“Measuring banking efficiency in Vietnam: parametric and non-parametric

methods”

Loan Thi Vu
AUTHORS Nga Thu Nguyen
Linh Hong Dinh

Loan Thi Vu, Nga Thu Nguyen and Linh Hong Dinh (2019). Measuring banking
ARTICLE INFO efficiency in Vietnam: parametric and non-parametric methods. Banks and Bank
Systems, 14(1), 55-64. doi:10.21511/bbs.14(1).2019.06

DOI http://dx.doi.org/10.21511/bbs.14(1).2019.06

RELEASED ON Friday, 08 February 2019

RECEIVED ON Wednesday, 19 December 2018

ACCEPTED ON Tuesday, 29 January 2019

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businessperspectives.org
 Banks and Bank Systems, Volume 14, Issue 1, 2019

Nga Thu Nguyen (Vietnam), Loan Thi Vu (Vietnam),

Linh Hong Dinh (Vietnam)

Measuring banking
BUSINESS PERSPECTIVES
efficiency in Vietnam:
parametric and non-
parametric methods
LLC “СPС “Business Perspectives”
Hryhorii Skovoroda lane, 10, Sumy,
40022, Ukraine
Abstract
www.businessperspectives.org
The article aims to evaluate the business efficiency of commercial banks in Vietnam
using both parametric and non-parametric approaches. In this study, the Stochastic
Frontier Analysis (SFA), which belongs to a parametric method, and Data Envelopment
Analysis (DEA), a non-parametric approach, are applied to a sample of 30 joint stock
commercial banks in Vietnam in the period of 2011–2015. Applying Tobit regression
model, the impact of bank size, bank age, and the ownership feature on the efficiency
of bank service industry in Vietnam is also investigated. The analysis results show that
in general, the Vietnamese banking efficiency is improving during the selected period
regardless of techniques used. However, there is small level of similarity in efficiency
rankings identified from the SFA and DEA models. In terms of efficiency determinants,
Received on: 19th of December, 2018 the results show that all three variables of size, age, and state ownership have a positive
Accepted on: 29th of January, 2019 impact on bank efficiency.

Keywords Vietnamese banks, efficiency score, Stochastic Frontier

Analysis (SFA), Data Envelopment Analysis (DEA)

© Nga Thu Nguyen, Loan Thi Vu,

JEL Classification G21, G24, G28
Linh Hong Dinh, 2019

Nga Thu Nguyen, Ph.D., Faculty of

Finance and Banking, Thainguyen INTRODUCTION
University of Economics and Business
Administration, Vietnam.
The history of Vietnamese banking system started with the estab-
Loan Thi Vu, Ph.D., Faculty of
Banking and Finance, VNU lishment of the State bank of Vietnam in 1951. From 1951 to 1990,
University of Economics and the State bank of Vietnam performed a mixed function of a central
Business, Vietnam.
bank and a commercial bank. As a result of launching an economic
Linh Hong Dinh, Ph.D., Department
of Training, Thainguyen University reform from the Government to transfer the planned economy to
of Economics and Business market oriented economy, the banking system had been separated
Administration, Vietnam.
into a state bank, entity that works a central bank and several com-
mercial banks which receive deposits and make loans to business-
es and individuals. Thank to this important step, the number of
commercial banks increases dramatically from 4 banks in 1990 to
the peak of 51 in 1997. The number of foreign bank branches also
increases with the further level of international integration of local
economy.

Understood by the Vietnamese government, in the transformation

This is an Open Access article,
distributed under the terms of the stage of the economy, the performance of banking system plays a
Creative Commons Attribution 4.0 very important role in creating sustainable economic development.
International license, which permits
unrestricted re-use, distribution, Therefore, during 15 years from 2000 to 2015, in order to strength-
and reproduction in any medium,
provided the original work is properly
en the banking sector in Vietnam, the Vietnamese government had
cited. implemented three different banking restructuring programs:

http://dx.doi.org/10.21511/bbs.14(1).2019.06 55
Banks and Bank Systems, Volume 14, Issue 1, 2019

1) after Asian financial crisis (198–2003);

2) after joining WTO (2005–2008);
3) during economy restructuring program (2011–2015).

Among those programs, the third program is highlighted as the Government has taken inten-
sive action plan to restructure Vietnamese commercial banks such as recapitalization, merger and
acquisition (M&A), and commercial bank purchase by the state bank. This program is also the
first stage in two-stage scheme to improve the transparency, efficiency and competitiveness of the
banking system. Therefore, the assessment of business performance of banks in terms of banking
efficiency in this first stage is necessary to determine the success of the second stage of 2016–2020.

