The determinants of profit efficiency of banks in Vietnam

Abstract

This paper examines the factors that affect profit efficiency of banks in Vietnam over the period from 2000 to 2006. The effects of four groups of variables, including bank-specific characteristics, ownership, transitional environment and macroeconomic conditions on the profitability of banks, are analysed using a Tobit model to account for the censored nature of the efficiency scores. The model is estimated using a two-step instrumental-variable method as a regressor is endogenous. The findings show that the profit efficiency of a bank is enhanced by a larger size and better management ability, while it is hampered by low quality of assets and a too high level of capitalisation. High growth in per-capita GDP and a low-inflation rate provide a favourable environment for banks to improve their profitability. The study also finds that among the foreign banks operating in Vietnam, those headquartered in Australia, Japan, the US and Europe perform better than those headquartered in Asia as well as the domestic banks. Finally, the study suggests that in order to optimise their performance while remaining secure, banks should maintain the ratio of equity over total assets between 4% and 14%.

Keywords:

• profit efficiency
• Vietnamese banking
• bank capitalisation
• bank ownership

JEL:

• G21
• C26
• D24

Notes

1. According to Berger et al. (2000) under the home field advantage hypothesis, foreign banks are generally found to be less efficient than domestic banks. The explanation is that operating or monitoring an institution from a distance entails organisational diseconomies, or that other advantages of domestic banks (e.g. language, culture, regulation and other barriers) are too difficult to overcome in most cases even for efficiently operated cross-border organisations. Under the general form of the global advantage hypothesis, efficiently managed foreign banks, regardless of the nation in which they are headquartered, are able to overcome any cross-border disadvantages and operate more efficiently than domestic banks in other countries. Under the limited form, only the efficient institutions headquartered in their home countries with specific favourable conditions are able to overcome any cross-border disadvantages and to operate more efficiently than domestic institutions.

2. Other studies using a Tobit model for the analysis of efficiency scores include, inter alia, Ariff and Can (2009), Grigorian and Manole (2002), Hauner (2005), Pasiouras (2008) and Sufian (2009).

3. Two of the four big SOCBs were privatised in 2009 and 2010, in which the state ownership accounts for 49%.

4. The mean minus the standard deviation of ETA is around 3%. However, there are only six bank observations whose ETA is less than 3%. Thus, the study uses a boundary of 4% with 21 bank observations satisfying this constraint among 392 observations.

5. This is the sample mean value of the equity-total asset ratio. This sub-sample includes 231 bank observations, accounting for about 59% of the whole sample observations.

6. 25% is the sample mean plus standard deviation of ETA. 43 bank observations have ETA in this range.

7. There are five foreign banks in the first group, three in the second and thirteen in the third group.

8. It should be noted that the estimates of the coefficients for the other variables in this modified version, of which no further analysis is provided, are almost the same as the estimates in the original model: they keep the same sign and the same order of magnitude, and the same coefficients that are significant in the original model are also significant in the modified model (albeit sometimes at different levels of significance).

9. It should be noted that ETA, which is the simple ratio of equity capital to total assets, is not the same as the risk-weighted ratio considered for the capital-adequacy requirement. Hence, this ratio being smaller than 8% does not necessarily mean that the capital-adequacy requirement is violated.