Measuring efficiency of Vietnamese banks

Abstract

Purpose This paper aims to examine alternative methods for treating nonperforming loans (NPLs) in bank cost-efficiency studies using stochastic frontier analysis (SFA). Design/methodology/approach The authors consider three methods of treating NPLs in SFA: as an additional control variable, as an environmental factor or as a deduction from total loans. Using data from the Vietnamese banking system (2003-2010), the authors then compare these results with those of the base model (where total loans is used regardless of the NPLs) to see which one is more appropriate for this study. Findings The authors observed that the first two methods are inappropriate for the analysis: one cannot find the significant relationship between NPLs and the banks’ total cost, and the other cannot account for any inefficiency at all. The authors suggested that the third method of separating NPLs from total loans can provide better insights. Using the proposed method, the authors showed that the cost-efficiency of Vietnamese banks over the period examined was moderate with a slight decreasing trend. When NPLs are separated, the cost-efficiency decreases in state-owned banks and big banks, whereas it increases in small and private banks. Research limitations/implications Research is limited to Vietnamese banks during a certain period, and it would be useful to apply the same technique to other data sets. Practical implications The paper suggests a new approach to account for NPLs in cost SFA studies in banking. Originality/value The paper provides a much more searching analysis of NPLs in banking than has generally been seen in previous research.

Operational Efficiency of Bank Loans and Deposits: A Case Study of Vietnamese Banking System

“…In particular, Stewart et al (2016) revealed that, in Vietnam, small and medium-sized banks were less efficient than large and very large banks, and the small banks had the lowest efficiency ratings. This was supported by Ngo and Tripe (2017) and Nguyen et al (2016) where they both found that SOCBs (which are large in size) were more (cost)-efficient than JSCBs (which are generally smaller). In terms of profit efficiency, findings from Vu and Nahm (2013) argued that Vietnamese banks operated well below the frontier in the 2000-2006 period mainly due to allocative inefficiency (of using labour, fixed assets , and deposits and other borrowed funds) rather than technical inefficiency.…”

“…The following three years saw a moderate recovery, reaching 18.8% in 2015. The development of the Vietnamese banking industry and its performance has been examined by many studies, including market reports from international financial institutions (e.g., WB or IMF) as well as individual researchers (Ngo 2012;Ngo and Tripe 2017;Nguyen and Simioni 2015;Nguyen et al 2016;Stewart et al 2016). In particular, Stewart et al (2016) revealed that, in Vietnam, small and medium-sized banks were less efficient than large and very large banks, and the small banks had the lowest efficiency ratings.…”

“…All data is calculated in VND and deflated using the Consumer Price Index (CPI) extracted from the World Bank Database, where 2010 is chosen as the base year. There might be differences between the accounting principles and standards of the banks, namely the Vietnamese Accounting Standards (VASs) and the International Financial Reporting Standards (IFRSs), but those differences are not important to our analysis, especially as VASs had begun to adopt IFRSs since 2001 (Ngo and Tripe 2017). A summary on the number and types of banks covered in this research is presented in Table 1 below, where the number of banks varied from 23 to 43 each year, supporting the use of a pooled cross-sectional analysis.…”

“…Moreover, the (median) operational efficiency of deposit-taking activities is higher than that of loan-making activities, suggesting that Vietnamese banks will need to focus more on their output side. One can see that, in the past few years, Vietnamese banks were not only having problems creating more loans but also had problems with the quality of the loans, as nonperforming loans increased over time (Ngo and Tripe 2017).…”

Capital market development and bank efficiency: a cross-country analysis

“…This input represents the labour cost of the banking system, which is also common in the literature, except that studies on individual banks’ efficiency normally use the personnel expenses instead (Sathye, 2001; Avkiran, 2011; Chortareas et al , 2011). Meanwhile, we use the private credit to GDP ( Credit ) which accounts for the credit by commercial banks to the private sector as a share of GDP (as opposed to the variable of total loans which is commonly used to assess individual banks by Delis et al (2011) and Ngo and Tripe (2016, 2017), among others) as our first output. The second output is the NIM), accounting for the value of a bank’s net interest revenue as a share of its interest-bearing assets.…”