The efficiency effects of bank mergers: An analysis of case studies in...

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This paper employs Data Envelopment Analysis to examine the relative efficiency for Vietnamese banks from 2008 to 2015. Efficiency level is relatively high and remains stable over the examined period, suggesting the banking system is less affected by the global financial crisis. More specifically, technical efficiency and scale efficiency in Vietnamese banking is examined when controlling for problem loans. We suggest that controlling for the exogenous impact of problem loans is important for joint-stock banks. Furthermore, our results do not support the hypothesis that acquiring banks are more efficient than the acquired banks. The efficiency improved in majority of merger cases and was not related to acquiring bank’s efficiency advantage over its targets. Small-and medium- banks should be promoted in future acquisitions as a means to enjoying efficiency gains. Finally, there are mixed results on the extent to which the benefits of efficiency gains are passed on to the public.

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Risk governance & control: financial markets & institutions / Volume 7, Issue 1, Winter 2017
THE EFFICIENCY EFFECTS OF BANK MERGERS:
AN ANALYSIS OF CASE STUDIES IN VIETNAM
Tu DQ Le*
* School of Accounting, Banking and Finance, University of Canberra, ACT, Australia
Abstract
This paper employs Data Envelopment Analysis to examine the relative efficiency for Vietnamese
banks from 2008 to 2015. Efficiency level is relatively high and remains stable over the
examined period, suggesting the banking system is less affected by the global financial crisis.
More specifically, technical efficiency and scale efficiency in Vietnamese banking is examined
when controlling for problem loans. We suggest that controlling for the exogenous impact of
problem loans is important for joint-stock banks. Furthermore, our results do not support the
hypothesis that acquiring banks are more efficient than the acquired banks. The efficiency
improved in majority of merger cases and was not related to acquiring bank’s efficiency
advantage over its targets. Small-and medium- banks should be promoted in future acquisitions
as a means to enjoying efficiency gains. Finally, there are mixed results on the extent to which
the benefits of efficiency gains are passed on to the public.
Keywords: Data Envelopment Analysis, Vietnam-mergers and Acquisitions, Bank Efficiency
JEL Classification: G34, G2
DOI: 10.22495/rgcv7i1art8
1. INTRODUCTION
on bank mergers and acquisitions. The consolidation
process should lead to restoring not only an
Vietnam is a rising economic star and considered as
a next dragon in the Asia-Pacific region with the
average GDP growth rate of 6.2% over the period
2006-2012 (World Bank 2016). Vietnamese banking
system is crucial to certain fundamental aspects of
the economy in terms of credit supply and plays an
essential role to contributing to economic stability.
The 1990 was a turning point when the Vietnamese
banking system was transformed from a one-tier
system in which State Bank of Vietnam (SBV) acted
as both the central bank and a commercial bank, to a
two-tier system where joint-stock commercial banks
(JSCBs) and foreign banks (FBs) were allowed to
coexist with state-owned commercial banks (SOCBs).
Since then, banking reforms have been implemented
under a gradual approach towards deregulation
(Nguyen, Roca & Sharma 2014).
As a result of implementing banking reforms,
bank size has significantly increased in recent years.
Particularly, the size in 2010 was surged twice as
much as that in 2007. Thus, Vietnam was ranked as
second top out of ten countries with the highest
asset growth of the banking sector in 2010
(Vietcombank Securities Company 2011). Also, the
banking sector experienced a fast growing pace of
credit and deposits over the period of 2007 to 2010.
However, credit growth was much higher than that
of deposits and GDP over the examined period,
which may cause liquidity risk for the banking
sector. Along with inefficient management of banks
and the lax regulatory environment, non-performing
loans (NPLs) rapidly arose due to the global financial
crisis 2008-09 (Leung 2009). The Vietnamese
Government (2012) thus, pronounced the
‘Restructuring the credit institutions system in the
period of 2011-2015’ program with the main focus
intermediary function of banks but also an
improvement in the efficient allocation of credits in
the economy.
In contrast to the expectation of bankers and
regulators, the prior studies on the impact of bank
mergers indicate mixed results about benefits of
mergers to merging banks or the public (DeYoung,
Evanoff & Molyneux 2009; Kolaric & Schiereck 2014).
A situation is even less clear in Vietnam due to the
small market and the difficulty in conducting
empirical study with small sample size. This
necessitates conducting an empirical research on the
effect of mergers on bank efficiency in Vietnam.
