Diversification Strategy and Bank Efficiency of Vietnamese Commercial Banks: Does Foreign Ownership and Bank Experience Matter?

Abstract

This study aims to investigate the impact of diversification strategies on the efficiency of Vietnamese commercial banks from 2012 to 2022. It further explores the moderating roles of foreign ownership and bank experience in the nexus between diversification and efficiency. The study examines three dimensions of diversification strategy: asset diversification, income diversification, and funding diversification. The impact of diversification strategies varies depending on foreign ownership and bank age. The findings reveal that asset and funding diversification negatively impact bank efficiency. Additionally, both foreign ownership structure and bank age significantly influence bank efficiency. A comparison of foreign and domestic banks reveals that foreign-owned banks outperform their domestic counterparts. Surprisingly, even asset and funding-diversified domestic or foreign banks fail to improve bank efficiency, while large banks can mitigate the adverse effects of these strategies. These findings hold implications for researchers, policymakers, and bank managers in formulating more appropriate diversification strategies to ensure the stability of the entire banking system.