The effects of foreign bank entry, deregulation on bank efficiency in Vietnam: Stochastic frontier analysis approach

Abstract

This study examines the effects of foreign banks entry on the efficiency of domestic banks in Vietnam following the program of financial deregulation initiated by the government. We also review the bank efficiency in term of bank size and ownership structure. There are two main approaches to assess the efficiency of a bank: data envelopment analysis (DEA) and stochastic frontier analysis (SFA). In this paper, we apply the SFA method which is suggested by Berger et al. (2009), Ahn et al. (2001) to estimate the cost and profit efficiency of three groups: 100% foreign-owned, big four state-owned and other domestic banks. Based on the initial sample which is collected from the BankScope database of Bureau van Dijk and Fitch Ratings and annual reports of 37 banks in Vietnam for the period 2009–2015. Results indicate that big four state-owned banks are seemly efficiency on both cost and profit approach while the 100% foreign-owned banks are not the most efficiency overall. However, the 100% foreign-owned banks are able to gain economy of scale in revenue while the big four state-owned and other domestic banks hardly take an advantage of economic of scale. All group of bank obtain the economy of scope but the level is different. Other domestic banks may exploit economy of scope greater than big four and foreign banks.