Indeed, changes in the scale and in the
organisational and market structure of the banking
industry, especially when M&As activities take place
in Vietnam would have critical implications on the
evolution of financial markets as well as the
economy as a whole.
Our paper makes several contributions on the
literature on the effect of mergers on banking
efficiency in Vietnam. First, the literature is
dominated by studies from US and European
markers while empirical evidence of bank mergers in
emerging markets is scanty. Our study contributes
to the literature by providing evidence on whether
bank mergers would lead to technical efficiency
gains. Second, we include an additional output to
reflect the fact that banks have been diversifying, at
the margin, away from traditional financial
intermediation business and into off-balance sheet
(OBS) and fee income-generating business. In
contrast to Nguyen and Simioni (2015), the nominal
value of OBS is used in our study rather than total
operating income as a proxy for OBS because that
measure may overestimate the amount of OBS.
61
Risk governance & control: financial markets & institutions / Volume 7, Issue 1, Winter 2017
Third, this is the first study to examine the effect of
frontier economic approach (Beccalli & Frantz 2009;
‘actual’
mergers
on
technical
efficiency
of
DeYoung, Evanoff & Molyneux 2009). Several studies
Vietnamese
banks
by
using
Data
Envelopment
reported that bank mergers lead to efficiency gains
Analysis (DEA). More specifically, we examine the
(Akhavein, Berger & Humphrey 1997; Al-Khasawneh
size-efficiency relationship for banks for year 2008,
2013; Figueira & Nellis 2009; Liu & Tripe 2003).
thus
providing
some
predictions
on
whether
However,
others
indicated
the
opposite
results
efficiency gains would be resulted from future bank
(Berger & Humphrey 1992; Montgomery, Harimaya &
acquisitions, particularly with the participation of
Takahashi 2014; Shih 2003).
state-owned banks. Finally, this study includes the
Considerably
less
research
attention
has
latest banking data from 2008 to 2015 where a
focused on examining mergers in the Vietnamese
significant change in the Vietnamese banking sector,
banking
system.
The
first
study
to
examine
the
especially
consolidation
of
banks
has
been
efficiency effect of bank merger was conducted by
undertaken.
More
importantly,
a
comparison
Le
(2016).
He
used
a
4-step
procedure
of
between
overall
efficiencies
and
market
shares
bootstrapped DEA to examine the effect of virtual
would provide an answer for the continuing debate
bank mergers on technical efficiency of Vietnamese
on public benefits of mergers often engaged in by
banks over the period of 2007 to 2011. He found
policy makers such as the State Bank of Vietnam
that mergers between two efficient banks would not
(SBV), the members of the Ministry of Finance in
generate
technical
efficiency
gains.
More
Vietnam.
importantly,
his
findings
suggest
that
mergers
The paper is structured as follows. Section 2
formed from joint-stock commercial banks should
presents literature review on bank merger. Section 3
be promoted in future acquisitions. In contrast, our
proposes a detailed description of methodological
paper evaluates the effect of actual mergers on bank
approach and data used in our study. Section 4
efficiency in Vietnam over the period of 2008 to
shows the empirical results derived. Finally, section
2015 by using DEA approach. In addition, we also
5 concludes the paper.
investigate whether operating efficiency gains are
passed on to the public.
2. LITERATURE REVIEW
3. METHODOLOGY AND DATA
Over the last decades, a large number of studies
have been searching on the effect of mergers in the
banking industry. The literature in this field is
3.1. Measuring Bank Efficiency
divided into two main strands (Aggarwal, Akhigbe &
McNulty 2006). The first strand uses event study
methodology to investigate the stock or bond
market reaction to mergers announcements. In
Vietnam, the small size of the equity market and the
limited number of listed banks make it extremely
difficult to conduct an empirical study on the
market reaction to M&A announcements
(Vietcombank Securities Company 2011)1. Therefore,
the present study focuses on the second strand
studies that examine the operating efficiency gains
from bank mergers and particular attention is given
to studies of the Vietnamese banking sector.
The operating gains are stemming from the
realisation of economies of scale and scope and
transfer of assets control to better quality managers
(Haynes & Thompson 1999). Simulation studies
indicates mergers can produce significant cost
savings when the acquiring bank’s efficiency
advantage over the target or closing overlapping
branches (Rhoades 1993; Shaffer 1993). However,
others suggest that the acquiring bank does not
always maintain its pre-merger efficiency (Avkiran
1999) or it take time for the acquiring bank to
integrate and improve performance (Lee, Liang &
Huang 2013). Furthermore, DeYoung (1997) suggests
that cost efficiency improved most often when both
acquirer and acquired banks were relatively cost
inefficiency. This implies that cost savings depend
more on the opportunities facing management
rather than the quality of that management.
