Factors influencing cost efficiency of commercial banks in Vietnam

Abstract

This paper examines the factors affecting the cost efficiency of commercial banks in Vietnam in the context of Covid-19 pandemic. The Data Envelopment Analysis (DEA) method measures the cost efficiency index. This paper identifies three input factors: non-performing assets, personnel expenses, and customer deposits, alongside three output factors: interest income and its equivalents, non-interest income and its equivalents, and customer loans. This study uses Tobit regression to analyze the impact of these factors on cost efficiency, incorporating variables based on the CAMEL model. This paper aims to identify factors that increase or decrease the cost efficiency of Vietnamese commercial banks and thus have some implications for them in improving their cost efficiency. Using a sample of 26 commercial banks in Vietnam from 2011 to 2022; this paper finds that capital adequacy, management quality, liquidity, and bank size have a positive effect on cost efficiency. Conversely, profitability and the Covid-19 pandemic hurt cost efficiency. However, this paper does not find a significant relationship between asset quality and cost efficiency. The study also highlights differences in cost efficiency across banks, with the highest efficiency observed in 2019, which declined post-pandemic. Banks should focus on enhancing capital adequacy, management practices, and liquidity to improve cost efficiency rather than solely increasing income. Banks can also concentrate on cost control to enhance input cost efficiency. Additionally, external factors like the pandemic, which may adversely affect operational efficiency, should be given attention. Furthermore, the variable measuring asset quality through the loan loss provision ratio shows a negative but statistically insignificant effect, emphasizing the importance of maintaining asset quality for overall efficiency. The study provides valuable insights for policymakers and bank managers to improve the cost efficiency of Vietnamese commercial banks.