Over the past decades, empirical studies which relate to assessing bank efficiency with modern
approaches such as parametric and non-parametric have been widely implemented in different
contexts. The research encompasses a variety of approaches to banking operations, measurement,
and analytical techniques, which in turn produce various differing results. The parametric ap-
proach tends to focus on the production function or cost function of banks. The estimated function
through the regression model can be considered as an optimal function that is used as a standard
frontier line (Banker & Maindiratta, 1988). Although this parametric method can provide informa-
tion about confidence intervals and standard deviations, the results would have a negative impact
on the indexes if the function was incorrect (Berger & Humphrey, 1997). In addition, this method
requires large sample sizes. In contrast, the non-parametric approach uses all data collected from
financial institutions to estimate the optimal variation of the whole sample, and then evaluates
each organization by comparing the current level with the optimal one. In researches on bank ef-
ficiency, Stochastic Frontier Analysis (SFA) and Data Envelopment Analysis (DEA) are applied in
parametric and non-parametric approaches, respectively.

Despite the importance of efficiency measurement for banking sector in restructuring programs, an
overview of literature shows that there is limited number of studies on this topic in Vietnam. Researches
taken to compare efficiency between banks mainly focus on the first and second restructuring programs
using non-parametric method – DEA (Lieu & Nguyen, 2012; Stewart et al., 2015). Because of each meas-
ure method has its own advantages and disadvantages, a study that performs the comparison of the re-
sults taken from both SFA and DEA approach could provide more reliable results. In addition, in order
to support the result’s contributions, several factors that affect banking efficiency in Vietnam should be
considered.

This paper aims to investigate the banking efficiency in Vietnam during the first step phase in the third
restructuring program taken by the Vietnamese government. The specific objectives are:

1) to compute the efficiency scores measured by two methods of parametric (SFA) and non-parametric
techniques (DEA);

2) to identify the correlation between efficiency results computed by two different methods; and

3) to discover the effects of factors such as size, ownership, and age on the bank’s efficiency.

The analysis results from this paper are expected to benefit not only individual commercial banks but
also the Vietnamese government. For a bank, the changes in efficiency scores over the period provide
further assessment of its business performance in addition to financial indicators such as ROA or ROE.
For the Vietnamese government, the results provide another method to rank commercial banks in order
to provide support or special control to weak banks. The Government can also make necessary adjust-
ments to ensure the success of future restructuring program.

56 http://dx.doi.org/10.21511/bbs.14(1).2019.06
 Banks and Bank Systems, Volume 14, Issue 1, 2019

1. LITERATURE REVIEW to create loans to the banks. However, this approa-

ch ignores investing, a very important activity
1.1. Banking efficiency and the choice that can create value to a modern bank (Berger &
of inputs and outputs Humphrey, 1997). The intermediation approach, in
contrast, emphasizes the connection role between
for efficiency frontier borrowers and lenders of banks. Thus, deposits, la-
The business performance of banks stemming bor, and physical assets are inputs to produce loans
from the concept of business efficiency has ap- and investments of a bank (Sealey & Lindley, 1977).
peared in numerous studies since the 1950s. This approach had been developed to “value-added”
Despite its long-term implications, the concept approach in which deposit is considered as an out-
of efficiency was only given explicitly in Lovell’s put of the bank because of its ability to create bank
(1992) study. According to Lovell (1992), an organ- value. Profit-oriented approach considers banking
ization’s business efficiency reflects the relation- business as a process to achieve profit from its ex-
ship between the output and input value in com- penses (Drake et al., 2006). Therefore, in order to
parison with the minimum input or maximum identify an efficiency frontier, inputs are interest
output value that the organization is able to reach. and non-interest expenses, while outputs are inter-
In other words, this relationship can be measured est and non-interest revenues.
by comparing the observed output to the maxi-
mum output that the organization achieves on a 1.2. Parametric method and non-
given input, or by comparing the observed input parametric method in efficiency
with the minimal input so that a certain amount
of output can be achieved.
measurement
Efficiency of banks can be measured by parame-
Among studies on efficiency, Farrel’s (1957) study tric and non-parametric methods. Both methods
is notable, since he clarified the concept of efficien- use input and output vectors to determine the effi-
cy. Not only did he identify each type of efficiency, cient frontier. The basic difference between these
but he also incorporated them into a model. Farrel two methods is that the non-parametric method
(1957) introduced an efficient frontier condition does not require a specific equation for the con-
in which an organization can maximize its output struction of the efficient frontier, while the para-
based on a certain amount of input. As a result, metric method requires the determination of a
the business performance of an organization in- specific function for inputs and outputs to estab-
cludes technical efficiency, distributional efficien- lish the efficient frontier.
cy, and economic efficiency.
1.3. The non-parametric method
Technical efficiency is the ability to maximize the
output from a certain amount of input or to mini- Research on the non-parametric method mainly
mize the input to obtain a certain amount of output. uses Data Envelopment Analysis (DEA) which was
An organization is considered technically inefficient developed by Charnes et al. (1978). DEA is used to
if it fails to produce the largest output from a given build the efficient frontier based on the business
amount of input. In other words, the organization is performance of an organization without requiring
producing at a point outside of the efficient frontier. a specific equation for the construction of the ef-
ficient frontier. An organization is considered to
For banks, the choices of inputs and outputs to bui- be efficient when it operates within this frontier.
ld the efficient frontier are not consistent in relevant The efficient frontier introduced by Charnes et al.
empirical researches and they really affect the result (1978) is applied with the assumption of constant
of efficiency calculation (Sufian, 2011). The combi- return to scale – CRS or variable return to scale –
nations of input and output in previous papers can VRS (Banker et al., 1988).
be divided into into four different approaches: “pro-
duction”, “intermediation”, “profit-oriented”, and Because DEA approach doesn’t require the users
“value added”. Production approach, introduced to identify any function between inputs and out-
by Benston (1965) uses deposit as the main input puts, it is applied widely in researches to calcu-

