The Impact of Noninterest Income on the Performance of Vietnamese Commercial Banks

Abstract

This paper uses the generalized method of moments (GMM) to analyze the impact of noninterest income on the performance of 28 Vietnamese commercial banks in the period from 2010 to 2018. GMM modeling uses techniques to deal with endogeneity, variance, and autocorrelation in the research model. This study provides evidence of nonlinear links between noninterest income and the profitability of bank. The regression shows an inverse relationship between noninterest income and the performance of Vietnamese commercial banks. Many studies have found that the development of noncredit services by U.S. banks and the banks of some developing countries increase bank income and significantly improve performance. This difference between banks in Vietnam and banks elsewhere stems from differences in the income structure of the Vietnamese banking system and those of developed countries in which noninterest income accounts for a high proportion of income, even surpassing net interest income. Banks can maximize the benefit of traditional noninterest income when they increase the proportion of noninterest income, especially when net interest income is lower than gross income. Noninterest income can significantly improve profitability. The larger the size of a bank’s assets, the more likely it is to increase revenue and profit, expand its assets, and use capital more efficiently than small banks. At the same time, the faster the growth of a bank’s assets, the more stable is its profit growth. The more liquid banks are, the more profitable credit institutions are, even as credit risk increases. Credit risk is adjusted to reduce the profit of a bank. The ratio of  equity to total assets increases, reducing dependence on funding flows and enabling banks to become more profitable. This trend in modern banking seems to be suitable only for banking operations in developed economies . In developing countries that still face many challenges, anxieties require banks to strengthen their urgent solutions promptly in order to increase their competitiveness in the marketplace.