630***

[3.35]
0.0101***
[14.11]
-2.037***
[-3.24]
-0.507***
[-5.93]
2.791***
[5.80]
-0.283***
[-3.72]


28
28
28
28
Number of group
27
27
28
28
Number of instrument
0,151
0,165
0,139
0,151
AR2
0,083
0,094

0,072
0,081
Hansen test
*, **, *** represent significance at the 10%, 5%, 1% levels, respectively
Source: Calculated from Stata
In the research model of factors affecting Vietnamese commercial banks’ income
diversification, when measurement of income diversification by DIV index is replaced by noninterest income rate (NON), there are some additional factors influencing income diversification:
bankruptcy risk, liquidity risk and operating expense ratio. The two results of the two
measurement of income diversification are not inconsistent, but complement each other, making
the research more reliable.
Summary of chapter 4


CHAPTER 5: CONCLUSION AND RECOMMENDATION
5.1.

Conclusion
This study has provided theoretical basis and empirical evidence to conclude about the

impact of income diversification on Vietnamese commercial banks’ performance and riskadjusted performance. In addition, the study also identifies the factors affecting income
diversification to suggest solutions for Vietnamese commercial banks to appropriately diversify
their income for increasing their performance and risk-adjusted performance. Specifically,
through the research results presented in chapter 4, we can conclude:
The impact of income diversification on Vietnamese commercial banks' performance:
- Bank income diversification positively affects Vietnamese commercial banks’
performance and risk-adjusted performance during the period of 2008 - 2018. This is consistent
with modern portfolio theory.
- Lagged variable of bank performance (or risk-adjusted performance) has a positive impact
on the bank performance (or risk-adjusted performance).
- Variables belonging to the bank internal characteristics such as bank size, growth rate,

capital adequacy ratio and loans ratio have a positive impact on bank performance. In addition
to diversification, the bank also needs to focus on lending to increase customer loans and to
ensure loan quality to improve risk-adjusted performance.
- Credit risk has a negative impact on bank performance.
- Operating expenses rate is inversely related to bank performance.
- Inflation has a positive impact on bank performance.
- A new factor in the macro environment that needs to be considered when assessing the
factors affecting bank performance is financial openness. This variable also has a positive impact
on the bank performance.
- The study has not found a relationship between deposits ratio, economic growth rate and
bank performance.
Factors affecting Vietnamese commercial banks’ income diversification:
- The degree of Vietnamese commercial banks’ income diversification depends on the
previous income diversification.


- Variables belonging to the bank internal characteristics such as bank performance, bank
size, capital adequacy ratio and credit risk have a positive impact on Vietnamese commercial
banks’ income diversification.
- The ratio of loan to total assets has a negative impact on Vietnamese commercial banks’
income diversification.
- When bank income diversification is measured by DIV index, no relationship between
bankruptcy risk, liquidity risk and ratio of operating expense to operating income and bank
income diversification has not been found. However, when bank income diversification is
measured by non-interest income ratio (NON), bankruptcy risk and liquidity risk have a negative
impact on bank income diversification, meanwhile the ratio of operating expenses to operating
income has a positive impact on bank income diversification.
- Variables belonging to macro factors such as economic growth rate and inflation rate,
have an inverse relationship with the bank income diversification.
- A new factor in the macro environment that needs to be considered when assessing factors

affecting bank income diversification is financial openness. This variable has a positive impact
on bank income diversification. In Vietnam, economy is being opening and financial openness
is higher, the level of bank income diversification will be more higher.
5.2.

