Since 2012, the government enforced the “Decision No.254” project to comprehensively restructure the entire system of credit institutions in Vietnam. This project aims to upgrade the financial market and improve the efficiency of credit institutions, especially commercial banks, to serve economic development. In some detail, apart from solving the problems of bad debts and capitalization, the banking sector was encouraged to diversify its activities and increase non-lending income sources. These encouragements have fostered the extension of non-interest activities in recent years (Dang, 2020 ).
Overall, initially specialized banks have gradually modified their core operations to get involved in all economic sectors and offer a diverse range of financial services to the economy now. Despite multiple reforms and diversification of banking activities, the banking sector in Vietnam still highlights the dominant positions of the “big four” state-owned banks, while the market share of foreign participants remains considerably small.
3.1. Sample data
The Vietnamese banking system consists of policy banks (non-profit banks) and commercial banks. The operation regime of non-profit policy banks differs significantly from that of commercial banks, so we do not pay attention to them in this study. In this regard, we manually collect data of Vietnamese commercial banks through financial statements published annually from 2008 to 2019. We eliminate banks that have been compulsorily acquired or under special control by the SBV due to the extreme difference in business orientations (four banks at the year-end of 2019). We also ignore joint-venture and foreign-owned banks because such banks are considerably small and account for a minor part of the Vietnamese banking system (two joint-venture banks and nine foreign-owned banks at the year-end of 2019). Most importantly, these excluded banks do not publish information on loan portfolios’ breakdown, a core item in this study.
Ultimately, we reach an unbalanced panel data consisting of 30 Vietnamese commercial banks, with the number of observations ranging from 259 to 356 depending on each available variable. Our sample creates an unbalanced panel, covering over 90% of the banking system’s total assets in Vietnam in any given year. To mitigate the impact of extreme outliers, we winsorize bank-specific variables at the 2.5% and 97.5% levels. Besides, to obtain macroeconomic data (including the annual inflation rate and the GDP growth rate of Vietnam), the study accesses the World Development Indicators’ data sources.
3.2.1. Bank returns
Consistent with most studies investigating the effectiveness of loan portfolio diversification, we first use two traditional accounting measures, including ROA and ROE, as bank return measures. Besides, supplementing previous studies, this paper employs net interest margin as an additional proxy for bank profits. The consistency in regression results across three different return measures could produce great confidence in the main conclusions of this study.
3.2.2. Loan portfolio diversification
In line with almost any paper on the same topic, the study utilizes the HHI and SE indicators to measure banks’ loan portfolio diversification (e.g., Behr et al., loans online payday South Carolina 2007 ; Lydia et al., 2017 ; Tabak et al., 2011 ). Before illustrating how we precisely compute portfolio diversification measures, we determine the relative exposure of bank i at time t to each economic sector s as follows: (1) x s i t = N o m i n a l e x p o s u r e s i t T o t a l e x p o s u r e i t (1)
Accordingly, the measure of loan portfolio diversification following the HHI index of bank i at time t is defined: (2) H H I i t = 1 ? ? s = 1 n x s i t 2 (2)