In addition, the majority of studies on the
impact of bank mergers fail to provide a clear
relationship between M&As and performance and
While mergers have some limited potential to
increase performance through scale and scope
economies, whether these gains are captured
depends on controlling technical inefficiency
(Haynes & Thompson 1999). The technical efficiency
of a bank reflects the ability of managers to control
costs and is measured by how close its costs are to
those of fully efficient firm when the effects of scale,
product mix and other exogenous variables, which
may influence banking costs, are considered (Coelli
et al. 2005).
The literature suggests that there is no
consensus on the preferred method for determining
the best practice frontier against which relative
efficiencies are measured. The most common
estimation techniques in the literature of bank
efficiency are parametric (SFA) and non-parametric
approaches (DEA)2.
DEA method is preferred for the present study
rather than SFA because of the following reasons.
Firstly, this is due to the availability of data and
contextual information. SFA requires the
specification of a cost function, thus, requiring data
on input prices. Unfortunately, the data on the
number of employees is not available while data on
the costs of the labour input is available for
Vietnamese banks. Therefore, it is impossible to
produce an accurate measure of the labour input
price. Furthermore, SFA produces measures of X-
efficiency, which is composed of both technical and
allocative efficiency while the primary focus of the
present study is on the technical efficiency. Clearly,
the accuracy measurement of SFA may be
efficiency
by
using
either
accounting
ratios
or
2 The advantages and disadvantages of parametric and non-parametric
1 Until 2011, only 8 commercial banks were listed in the Vietnamese stock
approaches are comprehensively discussed in Berger and Humphrey (1997);
Drake and Hall (2003).
market.
62
̂
𝑛
� 𝑖
𝑛 𝑛
� � � �
̂
̂
̂
+ +
+
+
+
Risk governance & control: financial markets & institutions / Volume 7, Issue 1, Winter 2017
compromised by the lack of accurate input price
data for labour.
determined as 𝜕𝐶(𝑦) = {𝑥|𝑥 ∈ 𝐶(𝑦),θx ∉ 𝐶(y),∀θ,0 <
𝜃 < 1}
Secondly, DEA can be used with small sample
sizes while SFA generally requires large data set to
θ(𝑥0,𝑦0) = inf {θ|θ𝑥0 ∈ 𝐶(𝑦0)} = inf{θ|(θ𝑥0,𝑦0) ∈ Ψ}
provide
a
good
picture
of
analysis
(Evanoff
&
Then, the DEA estimator under VRS assumption
Israilevich
1991).
In
addition,
Sathye
(2003)
as suggested by Banker, Charnes and Cooper (1984)
suggested that DEA is sensitive to the choice of
input-output variables. This is an advantage of the
technique as it reveals which of the input-output
variables need to be closely monitored by bank
management to improve efficiency. Hence,
information on peer group is relatively useful for
managerial purposes because bank managers could
enhance their bank’s efficiency by learning from
their more efficient counterparts.
Thirdly, the issue of functional form
dependence in respect of SFA is particularly
pertinent in the context of the present study, given
the wide diversity across the banking institutions in
Vietnam in respect of business mix. Mester (1997)
emphasises that the failure to adequately take
account of bank heterogeneity can lead to calculate
is defined as 𝜃𝐷𝐸𝐴(𝑥0,𝑦0) = min{𝜃|𝑦0 ≤ ∑𝑖=1 𝛾𝑌 ;𝜃𝑥0
𝑖=1 𝛾𝑋; 𝜃 > 0;∑𝑖=1 𝛾= 1; 𝛾≥ 0,𝑖 = 1,…,𝑛}
This equation measures the input-oriented
efficiency level 𝜃𝐷𝐸𝐴(𝑥0,𝑦0) of banks and is obtained
by calculating the radial distance between (𝑥0,𝑦0)
and(�̂�𝜕(𝑥0|𝑦,𝑦0)). Therefore, the level of the inputs
that the bank should reach to lie on the efficient
boundary with the same level of output and the
same proportion of inputs is indicated by(�̂�𝜕(𝑥0|𝑦).
