Would bank mergers and acquisitions improve technical efficiency of Vietnamese commercial banks?

Abstract

The Vietnamese banking system has experienced a period of restructuring. Trends such as globalisation, liberalisation and innovation of financial markets from 1990 to 2011 have affected not only the competitive viability of banks but also the nature of the intermediation business. Banks include mergers and acquisitions among the strategies they adopt to address the challenges of an increasingly competitive environment. This study investigates whether bank mergers would have improved efficiency of the Vietnamese banking system between 2007 and 2011,when the impact of the global financial crisis (GFC) (2007–08) is taken into account. The synergy theory posits that efficiency gains resulting from bank mergers can be achieved through economies of scale and economies of scope, selective redeployment of assets and transfer of assets control to better quality managers. A bootstrap data envelopment analysis approach is used to pre-evaluate whether virtual bank mergers would generate technical efficiency gains. Accordingly,136 virtual bank mergers are created as derived from the original sample of 21 Vietnamese commercial banks. The bias-corrected efficiency scores of banks in the sample are then calculated. The findings reveal that the exclusion of off-balance-sheet activities from output specification underestimates the technical efficiency of Vietnamese banks and reduces the number of possible combinations for virtual bank mergers. In addition, the study shows that, for virtual bank mergers that include a state-owned commercial bank, the post-GFC technical efficiency is higher than for virtual bank mergers that do not include a state-owned commercial bank, and for the pre-GFC technical efficiency of virtual bank mergers that include state-owned commercial banks and privately owned commercial banks. This suggests that mergers that include a state-owned commercial bank should be encouraged. In addition, the study investigates the determinants of technical efficiency in Vietnamese commercial banks. The findings show that state-owned commercial banks are more efficient than privately owned commercial banks. This reinforces the earlier finding that mergers that include a state-owned commercial bank should be promoted. Furthermore, the findings indicate that banks that are more-diversified are more efficient than banks that are less-diversified. This suggests that Vietnamese banks should diversify by including non-traditional activities in order to improve their operating efficiency. The findings also confirm that banks with more capital are more efficient than those with less capital. This suggests that policy-makers could further increase the minimum charter capital requirement on banks in order to improve their ability to absorb losses and to enhance their efficiency. In fact, the current level of charter capital requirement in Vietnam is much lower than what is suggested in Basel III. Finally, it is found that banks that are better managed are more efficient than those that are poorly managed. This suggests that banks should implement superior management practices in their day-to-day operations and minimise their input usage.

Date of Award	2017
Original language	English
Supervisor	Suneeta Sathye (Supervisor) & Milind SATHYE (Supervisor)