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Banks and Bank Systems, Volume 14, Issue 1, 2019

late the efficiency of bank sector within a coun- stage DEA method remove any insignificant var-
try. For example, Pasiouras (2007) uses DEA to iables by running a regression model of efficiency
measure efficiency of banks in Greece from 2000 scores with the original inputs and outputs.
to 2004. Raphael (2013) uses DEA to evaluate the
business performance of commercial banks in 1.4. The parametric method
Tanzania in the period between 2005 and 2011,
while Ouenniche and Carrales (2018) apply DEA In addition to studies using the non-parametric
to compute the efficiency scores of 109 banks in methods with DEA, the parametric method is al-
the UK. DEA is also implemented to compare so commonly used in determining the efficiency
the efficiency of banks in different countries. of banking business. Unlike the non-parametric
Svitalkova (2014) calculates the efficiency of banks method, the parametric method requires the de-
operating in six countries in EU, while Chan et al. termination of a function that expresses the rela-
(2015) measure and compare bank efficiency in tionship between inputs and outputs associated
five selected Asian countries. In Vietnam, sever- with the operation of the bank.
al researches have been conducted using DEA to
compute bank efficiency in different selected pe- Fan and Shaffer (2004) have made a number of
riods. Lieu and Nguyen (2012) use two methods contributions to the development of a profit-max-
including total factor productivity and DEA to imizing function (the kind of efficiency that has
analyze the factors affecting the business perfor- not been approached much in traditional stud-
mance of 22 commercial banks in Vietnam in the ies) as well as comparing the results of a bank’s
period of 2006–2009. The results show that the business performance when using different types
economic efficiency of the joint stock commercial of functions. The authors argue that the business
banks tends to increase but the overall efficiency performance of the bank should be approached
of business activities is not high and remains in in terms of profit efficiency since banks now tend
decline. Nguyen (2012) performs research based to use high-cost but profitable inputs. By using
on the DEA method to measure the technical ef- the parametric method in assessing the bank’s
ficiency and the Malmquist index of commercial profit efficiency, the authors develop a marginal
banks in Vietnam in the period of 2007–2010. The function that shows the relationship between the
results show that the banks are not effective dur- bank’s profit and the input variables in its business
ing the financial crisis of 2008. Research under- process. This function measures the bank’s maxi-
taken by Stewart et al. (2015) presents a decrease mum return that can be obtained from inputs and
in efficiency as a result of computation for banks outputs with certain input and output prices. The
in the period of 1999 and 2009. marginal profit function can be constructed in
two ways: the standard marginal profit function
Two-stage DEA is a center of existing papers us- and the substituted marginal profit function.
ing non-parametric method as it can reveal the
impacts of factors on the bank efficiency. Raphael To precisely determine the form of the stand-
(2013) takes efficiency calculated by DEA in the ard marginal profit function as described above,
first step as the dependent variable in a Tobit re- several types of functions have been proposed
gression model. The Tobit model analysis results and widely used in various studies. Examples in-
indicate that bank size, non-interest income and clude the Cobb-Douglas log-linear model and the
capital adequacy ratios are positively correlated translog function, as well as the Fourier function.
with the bank efficiency, whereas bad debt has Among translog functions, the inefficient error is
a negative impact on bank efficiency. Similarly, extracted from the random statistical error in the
Steward et al. (2015) perform regression of effi- Cobb-Douglas function and is considered a func-
ciency scores obtained from stage 1 with bank size, tion dependent on the input and output variables
ownership structure, and bank branch number. in the model.
They find that larger or private banks are more
efficient, while the number of branches negative- Despite having the requirement of specific func-
ly correlates with the bank efficiency. Ouenniche tion between inputs and outputs, the advantage of
and Carrales (2018) in their research using two- considering the inefficiency effects makes SFA be-

