Income diversification and cost-efficiency of Vietnamese banks

Abstract

Purpose

The study examines the impact of income diversification on cost efficiency of Vietnamese commercial banks over the period 2005–2017.

Design/methodology/approach

Income diversification indicators are designed based on measures of diversifying loan portfolio. Besides the traditional model, we use the Fractional Regression to estimate the model with dependent variables defined on the unit interval.

Findings

Through the two-stage DEA analysis, we find that the income diversification has a positive impact on the cost efficiency of banks. In addition, this impact is stronger for unlisted banks and in the phase of banking system ongoing restructuring.

Originality/value

The use of a variety of income diversification measures and estimation methods for models with bounded dependent variable has provided a reliable empirical evidence of the advantages of implementing a strategy on structural diversity of both interest and non-interest income in the emerging banking markets such as Vietnam.

Citation

Nguyen, P.H. and Pham, D.T.B. (2020), "Income diversification and cost-efficiency of Vietnamese banks", International Journal of Managerial Finance, Vol. 16 No. 5, pp. 623-643. https://doi.org/10.1108/IJMF-06-2019-0230