Recommendation
From the research results above, the dissertation gives some recommendation as follows:
Firstly, Vietnamese commercial banks need to increase income diversification to

increase their performance. According to this research result, increasing income diversification
will increase the bank performance. At the same time, when a bank operates effectively, it will
promote income diversification. Thus, the relationship between income diversification and
performance is interactive, so banks need to develop non-interest activities to increase income
diversification, and it will also increase their bank performance. Currently, the income of
Vietnamese commercial banks is mainly from credit activities. Therefore, these banks need to
diversify products and services, invest in non-interest activities to diversify their incomes,
increase income from non-interest activities.
Secondly, Vietnamese commercial banks need to improve their management ability
to reduce operating costs in order to increase the bank performance. Lowering operating


costs does not mean that banks will cut operating costs by reducing investments in fixed assets
and salaries for employees. On the contrary, in the first time to increase income diversification,
Vietnamese commercial banks need to invest in technology development, improve the quality of
human resources to develop products and services bringing non-interest income. At the same
time, the bank's operating costs will increase. However, according to the research results, this
will push the non-interest income rate to increase, in other words, income diversification
increases. Next, the income diversification will improve bank performance and thus compensate
for investment costs for non-interest activities. Thus, in order to increase income diversification
and increase bank performance, banks need to invest in technology development and quality of

human resources in parallel with improving the efficiency of management and administration to
use human resources and assets effectively.
Thirdly, Vietnamese commercial banks need to improve credit quality to reduce
credit risk because the research results also show that a high loan ratio with low credit risk will
increase the risk-adjusted performance. Thus, on the one hand, banks need to increase their credit
balance, on the one hand, they still have to ensure credit quality in order to increase their
performance. If only focusing on increasing credit balance and not paying attention to credit
quality, bad debt will increase, making provision for risks increase, leading to a decrease in the
bank performance. In the case of economic depression, credit risk is high, banks should reduce
lending activities, focus on improving credit quality and develop other non-interest activities.
Then, income diversification will increase, bank profits will also increase due to the decrease in
loan loss provision, so it has dual effects to improve the bank performance.
Fourthly, Vietnamese commercial banks need to continue to increase their size and
equity because the research results also show that when the size and equity increase, the level of
income diversification as well as performance will increase. In recent years, it is right for banks
to increase their authorized capital or do merger because it will help banks to have larger equity
and size to develop non-interest activities, to increase income diversification and to improve their
performance. When increasing authorized capital, the bank will have enough financial capacity
to invest in technology, develop new and modern products and services, as well as invest in other
areas where the bank has strengths. Since then, the size of the bank has also increased rapidly
and created a resonance for better bank performance.


Fifthly, Vietnamese commercial banks need to perform well in liquidity risk
management. The research results show that liquidity risk has opposite impact with the ratio of
non-interest income. Therefore, banks need to perform good liquidity risk management because
it is not only a mandatory requirement in banking operations but also helps higher income
diversification, resulting in better performance.
Sixthly, Vietnamese commercial banks need to improve their ability to manage their
risks to reduce their risk of bankruptcy. Research results show that the lower the bankruptcy

risk, the higher the ratio of non-interest income. Therefore, in order to increase income
diversification to increase Vietnamese commercial banks performande, banks need to manage
their bankruptcy risk well.
Seventhly, when the economy grows slowly, Vietnamese commercial banks can take
advantage of this suitiation to increase income diversification, thereby improving bank
performance. According to the research results, economic growth has opposite effects with
income diversification. Therefore, when the economy is in recession, banks need to focus on
developing non-interest activities, increasing income diversification, thereby improving the bank
performance.
Eighthly, Vietnamese commercial banks need to have a good forecast of the inflation
rate to increase bank performance in case of high inflation. The research results show that
inflation is positively correlated with the bank performance. Thus, the high inflation rate is not
always a problem that adversely affects the bank performance, but the bank needs to have a
correct forecast of the inflation rate so that there is suitable interest rate policy as well as business
strategies to achieve higher efficiency.
Ninthly, Vietnamese commercial banks need to take advantage of the financial
openness to develop new products and services, which helps to diversify their income and
have higher bank performance. Currently, Vietnam is increasingly opening, integrating into
the world economy, so the financial openness will be higher and higher. According to the
research results, this is a factor that positively affects income diversification and performance of
Vietnamese commercial banks. Therefore, this is an opportunity for Vietnamese commercial
banks to develop modern banking products and services to meet the needs of customers and
increase the income diversification, bringing higher bank performance.