58 http://dx.doi.org/10.21511/bbs.14(1).2019.06
 Banks and Bank Systems, Volume 14, Issue 1, 2019

come popular in bank efficiency papers (Altunbas No. Bank Code

et al., 2000; Sun & Chang, 2010; Nguyen, 2012). 18 National Citizen Commercial Joint Stock Bank NVB
Recently, Galan et al. (2015) estimate the ineffi- 19 Nam A Commercial Joint Stock Bank NAB
ciency effects for banks in Columbia, while Rekik 20 Ban Viet Commercial Joint Stock Bank GDB
and Lakai (2018) measure the cost and profit effi-
21 Vietnam Prosperity Joint Stock Commercial VPB
ciency of banks in 14 different countries. Silva et Bank

al. (2017) identify the bank efficiency using SFA in 22 Military Commercial Joint Stock Bank MBB

comparison with DEA for banks in China during Vietnam Maritime Commercial Joint Stock
23 MSB
Bank
the 2001–2012 period. They find that efficiency re- Vietnam International Commercial Joint
24 VIB
sults from both methods are not similar in rank- Stock Bank
ing individual banks in the sample. Bank for Investment and Development of
25 BID
Vietnam
Vietnam Thuong Tin Commercial Joint Stock
26 VTTB
Bank
2. METHODOLOGY 27 Petrolimex Group Commercial Joint Stock
Bank PGB

28 North Asia Commercial Joint Stock Bank NASB

2.1. Data collection method
29 Southeast Asia Commercial Joint Stock Bank SEAB
30 Eastern Asia Joint Stock Commercial Bank EAB
The author has collected data from 30 Vietnamese
joint stock banks for five years from 2011 to 2015.
These are state-owned banks and private banks The data on the variables in the model is derived
with no foreign commercial banks. Thus, if the from the audited annual financial statements of
banks are classified in terms of ownership, the the banks for five years from 2011 to 2015. The fi-
sample includes banks in the group of joint stock nancial statements are collected by the author from
commercial banks and some in the group of state Stoxplus joint stock company. The 5-year period
commercial banks. The list of banks in the sample is not too long but remains enough to see the de-
is summarized in Table 1. velopment of banks in general and the change of
business performance particularly. Therefore, the
Table 1. Banks in the research sample
data collected is cross-sectional, including 150 ob-
No. Bank Code servations. This scope of study was chosen because
Saigon Thuong Tin Commercial Joint Stock this was the period when the Vietnamese banking
1 STB
Bank system implemented Project 254: “Restructuring
2 Asia Commercial Joint Stock Bank ACB credit institutions during 2011–2015” in the third
3 Vietnam Public Joint Stock Commercial Bank PVF restructuring program.
4 Saigon Hanoi Commercial Joint Stock Bank SHB

5 Joint Stock Commercial Bank for Foreign VCB 2.2. Variables selection method
Trade of Vietnam
Vietnam Joint Stock Commercial Bank for
6 CTG Because banks are a relatively special business
Industry and Trade

7 Vietnam Export Import Commercial Joint EIB

entity, there are a number of different approach-
Stock Bank
es to banking operations when assessing business
Vietnam Technological and Commercial Joint
8 TCB performance. This study uses an “intermediation”
Stock Bank
9 Saigon Commercial Joint Stock Bank SCB approach to assess the business performance of a
10 Lien Viet Post Commercial Joint Stock Bank LVB bank as it is a popular and consistent approach to
Ho Chi Minh City Development Joint Stock a bank’s business operation. The business perfor-
11 HDB
Commercial Bank mance of a bank is concretized by technical effi-
12 Orient Commercial Joint Stock Bank OCB ciency and assessment of the relationship between
13 Saigon Bank for Industry and Trade SGB the input and output of the bank.
14 Saigon Commercial Joint Stock Bank ABB