In another word, �̂�𝜕(𝑥0|𝑦) = 𝜃(𝑥0,𝑦0)𝑥𝑜
According to Farrell (1957) definition, the
𝜃𝐷𝐸𝐴(𝑥0,𝑦0) will be bounded by zero and one. The
value of 1 indicates the bank is technically efficient
because it is able to operate on the boundary of its
production set.
bank cost efficiency inaccurately. In contrast, DEA
imposes very little structure on the efficiency
frontier and does not require the maintained
3.3. Case Study Approach
assumption that all firms face the same unknown
production technology (Drake & Hall 2003). When a
comprehensive set of specified inputs and outputs is
provided, DEA simply requires the existence of an
input/output correspondence to produce relative
efficiency measurements.
Fourthly, SFA allows for random error, the
decomposition of the combined error term into the
random error and inefficiency components requires
an assumption concerning the appropriate
distribution of the latter. Any distributional
assumptions simply imposed without basis in fact
are quite biased thus, resulting in significant error
in calculating each firm’s efficiencies (Bauer et al.
1998). In contrast, DEA assumes no random error,
implying that all deviations from the estimated
efficient frontier actually constitute X-inefficiencies
(Resti 1997).
Earlier studies on the efficiency effects of bank
mergers used a cross-section analysis. That type of
analysis typically includes a relatively larger number
of mergers and the use of a statistical model. The
great advocate of the cross-section approach is that
it allows statistical tests that control for various
other influences on merger performance, thus
leading to statistically valid generalisations.
However, Rhoades (1998, p. 276) argued that ‘this
methodology may be not adequately capturing
industry-specific or firm-specific idiosyncrasies have
resulted in the re-emergence of the analysis of
particular industries or firms in industrial
organisation.’
Due to the limited number of observations,
case studies do not permit statistically valid
generalisations. Nonetheless, the case study
approach may provide insights into firm behaviour
and performance that cannot be captured in a cross-
3.2. Economic Model оf Efficiency Measurement
section methodology since a case study may employ
a wide range of data and institutional detail from
The variable returns to scale (VRS) in DEA is adopted
in our study3.
Given a bank with a set of input p and a set of
output q, a production set Ψ can be defined in the
Euclidean space 𝑅𝑝+𝑞as: Ψ = {(𝑥,𝑦)|𝑥 ∈ 𝑅𝑝,𝑦 ∈
𝑅𝑞,(𝑥,𝑦) 𝑖𝑠 feasible}
Where 𝑥 and 𝑦 are additional input and output
vectors and feasibility implies that the bank under
consideration can obtain output quantities given the
input quantities. Thus, the input requirement set is
defined as C(y) = {x ∈ 𝑅𝑝|(x,y) ∈ Ψ}
Therefore, the production set Ψ of a bank
can be defined as Ψ = {(𝑥,𝑦)|𝑥 ∈ 𝐶(𝑦),y ∈ 𝑅𝑞}
According to Farrell (1957), the efficient
boundaries of Ψ in the input space can be
sources that may be unique to a firm.
For the merger cases identified in this study,
the relative efficiencies of the acquiring bank and
the target bank were observed for a period of two
years prior to the merger and that of the newly-
combined banks for three years following the
merger (Ralston, Wright & Garden 2001; Rhoades
1998). Three bank mergers cases are used as
follows:
Case 1: The consolidation of Saigon
Commercial Joint Stock Bank (SCB), First Joint Stock
Commercial Bank (FicomBank) and Vietnam Tin
Nghia Commercial Joint Stock Bank (TinNghiaBank)
on 26th December 2011
Case 2: Hanoi Building Joint Stock Commercial
Bank (HabuBank) was acquired by Saigon-Hanoi
Commercial Joint Stock Bank (SHB) on 7th August
3 Coelli et al. (2005) suggested that the CRS assumption is only appropriate
when all DMU’s are operating at an optimal scale. In fact, imperfect
competition, constraints on finance would cause a DMU to be not operating at
optimal scale. The use of the CRS specification when not all DMU’s are
operating at the optimal scale will result in measures of technical efficiency
2012
Case 3: Dai A Joint Stock Commercial Bank
(DaiABank) merged with Ho Chi Minh Development
Joint Stock Commercial Bank (HDBANK) on 23rd
November 2013. Due to the unavailability of data,
(TE) which are confounded by scale efficiencies (SE). The use of the VRS
specification will permit the calculation of TE devoid of these SE effects
63

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