15 Tien Phong Commercial Joint Stock Bank TPB In the intermediation approach, banks act as in-
16 Kien Long Commercial Joint Stock Bank KLB
termediaries between lenders and borrowers. As a
result, the outputs of banking activity are the total
17 Vietnam Asia Commercial Joint Stock Bank VAB
amount of loans and securities investments, while

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Banks and Bank Systems, Volume 14, Issue 1, 2019

the inputs are deposits, human resources and tangi- amount for individual customers and corporate
ble assets (Sealey et al., 1977). The input and output loans and Q2 includes loans to other credit institu-
variables in the model are calculated from the au- tions, investment securities and trading securities.
dited annual financial statements of the bank and Selected inputs include Fixed assets (X1), Customer
summarized by the author (Table 2). deposits (X2) and Labor (X3).
Table 2. Input and output variables in the model
2.3.2. Non-parametric method (DEA)
Variable Detail
Input
The 2-step non-parametric or Data Envelopment
Fixed assets: the net tangible fixed asset
X1 value, which is the cost of fixed assets minus Analysis (DEA) method is used in comparison
accumulated depreciation with parametric method. In the first step, bank
Deposits of customers: total deposits of
X2 customers and other credit institutions efficiency scores in each year are calculated us-
Labor: total salary expenditures (equal to total ing from DEA model (model 2) using DEAP 2.1
X3 employee salary divided by the total number of software with the same inputs and outputs as
employees)
Output
in model 1. In the second step, Tobit regression
Loans to customers: the sum of money for model in which dependent variable is the effi-
Q1 individuals and organizations to borrow ciency score identified from model 2 is applied
Other assets: total loans to other credit to identify the impact of SIZE, GOV, AGE on
Q2 institutions, trading securities, investment
securities and long-term investments bank’s efficiency. Those independent variables
are measured below:
2.3. Data analysis method
• SIZE: assets size of the bank, receives 1 if it is
2.3.1. Parametric method (SFA) over VND 45,000 bln and 0 otherwise;

The parametric method is a method of assessing the • GOV: bank’s ownership, receives 1 if it is fund-
efficiency of banking businesses expressed by techni- ed by the government and 0 otherwise;
cal efficiency coupled with the determination of the
efficient frontier. It uses the quantitative approach to • AGE: the number of years in business of a
identify the relationship between inputs and outputs bank.
in the operation of the bank in which the efficient
frontier is defined as the achievable limit. In other
words, it is the optimal value in the economic activ- 3. RESEARCH RESULTS
ity of an organization. The closer to the frontier an
organization works, the more profit it achieves. The
OF JOINT STOCK
organization that operates on the frontier is consid- COMMERCIAL BANKS
ered to be the most efficient in comparison with oth- IN VIETNAM
er organizations in a particular industry.

When constructing an efficient frontier, the au- 3.1. The results of the business
thors use the Cobb-Douglas linear function to efficiency assessment
describe the relationship between input and out-
put factors in a bank’s operation. Cobb-Douglas
of banks in model 1 – parameter
(Cobb & Douglas, 1928) linear function has the method (SFA)
form:
With the support of FRONTIER 4.1, the busi-
Model 1: ness efficiency scores of each commercial bank
calculated in five years are shown in Table 3. In
ln ( Qi ) = β1 + β 2 X 1i + β 2 X 2i + β3 X 3i + vi − ui . this table, the output and input variables in the
Cobb-Douglas function are defined in mod-
Qi is the output of banking operation, including el 1. The business performance of banks is ar-
customer loans (Q1) and other assets (Q2). Q1 is the ranged in a descending order to easily classi-

60 http://dx.doi.org/10.21511/bbs.14(1).2019.06
 Banks and Bank Systems, Volume 14, Issue 1, 2019

fy the groups of banks with different levels of Table 3. Results of calculating the business
efficiency. performance of banks in model 1
Source: Results analysis based on FRONTIER 4.1.
The highest performing banks amongst the 30 No. Bank 2011 2012 2013 2014 2015 Average
used in the model are the Bank for Investment
1 BID 0.965 0.965 0.966 0.966 0.967 0.9658
and Development of Vietnam (BID) at 96.58%,
2 PVF 0.962 0.962 0.963 0.963 0.964 0.9628
the Vietnam Public Joint Stock Commercial
3 CTG 0.944 0.944 0.945 0.946 0.947 0.9452
Bank (PVF) at 96.28%, and the Vietnam Joint
4 VCB 0.881 0.883 0.885 0.886 0.888 0.8846
Stock Commercial Bank for Industry and Trade
5 NASB 0.825 0.827 0.830 0.832 0.834 0.8296
(CTG) at 94.52%. These banks are all large in
6 STB 0.821 0.824 0.826 0.829 0.831 0.8262
scale with total assets of more than VND 45,000
billion and have been operating for more than 10 7 ACB 0.812 0.814 0.817 0.820 0.822 0.817

years. Amongst these three banks, the Bank for 8 EAB 0.800 0.803 0.805 0.808 0.811 0.8054

Investment and Development of Vietnam and 9 VIB 0.787 0.790 0.793 0.796 0.799 0.793
the Vietnam Joint Stock Commercial Bank for 10 EIB 0.780 0.783 0.786 0.789 0.792 0.786
Industry and Trade are state-owned, joint stock 11 OCB 0.771 0.774 0.777 0.780 0.783 0.777
commercial banks, while the Vietnam Joint Stock 12 SCB 0.771 0.774 0.777 0.780 0.783 0.777
Commercial Bank is only owned by the State 13 VPB 0.766 0.769 0.772 0.775 0.779 0.7722
in the capital structure. In terms of the capital 14 VAB 0.749 0.752 0.756 0.759 0.762 0.7556
structure, measured by the ratio of liabilities and 15 TCB 0.746 0.749 0.753 0.756 0.759 0.7526
equity, these banks have a debt to equity ratio 16 MBB 0.744 0.747 0.751 0.754 0.757 0.7506
(D/E) of over 10. It can be understood that these 17 SGB 0.741 0.745 0.748 0.751 0.755 0.748
three banks use inputs effectively, as demonstrat- 18 PGB 0.737 0.741 0.744 0.747 0.751 0.744
ed by the average efficiency of the three banks be- 19 KLB 0.733 0.736 0.740 0.743 0.747 0.7398
ing above 90% during the period 2011–2015. 20 NVB 0.731 0.734 0.738 0.741 0.745 0.7378
21 HDB 0.722 0.725 0.729 0.733 0.736 0.729
The list of banks with the lowest level of business 22 SHB 0.705 0.709 0.713 0.717 0.720 0.7128
efficiency (less than 70%) includes seven banks,
23 ABB 0.704 0.707 0.711 0.715 0.719 0.7112
namely Ban Viet Commercial Joint Stock Bank
24 GDB 0.682 0.686 0.690 0.694 0.697 0.6898
(GDB), Vietnam Thuong Tin Commercial Joint
25 VTTB 0.678 0.682 0.686 0.690 0.694 0.686
Stock Bank (VTTB), Nam A Commercial Joint
26 NAB 0.651 0.655 0.660 0.664 0.668 0.6596
Stock Bank (NAB), Southeast Asia Commercial
27 SEAB 0.647 0.651 0.656 0.660 0.664 0.6556
Joint Stock Bank (SEAB), Vietnam Maritime
28 MSB 0.647 0.651 0.655 0.660 0.664 0.6554
Commercial Joint Stock Bank (MSB), Lien Viet
29 LVB 0.644 0.649 0.653 0.657 0.661 0.6528
Post Commercial Joint Stock Bank (LVB) and
Tien Phong Commercial Joint Stock Bank (TPB). 30 TPB 0.593 0.597 0.602 0.607 0.612 0.6022
These banks range from small to large in scale,
but they are not state-owned commercial banks.
Some of these banks have been operating for 3.2. The results of the business
more than 20 years, such as NAB, SEAB, and efficiency assessment of banks
MSB, whilst others have been operating for less
than 10 years, such as VTTB, LVB and TPB. It
in model 2 – non-parametric
is noteworthy that these banks have a relatively method (DEA)
small debt to equity ratio (D/E), with computa-
tional ratios nearly less than 10. In the first step, model 2 was developed to assess the
efficiency of banking business by the method of Data
Regarding the change over the years, it can be Envelopment Analysis (DEA). The model consists of
seen that the business performance of the banks two output variables and three input variables with
has increased steadily over the years. However, the assumption that efficiency changes with scale,
this increase is not too significant, almost all of that is, the output can be increased or decreased by
which is less than 10%. changing the amount of input.

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Banks and Bank Systems, Volume 14, Issue 1, 2019

In the results of the technical efficiency assessment No. Bank 2011 2012 2013 2014 2015 Average
(TE) of banks in the sample, technical efficiency 7 SEAB 1.000 1.000 1.000 1.000 1.000 1.000
8 VPB 1.000 1.000 1.000 1.000 1.000 1.000
indicates the economical use of input resources to
9 TCB 1.000 0.994 1.000 1.000 1.000 0.9988
generate a specific amount of output of a bank in
10 EIB 1.000 1.000 1.000 1.000 0.975 0.995
comparison with other banks. Therefore, technical 11 VTTB 0.904 1.000 1.000 1.000 1.000 0.9808
efficiency receives the value within 0.1, in which 12 VIB 1.000 1.000 0.961 0.907 1.000 0.9736
the bank receiving the highest value of 1 has the 13 GDB 1.000 1.000 1.000 0.870 0.941 0.9622
highest technical efficiency in the research sample. 14 PVF 1.000 1.000 1.000 0.945 0.847 0.9584
15 PGB 0.927 0.923 0.939 1.000 1.000 0.9578
The results show that there are eight banks oper- 16 VAB 0.788 1.000 1.000 1.000 1.000 0.9576
ating on the data frontier whose efficiency rate 17 HDB 0.975 0.801 1.000 1.000 1.000 0.9552
is 100% – the joint highest in the sample. These 18 NAB 0.726 1.000 1.000 1.000 1.000 0.9452
19 ACB 1.000 1.000 0.928 0.820 0.873 0.9242
banks are: Joint Stock Commercial Bank for
20 SCB 0.618 1.000 1.000 1.000 1.000 0.9236
Foreign Trade of Vietnam (VCB), Vietnam Joint
21 NVB 1.000 1.000 1.000 0.806 0.812 0.9236
Stock Commercial Bank for Industry and Trade
22 LVB 1.000 1.000 0.829 0.788 1.000 0.9234
(CTG), Tien Phong Commercial Joint Stock 23 SGB 0.612 1.000 1.000 1.000 1.000 0.9224
Bank (TPB), Vietnam Maritime Commercial 24 MBB 0.880 0.794 1.000 0.959 0.943 0.9152
Joint Stock Bank (MSB), Bank for Investment 25 STB 0.891 0.862 0.920 0.898 0.912 0.8966
and Development of Vietnam (BID), North Asia 26 KLB 0.824 0.849 0.946 0.952 0.909 0.896
Commercial Joint Stock Bank (NASB), Southeast 27 OCB 0.761 0.847 0.885 1.000 0.943 0.8872
Asia Commercial Joint Stock Bank (SEAB) and 28 SHB 0.673 0.879 0.826 0.985 0.975 0.8676
Vietnam Prosperity Joint Stock Commercial 29 EAB 0.775 0.752 0.903 0.831 0.802 0.8126
Bank (VPB). They are the most efficient banks 30 ABB 0.567 0.686 0.844 0.946 0.981 0.8048

in all years of the research period. They have

used resources more effectively than all the other In the second step, Tobit regression model is
banks. In the whole sample, 24 out of 30 banks identified to discover the relationship of bank’s
had an efficiency rate of more than 90% and only size, ownership structure and age and bank’s ef-
six banks had an efficiency rating between 80 and ficiency. As described in Table 5, the coefficients
90%, namely Saigon Thuong Tin Commercial of all three variables are significant at the level
Joint Stock Bank (STB), Kien Long Commercial of 5%. A bank’s efficiency score is higher as it is
Joint Stock Bank (KLB), Orient Commercial Joint owned by the Government. The similar finding
Stock Bank (OCB), Saigon Hanoi Commercial is also discovered in the research by Chan and
Joint Stock Bank (SHB), Eastern Asia Joint Chiu (2006) on Taiwan banks. However, in a re-
Stock Commercial Bank (EAB) and An Binh search on Vietnamese banks, Chris et al. (2015)
Commercial Joint Stock Bank (ABB). Saigon state that private banks, are more efficient than
Commercial Joint Stock Bank (SCB), Saigon state-owned banks while the asset size has a
Thuong Tin Commercial Joint Stock Bank (STB) positive impact on the efficiency of a bank. This
and Orient Commercial Joint Stock Bank (OCB) result difference is explained by the fact that da-
experienced extraordinary fluctuations in effi- ta collected in two papers is not in the same pe-
ciency over the research period. riod. In terms of bank’s size, the bigger the bank,
the more efficient it is. In terms of age, a bank is
Table 4. Results of calculating business
performance of banks in model 2 more efficient as the number of years in service
is higher.
Source: Results analysis based on DEAP 2.1.
Table 5. Tobit regression result
No. Bank 2011 2012 2013 2014 2015 Average
1 VCB 1.000 1.000 1.000 1.000 1.000 1.000 Source: Results analysis based on Eview 10.0.

2 CTG 1.000 1.000 1.000 1.000 1.000 1.000 Variable Coefficient Std. error Z-statistic Prob.
3 TPB 1.000 1.000 1.000 1.000 1.000 1.000
SIZE 0.152 0.054 2.815 0.005
4 MSB 1.000 1.000 1.000 1.000 1.000 1.000
5 BID 1.000 1.000 1.000 1.000 1.000 1.000 GOV 0.391 0.047 8.360 0.000
6 NASB 1.000 1.000 1.000 1.000 1.000 1.000 AGE 0.022 3.002 10.078 0.000

62 http://dx.doi.org/10.21511/bbs.14(1).2019.06
 Banks and Bank Systems, Volume 14, Issue 1, 2019

3.3. Comparison of business Stock Bank (TPB), Vietnam Maritime Commercial

performance of Vietnamese joint Joint Stock Bank (MSB), North Asia Commercial
Joint Stock Bank (NASB) and Southeast Asia
stock commercial banks between Commercial Joint Stock Bank (SEAB) had the low-
parametric and non-parametric est efficiency with 60% in model 1 but were the
methods most efficient banks in model 2.
Table 6. Correlation between parametric and
A comparison of banking business performance cal- non-parametric methods
culated from both parametric and non-parametric
Source: Results analysis based on SPSS 20.0.
methods was made by considering the correlation
between the construction models in the two meth- SFA 1 Model
DEA 3 Model 0.199**
ods. The parametric method is attached to model 1,
while the non-parametric method is associated with Note: ** Significant at a significance level of 1%.
model 2. The results of the correlation analysis in
Table 6 show that the relationship between the mod- In the period, the merger and acquisition has
els is statistically significant. However, the calculated
been taken by Saigon Thuong Tin Commercial
correlation coefficient was relatively low at 19.9%. Joint Stock Bank (STB), Vietnam Joint Stock
Commercial Bank for Industry and Trade (CTG),
The Bank for Investment and Development of (BID), Joint Stock Commercial Bank for Foreign
Vietnam (BID) and the Vietnam Joint Stock Trade of Vietnam (VCB), Vietnam Maritime
Commercial Bank for Industry and Trade (CTG) Commercial Joint Stock Bank (MSB), and
had the joint highest efficiency in both two models. Vietnam Export Import Commercial Joint Stock
They are both state-owned commercial joint stock Bank (EIB). Except for EIB, those banks have im-
banks. However, Tien Phong Commercial Joint proved their efficiency scores in both models.

CONCLUSION AND RECOMMENDATIONS

The study is conducted to assess the business efficiency of 30 Vietnamese joint stock commercial banks
using SFA method (linked to model 1) and DEA (linked to model 2) during 2011–2015. In general,
the efficiency of banking business using the “intermediation” approach to banking operations by two
methods of calculation is quite high, in which the business performance of banks calculated from the
non-parametric method is even higher than that from the parametric method. Because of low correla-
tion, the use of parametric and non-parametric methods for calculating bank efficiency yields relatively
varied results for some individual banks. This finding is similar with that of research undertaken by
Silva et al. (2017). This can be explained by the method of constructing different efficient frontiers in the
two methods. If the parametric method builds a function between the bank’s inputs and outputs, the
non-parametric method forms the efficient frontier from the best banks in the sample. Analysis results
of 2-stage DEA show a significant relationship between bank’s size, ownership and age. A bank is more
efficient if it is bigger in size or has longer time in servicing. A bank with state-owned capital also gains
higher efficiency score than a bank without public ownership.

In connection to the findings of the previous study conducted by Chris et al. (2015), the restructur-
ing program from 2011–2015 really benefits Vietnamese banks regarding efficiency improvement.
Specifically, merger action between stronger banks and weaker banks can be rated as successful as the
efficiency of new banks is getting higher. While it is found that state-owned commercial banks used re-
sources more efficiently than private banks in this research, the recapitalization, an important policy of
the Government for restructuring should be pursued to create fair business environment.

The choice of inputs and outputs and the sampling technique may limit the significance of the findings
and the relevant recommendations of this study. For future research, the other approach of selecting

http://dx.doi.org/10.21511/bbs.14(1).2019.06 63
Banks and Bank Systems, Volume 14, Issue 1, 2019

variables such as “profit-oriented approach” should be used in comparison with “intermediation” ap-
proach. In order to provide better assessment of parametric and non-parametric methods for calculat-
ing bank efficiency, larger sample size including foreign bank branches should be collected. In addition,
to assess the success of restructuring program, a group of banks receiving restructuring such as recapi-
talization, merger and acquisition in the period should be separated for results analysis.

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